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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
  FORM 20-F (Mark One) [   ]
     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934OR[X]
     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended   May 31, 2010OR[   ]
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934OR[   ]
     SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Date of event requiring this shell company reportFor the transition period from ________________ to ___________________
  Commission file number: 000-26296 Petaquilla Minerals Ltd.(Exact name of Registrant as specified in its charter)Not Applicable(Translation of Registrant's name into English)Province of British Columbia, Canada(Jurisdiction of incorporation or organization)Suite 410, 475 West Georgia Street, Vancouver, British Columbia, Canada V6B 4M9(Address of principal executive offices)Julie van Baarsen, telephone (604) 694-0021, facsimile (604) 694-0063,Suite 410, 475 West Georgia Street,Vancouver, British Columbia, Canada V6B 4M9(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
  Page 1


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Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
     
     Name of each exchange on which registeredNone
     
     Not applicable
  Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Shares Without Par Value(Title of Class)Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.Not Applicable(Title of Class)
  Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report. 125,281,951 common shares, without par value, as at May 31, 2010 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [   ] Yes [X] No If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. [   ] Yes [X] No Note  Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding year (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. [X] Yes [   ] No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding year (or for such shorter period that the registrant was required to submit and post such files). [   ] Yes [   ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [   ]
     Accelerated filer [X]
     Non-accelerated filer [   ]
  Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP [   ]
     International Financial Reporting Standards as issued by the International Accounting Standards Board [   ]
     Other [X]
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If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. [X] Item 17
     [   ] Item 18
  If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [   ] Yes [X] No Page 3


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PETAQUILLA MINERALS LTD. 
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F 
TABLE OF CONTENTS
     Page No. GLOSSARY OF MINING TERMS
     8CAUTIONARY NOTE REGARDING RESOURCE AND RESERVE ESTIMATES
     10CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
     10CURRENCY PRESENTATION
     11INTRODUCTION
     12PART I
     
     12ITEM 1.
     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     12ITEM 2.
     OFFER STATISTICS AND EXPECTED TIMETABLE
     12ITEM 3.
     KEY INFORMATION
     123.A.
     Selected Financial Data
     123.B.
     Capitalization and Indebtedness
     153.C.
     Reasons for the Offer and Use of Proceeds
     163.D.
     Risk Factors
     16Mining operations and projects are vulnerable to supply chain disruptions and our operations and development projects could be adversely affected by shortages of, as well aslead times to deliver, strategic spares, critical consumables, mining equipment or metallurgical plant equipment.
     16We face uncertainty and risks in our exploration and project evaluation activities.
     16We face many risks related to the development of our mining projects that may adversely affect our results of operations and profitability.
     17We may require additional funding in order to continue our operations.
     18Our level of indebtedness could adversely affect our business.
     18We face many risks related to our operations that may adversely affect our cash flows and overall profitability.
     19Mineral prices can fluctuate dramatically and have a material adverse effect on our results of operations.
     19We face risks related to operations in foreign countries.
     20The requirements of the Ley Petaquilla may have an adverse impact on us.
     20Our operations are subject to environmental and other regulation.
     21Our directors may have conflicts of interest.
     22Environmental protestors are present in Panama.
     22Our common shares are subject to penny stock rules, which could affect trading in our shares.
     22U.S. investors may not be able to enforce their civil liabilities against us or our directors, controlling persons and officers.
     22If we are characterized as a Passive Foreign Investment Company (PFIC), our U.S. shareholders may be subject to adverse U.S. federal income tax consequences.
     22ITEM 4.
     INFORMATION ON THE COMPANY
     23
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4.A.
     History and Development of the Company
     23Molejon Property  Panama
     24Principal Capital Expenditures and Divestitures Over Last Three Fiscal Years
     24Current Capital Expenditures and Divestitures
     24Public Takeover Offers
     254.B.
     Business Overview
     254.C.
     Organizational Structure
     26Corporate Entities Chart as at August 30, 2010
     274.D.
     Property, Plant and Equipment
     28Mineral Concession Lands
     28Introduction
     28Property Location
     28Location, Access & Physiography
     30Plant and Equipment
     31Title
     33Exploration History
     34Outlook  2011
     38Regional and Local Geology
     38Mineralization
     39Doing Business in Panama
     40ITEM 4A.
     UNRESOLVED STAFF COMMENTS
     42ITEM 5.
     OPERATING AND FINANCIAL REVIEW AND PROSPECTS
     425.A.
     Operating Results
     42Year Ended May 31, 2010, Compared to Year Ended May 31, 2009
     43Year Ended May 31, 2009, Compared to Year Ended May 31, 2008
     44One Month Ended May 31, 2008, Compared to One Month Ended May 31, 2007
     45Year Ended April 30, 2008, Compared to Year Ended April 30, 2007
     465.B
     Liquidity and Capital Resources
     48May 31, 2010, Compared with May 31, 2009
     50May 31, 2009, Compared with May 31, 2008
     50May 31, 2008, Compared with April 30, 2008
     51April 30, 2008, Compared to April 30, 2007
     525.C.
     Research and Development, Patents and Licenses, etc.
     525.D.
     Trend Information
     535.E.
     Off-Balance Sheet Arrangements
     535.F.
     Tabular Disclosure of Contractual Obligations
     535.G.
     Safe Harbour
     555.H.
     Non-GAAP Measures
     55ITEM 6.
     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
     566.A.
     Directors and Senior Management
     566.B.
     Compensation
     57Cash and Non-Cash Compensation  Directors and Officers
     57Option Grants to Directors and Officers During Fiscal Year Ended May 31, 2010
     58Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
     59Defined Benefit or Actuarial Plan Disclosure
     59Termination of Employment, Change in Responsibilities and Employment Contracts
     59Directors
     60
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6 .C.
     Board Practices
     606 .D.
     Employees
     606 .E.
     Share Ownership
     61ITEM 7.
     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
     627 .A.
     Major Shareholders
     627 .B.
     Related Party Transactions
     627 .C.
     Interests of Experts and Counsel
     63ITEM 8.
     FINANCIAL INFORMATION
     648 .A.
     Consolidated Statements and Other Financial Information
     648 .B.
     Significant Changes
     64ITEM 9.
     THE OFFER AND LISTING
     659 .A.
     Offer and Listing Details
     659 .B.
     Plan of Distribution
     679 .C.
     Markets
     679 .D.
     Selling Shareholders
     679 .E.
     Dilution
     689 .F.
     Expenses of the Issue
     68ITEM 10.
     ADDITIONAL INFORMATION
     6810 .A.
     Share Capital
     6810 .B.
     Memorandum and Articles of Association
     6810 .C.
     Material Contracts
     6910 .D.
     Exchange Controls
     6910 .E.
     Taxation
     70Material Canadian Federal Income Tax Consequences
     70Dividends
     71Capital Gains
     71Material United States Federal Income Tax Consequences
     72U.S. Holders
     72Distributions on our Common Shares
     72Disposition of our Common Shares
     73Passive Foreign Investment Company
     73Foreign Tax Credit
     74Controlled Foreign Corporation
     74Information Reporting; Backup Withholding
     7510 .F.
     Dividends and Paying Agents
     7510 .G.
     Statement by Experts
     7510 .H.
     Documents on Display
     7510 .I.
     Subsidiary Information
     75ITEM 11.
     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     75ITEM 12.
     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
     76PART II
     
     77ITEM 13.
     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
     77
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ITEM 14.
     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
     77ITEM 15.
     CONTROLS AND PROCEDURES
     77ITEM 16.
     [RESERVED]
     79ITEM 16.A.
     AUDIT COMMITTEE FINANCIAL EXPERTS
     79ITEM 16.B.
     CODE OF ETHICS
     79ITEM 16.C.
     PRINCIPAL ACCOUNTANT FEES AND SERVICES
     79ITEM 16.D.
     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
     80ITEM 16.E.
     PURCHASES OF EQUITY SECURITIES BY OUR COMPANY AND AFFILIATED PURCHASERS
     80ITEM 16.F.
     CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
     80ITEM 16.G.
     CORPORATE GOVERNANCE
     80PART III
     
     80ITEM 17.
     FINANCIAL STATEMENTS
     80ITEM 18.
     FINANCIAL STATEMENTS
     125ITEM 19.
     EXHIBITS
     125SIGNATURES
     127
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GLOSSARY OF MINING TERMS The following is a glossary of some of the terms used in the mining industry and referenced herein: cuttoff grade
     the deemed grade of mineralization, established by reference to economic factors, above which material is included in mineral deposit calculations and below which material is considered waste. May be either an external cutoff grade, which refers to the grade of mineralization used to control the external or design limits of an open pit based upon the expected economic parameters of the operation, or an internal cutoff grade, which refers to the minimum grade required for blocks of mineralization present within the confines of an open pit to be included in mineral deposit estimatesdiamond drill
     a machine designed to rotate under pressure an annular diamond-studded cutting tool to produce a more or less continuous solid sample (drill core) of the material that is drilledepithermal
     a term applied to those mineral deposits formed in and along fissures or other openings in rocks by deposition at shallow depths from ascending hot solutionsexploration information
     geological, geophysical, geochemical, sampling, drilling, trenching, analytical testing, assaying, mineralogical, metallurgical and other similar information concerning a particular property that is derived from activities undertaken to locate, investigate, define or delineate a mineral prospect or mineral depositindicated mineral resource
     that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumedinferred mineral resource
     that part of a Mineral Resource for which quantity, grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holesjunior resource company
     as used herein means a company whose mineral resource properties are in the exploration phase only and which is wholly or substantially dependent on equity financing or joint ventures to fund its ongoing activitiesmeasured mineral resource
     that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuitymineral deposit, deposit or mineralized material
     a mineralized body which has been physically delineated by sufficient drilling, trenching and/or underground work and found to contain a sufficient average grade of metal or metals to warrant further exploration and/or development expenditures. Such a deposit does not qualify under standards of the Securities Exchange Commission as a commercially mineable ore body or as containing ore reserves, until final legal, technical and economic factors have been resolvedmineral reserve
     the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined
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mineral resource
     a concentration or occurrence of diamonds, natural solid inorganic material or natural solid fossilized organic material including base and precious metals, coal and industrial minerals in or on the Earths crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledgeopen pit mining
     the process of mining an ore body from the surface in progressively deeper steps. Sufficient waste rock adjacent to the ore body is removed to maintain mining access and to maintain the stability of the resulting pitore
     a natural aggregate of one or more minerals which, at a specified time and place, may be mined and sold at a profit, or from which some part may be profitably separatedounces
     troy ouncesoz/tonne
     troy ounces per metric tonppb
     parts per billionppm
     parts per millionporphyry deposit
     a disseminated mineral deposit often closely associated with porphyritic intrusive rocks;preliminary feasibility study
     a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, has been established and an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, economic, social and environmental factors and the evaluation of other relevant factors which are sufficient for a Qualified Person, acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserveprobable mineral reserve
     the economically mineable part of an Indicated mineral resource and, in some circumstances, a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. Such Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justifiedproven mineral reserve
     the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.  Such study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justifiedqualified person
     an individual who is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these; has experience relevant to the subject matter of the mineral project and the technical report; and is a member or licensee in good standing of a professional associationstockwork
     a rock mass so interpenetrated by small veins of ore that the whole must be mined together. Stockworks are distinguished from tabular or sheet deposits, (i.e. veins or beds), which have a small degree of thickness in comparison with their extension in the main plane of the depositstrike length
     the longest horizontal dimensions of a body or zone of mineralizationstripping ratio
     the ratio of waste material to ore that is experienced in mining an oretonne
     body, metric ton (2,204 pounds)


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CAUTIONARY NOTE REGARDING RESOURCE AND RESERVE ESTIMATES The terms mineral reserve, proven mineral reserve and probable mineral reserve are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101  Standards of Disclosure for Mineral Projects (NI 43-101) and the Canadian Institute of Mining, Metallurgy and Petroleum (the CIM) - CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended. These definitions differ from the definitions in SEC Industry Guide 7 under the United States Securities Act of 1993, as amended (the Securities Act). Under SEC Industry Guide 7 standards, a final or bankable feasibility study is required to report reserves, the three-year historical average price is used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate governmental authority. In addition, the terms mineral resource, measured mineral resource, indicated mineral resource and inferred mineral resource are defined in and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. Inferred mineral resources have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases. Investors are cautioned not to assume that all or any part of an inferred mineral resource exists or is economically or legally mineable. Disclosure of contained ounces in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute reserves by SEC Industry Guide 7 standards as in place tonnage and grade without reference to unit measures. Accordingly, information contained in this Annual Report contains descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 20-F contains forward-looking information and forward-looking statements as defined in applicable securities laws. These statements relate to future events or our future performance. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements include, but are not limited to, statements with respect to the future price of gold, silver and other minerals, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting time lines, currency exchange rate fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as plans, expects or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate or believes, or variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to international operations; risks related to joint venture operations; actual results of current exploration activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of gold and silver; possible variations in ore reserves, grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; delays in obtaining governmental approvals or financing or in the completion of development or construction activities, as well as those factors discussed in the section entitled Risk Factors in this Annual Report on Form 20-F. Although we have attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Page 10


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Statements in this Annual Report on Form 20-F regarding expected completion dates of feasibility studies, anticipated mining or metal production operations, projected quantities of future metal production and anticipated production rates, operating efficiencies, costs and expenditures are forward-looking statements. Actual results could differ materially depending upon the availability of materials, equipment, required permits or approvals and financing, the occurrence of unusual weather or operating conditions, the accuracy of reserve estimates, lower than expected ore grades or the failure of equipment or processes to operate in accordance with specifications. Additional information about these and other assumptions, risks and uncertainties that may affect our future financial performance are set out in Item 3.D.  Key Information  Risk Factors. Forward-looking statements in this Annual Report on Form 20-F are as of August 30, 2010. We do not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws. CURRENCY PRESENTATION This Annual Report on Form 20-F contains references to United States dollars and Canadian dollars. Unless otherwise indicated, all dollar amounts referred to herein are expressed in United States dollars and all financial information presented has been prepared in accordance with Canadian generally accepted accounting principles. Measurement differences between Canadian generally accepted accounting principles and those in the United States, as applicable to our company, are set forth in Item 3.A. and Note 27 to the accompanying financial statements of our company. Canadian dollars are referred to as CAD$. Page 11


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INTRODUCTION Petaquilla Minerals Ltd. is organized under the British Columbia Business Corporations Act. As used in this Annual Report on Form 20-F (the Annual Report), the terms Petaquilla, we, us and our refer to Petaquilla Minerals Ltd. and our subsidiaries unless otherwise indicated or if the context otherwise requires. We refer you to the actual corporate documents for more complete information than may be contained in this Annual Report. Our principal corporate offices are located at Suite 410, 475 West Georgia Street, Vancouver, British Columbia, Canada V6B 4M9. Our telephone number is 604-694-0021. We file reports and other information with the Securities and Exchange Commission (the SEC) located at 100 F Street NE, Washington, D.C. 20549; you may obtain copies of our filings with the SEC by accessing its website located at www.sec.gov. Further, we file reports under Canadian regulatory requirements on the System for Electronic Document Analysis and Retrieval of the Canadian Securities Administrators (SEDAR); you may access our reports filed on SEDAR by accessing the following website: www.sedar.com. The information set forth in this Annual Report is as at August 30, 2010, unless an earlier or later date is indicated. PART I ITEM 1.
     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  Not applicable. ITEM 2.
     OFFER STATISTICS AND EXPECTED TIMETABLE
  Not applicable ITEM 3.
     KEY INFORMATION
  3.A.
     Selected Financial Data
  The following tables summarize our selected consolidated financial data prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) and reconciled for measurement differences to United States generally accepted accounting principles (U.S. GAAP). The information in the tables was extracted from the more detailed financial statements and related notes included with this filing and should be read in conjunction with these financial statements and with the information appearing under the heading Item 5  Operating and Financial Review and Prospects. Note 27 of our consolidated financial statements, included with this filing, sets forth the material variations in U.S. GAAP. Results for the periods presented are not necessarily indicative of results for future periods. Page 12


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INFORMATION IN ACCORDANCE WITH CANADIAN GAAP: Year
Ended
May 31
     
     
     Year
Ended
May 31
     
     
     1 Month
Ended
May 31
     
     
     Year
Ended
April 30
     
     
     3 Months
Ended
April 30
     
     
     Year
Ended
January 312010
     
     
     2009
     
     
     2008
     
     
     2008
     
     
     2007
     
     
     2007
     
     
     2006(a)
     Total revenue
     
     27,827,935
     
     $
     0
     
     $
     0
     
     $
     0
     
     $
     0
     
     $
     0
     
     $
     0(b)
     (Loss) before extraordinary items (1)Total
     $
     (26,982,082
     )
     $
     (21,099,866
     )
     $
     (5,544,998
     )
     $
     ( 16,111,007
     )
     $
     (8,492,639
     )
     $
     (30,712,592
     )
     $
     (3,948,102
     )Per share (1)
     $
     (0.25
     )
     $
     (0.22
     )
     $
     (0.06
     )
     $
     (0.17
     )
     $
     (0.09
     )
     $
     (0.40

     )
     $
     (0.06
     )(c)
     Total assets
     $
     80,262,195
     
     $
     81,543,823
     
     $
     71,208,177
     
     $
     58,789,331
     
     $
     24,981,649
     
     $
     22,743,078
     
     $
     9,279,398(d)
     Total long-term debt
     $
     520,464
     
     $
     52,939,642
     
     $
     30,939,670
     
     $
     1,367,249
     
     $
     631,775
     
     $
     739,159
     
     $
     0(e)
     Total shareholders equity (deficiency)
     $
     (21,353,115
     )
     $
     (8,920,288
     )
     $
     14,606,134
     
     $
     18,765,944
     
     $
     14,370,149
     
     $
     18,647,224
     
     $
     8,798,091(f)
     Cash dividends declared per share
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a(g)
     Capital stock (number of issued and outstanding common shares)
     
     125,281,951
     
     
     96,040,121
     
     
     95,958,641
     
     
     95,958,641
     
     
     89,876,951
     
     
     89,367,031
     
     
     70,246,303(h)
     Net earnings (loss) for the periodTotal
     $
     (26,982,082
     )
     $
     (21,099,866
     )
     $
     (5,544,998
     )
     $
     (16,111,007
     )
     $
     (8,492,639
     )
     $
     (30,712,592
     )
     $
     (3,948,102
     )Per share (1)
     $
     (0.25
     )
     $
     (0.22
     )
     $
     (0.06
     )
     $
     (0.17
     )
     $
     (0.09
     )
     $
     (0.40
     )
     $
     (0.06
     )
  (1)
     The effect of potential share issuances pursuant to the exercise of options and warrants would be anti-dilutive and, therefore, basic and diluted losses per share are the same.
  INFORMATION IN ACCORDANCE WITH U.S. GAAP: Year Ended
May 31
     
     
     Year Ended
May 31
     
     
     1 Month
Ended
May 31
     
     
     Year Ended
April 30
     
     
     3 Months
Ended
April 30
     
     
     Year
Ended
January 312010
     
     
     2009
     
     
     2008
     
     
     2008
     
     
     2007
     
     
     2007
     
     
     2006(a)
     Total revenue
     $
     55,776,410
     
     $
     653,941
     
     $
     0
     
     $
     0
     
     $
     0
     
     $
     0
     
     $
     0(b)
     (Loss) before extraordinary items (1)Total
     $
     (26,675,905
     )
     $
     (46,852,067
     )
     $
     (3,597,227
     )
     $
     (49,752,062
     )
     $
     (14,635,836
     )
     $
     (35,682,285
     )
     $
     (4,120,582
     )Per share (1)
     $
     (0.25
     )
     $
     (0.49
     )
     $
     (0.04
     )
     $
     (0.53
     )
     $
     (0.16
     )
     $
     (0.46
     )
     $
     (0.07
     )(c)
     Total assets
     $
     23,745,094
     
     $
     26,542,454
     
     $
     37,419,662
     
     $
     36,108,361
     
     $
     19,470,848
     
     $
     19,202,974
     
     $
     9,106,918(d)
     Total long-term debt
     $
     5,486,053
     
     $
     59,727,593
     
     $
     17,303,337
     
     $
     1,367,249
     
     $
     631,775
     
     $
     739,159
     
     $
     0(e)
     Total shareholders equity (deficiency)
     $
     (83,013,583
     )
     $
     (70,709,608
     )
     $
     (5,546,048
     )
     $
     (3,915,026
     )
     $
     8,859,348
     
     $
     15,107,120
     
     $
     8,625,611(f)
     Cash dividends declared per share
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a
     
     
     n/a(g)
     Capital stock (number of issued and outstanding common shares)
     
     125,281,951

     
     
     96,040,121
     
     
     95,958,641
     
     
     95,958,641
     
     
     89,876,951
     
     
     89,367,031
     
     
     70,246,303(h)
     Net earnings (loss) for the periodTotal
     $
     (26,675,095
     )
     $
     (46,852,067
     )
     $
     (3,597,227
     )
     $
     (49,752,062
     )
     $
     (14,635,836
     )
     $
     (35,682,285
     )
     $
     (4,120,582
     )Per share (1)
     $
     (0.25
     )
     $
     (0.49
     )
     $
     (0.04
     )
     $
     (0.53
     )
     $
     (0.16
     )
     $
     (0.46
     )
     $
     (0.07
     )
  (1)
     The effect of potential share issuances pursuant to the exercise of options and warrants would be anti-dilutive and, therefore, basic and diluted losses per share are the same.
  Page 13


---

We have not declared nor paid any dividends since incorporation and we do not anticipate doing so in the foreseeable future. Our present policy is to retain all available funds for use in our operations and the expansion of our business. Difference Between Canadian and Unites States Generally Accepted Accounting Principles Loss for the periodsYear ended
     
     
     Year ended
     
     
     One month endedMay 31
     
     
     May 31
     
     
     May 312010
     
     
     2009
     
     
     2008(Loss) for the period  Canadian GAAP
     $
     (26,982,082
     )
     $
     (21,099,866
     )
     $
     (5,544,998
     )Gain on dilution of equity investment
     
     -
     
     
     (2,238,492
     )
     
     -Mineral properties expensed under U.S. GAAP
     
     (3,411,935
     )
     
     (17,562,548
     )
     
     (1,884,160
     )Revenue recognized
     
     27,948,475
     
     
     653,941
     
     
     -Cost of goods sold
     
     (24,275,977
     )
     
     (1,260,127
     )
     
     -Amortization
     
     (1,825,067
     )
     
     (640,425
     )
     
     -Amortization of balls mills included in mineral properties
under U.S. GAAP
     
     (419,345
     )
     
     -
     
     
     -Depletion of mineral properties under Canadian GAAP
     
     3,338,116
     
     
     -
     
     
     -Loss of variable interest entity under U.S. GAAP
     
     69,765
     
     
     -
     
     
     -Expensing of opening inventory reclassified in prior year
     
     (2,868,999
     )
     
     -
     
     
     -Write down of inventory in finished goods and work in progress
     
     -
     
     
     (2,404,695
     )
     
     -Change in fair value of warrants denominated in Canadian dollars under U.S. GAAP
     
     1,692,320
     
     
     22,871,582
     
     
     -Change in fair value of share capital issued with warrants denominated in Canadian dollars under U.S. GAAP
     
     58,824
     
     
     -
     
     
     -Canadian dollars under U.S. GAAPForeign exchange on difference in mineral properties expensed under U.S. GAAP
     
     -
     
     
     (9,639,262
     )
     
     -Foreign exchange on difference in senior secured notes under U.S. GAAP
     
     -
     
     
     3,180,313
     
     
     -Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP
     
     -
     
     
     (18,712,488
     )
     
     3,831,931Net loss  U.S. GAAP
     $
     (26,675,905
     )
     $
     (46,852,067
     )
     $
     (3,597,227
     )Basic and diluted loss per share  U.S. GAAP
     $
     (0.25
     )
     $
     (0.49
     )
     $
     (0.04
     )Year
     
     
     Three months
     
     
     Yearended April 30
     
     
     ended April 30
     
     
     ended January 312008
     
     
     2007
     
     
     2007(Loss) for the period  Canadian GAAP
     $
     (16,111,007
     )
     $
     (8,492,639
     )
     $
     (30,712,592
     )Gain on dilution of equity investment
     
     (12,582,085
     )
     
     (632,396
     )
     
     (1,701,589
     )Mineral properties expensed under U.S. GAAP
     
     (22,680,970
     )
     
     (5,510,801
     )
     
     (3,540,104
     )Foreign exchange on difference in mineral properties under U.S. GAAP
     
     1,622,000
     
     
     -
     
     
     272,000Net loss  U.S. GAAP
     $
     (49,752,062
     )
     $
     (14,635,836
     )
     $
     (35,682,285
     )Basic and diluted loss per share  U.S. GAAP
     $
     (0.53
     )
     $
     (0.16
     )
     $
     (0.46
     )
  Page 14


---

Balance Sheets
     
     May 31,
     
     
     May 31,
     
     
     May 31,2010
     
     
     2009
     
     
     2008Total assets  Canadian GAAP
     $
     80,262,195
     
     $
     81,543,823
     
     $
     71,208,177Depletion of mineral properties added to ending inventory
     
     (281,617
     )
     
     -
     
     
     -Mineral properties expensed or charged to cost of sales and revenue under U.S. GAAP
     
     (56,235,484
     )
     
     (55,001,369
     )
     
     (33,788,515
     )Total assets  U.S. GAAP
     $
     23,745,094
     
     $
     26,542,454
     
     $
     37,419,662Long term debt  Canadian GAAP
     $
     520,464
     
     $
     52,939,642
     
     $
     30,939,670Allocation of fair value of senior notes under U.S. GAAP
     
     -
     
     
     -
     
     
     (13,636,333
     )Derivative liability warrants
     
     4,965,589
     
     
     6,292,830
     
     
     -Equity component of convertible debt treated as a liability under U.S. GAAP
     
     -
     
     
     495,121
     
     
     -Long term debt  U.S. GAAP
     $
     5,486,053
     
     $
     59,727,593
     
     $
     17,303,337Shareholders deficiency Canadian  GAAPMineral properties expensed or charged to cost of sales and revenue
     $
     (21,353,115
     )
     $
     (8,920,288
     )
     $
     14,606,134Mineral properties expensed or charged to cost of sales and revenue under U. S. GAAP
     
     (56,235,484
     )
     
     (55,001,369
     )
     
     (33,788,515
     )Exercise of warrants denominated in Canadian dollars under U.S. GAAP
     
     272,000
     
     
     -
     
     
     -Depletion added to ending inventory
     
     (281,617
     )
     
     -
     
     
     -(Decrease) increase in retained earnings due to translation of prior year mineral property expenses and senior secured notes
     
     (4,564,949
     )
     
     (4,564,949
     )
     
     1,622,000Difference in accumulated other comprehensive income Increase in net income due to the change in fair value of warrants denominated in Canadian dollars under U.S. GAAP
     
     4,564,949
     
     
     4,564,949
     
     
     (1,622,000
     )Increase in net income due to the change in fair value of warrants denominated in Canadian dollars under U.S.
     
     22,883,272
     
     
     22,871,582
     
     
     -Decrease in warrants due to fair value of warrants denominated in Canadian dollars under U. S. GAAP
     
     (28,120,861
     )
     
     (29,164,412
     )
     
     -Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP
     
     (14,591,713
     )
     
     (14,903,816
     )
     
     3,831,931Allocation of fair value of senior secured notes under U. S. GAAP
     
     14,591,713
     
     
     14,903,816
     
     
     9,804,402Equity component of convertible debenture treated as a liability under U.S. GAAP.
     
     (177,778
     )
     
     (495,121
     )
     
     -Shareholders deficiency  U.S. GAAP
     $
     (83,013,583
     )
     $
     (70,709,608
     )
     $
     (5,546,048
     )Balance Sheets
     
     April 30,
     
     
     April 30,
     
     
     January 31,2008
     
     
     2007
     
     
     2007Total assets  Canadian GAAP
     $
     58,789,331
     
     $
     24,981,649
     
     $
     22,743,078Mineral properties expensed or charged to cost of sales and revenue under U. S. GAAP
     
     (22,680,970
     )
     
     (5,510,801
     )
     
     (3,540,104
     )Total assets  U.S. GAAP
     $
     36,108,361
     
     $
     19,470,848
     
     $
     19,202,974Shareholders equity (deficit) -Canadian GAAP
     $
     18,765,944
     
     $
     14,370,149
     
     $
     18,647,224Mineral properties expensed under U.S. GAAP
     
     (22,680,970
     )
     
     (5,510,801
     )
     
     (3,540,104
     )Shareholders equity (deficit)  U.S. GAAP
     $
     (3,915,026
     )
     $
     8,859,348
     
     $
     15,107,120
  3. B.
     Capitalization and Indebtedness
  Not applicable. Page 15


---

3.C.
     Reasons for the Offer and Use of Proceeds
  Not applicable. 3.D.
     Risk Factors
  The following is a brief discussion of those distinctive or special characteristics of our operations and industry, which may have a material impact on, or constitute risk factors in respect of, our financial performance. However, there may be additional risks unknown to us and other risks, currently believed to be immaterial, that could turn out to be material. These risks, either individually or simultaneously, could significantly affect the groups business and financial results. We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. Investors should carefully consider the risks described below before investing in our securities. The occurrence of any of the following events could harm us. If these events occur, the trading price of our common shares could decline, and investors may lose part or even all of their investment. Mining operations and projects are vulnerable to supply chain disruptions and our operations and development projects could be adversely affected by shortages of, as well as lead times to deliver, strategic spares, critical consumables, mining equipment or metallurgical plant equipment. Our operations and development projects could be adversely affected by shortages of, as well as lead times to deliver, strategic spares, critical consumables and processing equipment. In the past, we and other gold mining companies have experienced shortages in critical consumables, particularly as production capacity in the global mining industry has expanded in response to increased demand for commodities, and we have experienced increased delivery times for these items. These shortages have also resulted in unanticipated increases in the price of certain of these items. Shortages of strategic spares, critical consumables or mining equipment, which could occur in the future, could result in production delays and production shortfalls, and increases in prices result in an increase in both operating costs and the capital expenditure to maintain and develop mining operations. We and other gold mining companies, individually, have limited influence over manufacturers and suppliers of these items. In certain cases there are only limited suppliers for certain strategic spares, critical consumables and processing equipment and they command superior bargaining power relative to us, or we could at times face limited supply or increased lead time in the delivery of such items. If we experience shortages, or increased lead times in delivery of strategic spares, critical consumables or processing equipment our results of operations and our financial condition could be adversely affected. We face uncertainty and risks in our exploration and project evaluation activities. Exploration activities are speculative in nature and project evaluation activities necessary to determine whether a viable mining operation exists or can be developed are often unproductive. These activities also often require substantial expenditure to establish the presence, and to quantify the extent and grades (metal content), of mineralized material through exploration drilling. Once mineralization is discovered it can take several years to determine whether adequate ore reserves exist. During this time, the economic feasibility of production may change owing to fluctuations in factors that affect revenue, as well as cash and other operating costs, including: future metal and other commodity prices;anticipated tonnage, grades and metallurgical characteristics of the ore to be mined and processed;anticipated recovery rates of gold from the ore; andanticipated capital expenditure and cash operating costs. These estimates depend upon the data available and the assumptions made at the time the relevant estimate is made. Resource estimates are not precise calculations and depend on the interpretation of limited information on the location, shape and continuity of the occurrence and on the available sampling results. Further exploration and studies can result in new data becoming available that may change previous resource estimates which will impact upon both the technical and economic viability of production of the relevant mining project. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of resources resulting in revisions to previous resource estimates. These revisions could impact depreciation and amortization rates, asset-carrying values provisions for closedown, restoration and environmental clean-up costs. These estimates depend upon the data available and the assumptions made at the time the relevant estimate is made. Page 16


---

We undertake revisions to our resource estimate based upon actual exploration and production results, new information on geology and fluctuations in production, operating and other costs and which could adversely affect the life-of-mine plans and consequently the total value of our mining asset base. Resource restatements could negatively affect our results, financial condition and prospects, as well as our reputation. The increased demand for gold and other commodities, combined with a declining rate of discovery, has resulted in existing reserves being depleted at an accelerated rate in recent years. We, therefore, face intense competition for the acquisition of attractive mining properties. From time to time, we evaluate the acquisition of exploration properties and operating mines, either as stand-alone assets or as part of companies. Our decisions to acquire these properties have historically been based on a variety of factors including estimates of and assumptions regarding the extent of resources, cash and other operating costs, gold prices and projected economic returns and evaluations of existing or potential liabilities associated with the relevant property and our operations and how these factors may change in the future. All of these factors are uncertain and could have an impact upon revenue, cash and other operating issues, as well as the uncertainties related to the process used to estimate resources. As a result of these uncertainties, the exploration programs and acquisitions engaged in by us may not result in the expansion or replacement of the current production with new resources or operations. Our operating results and financial condition are directly related to the success of our exploration and acquisition efforts and our ability to replace or increase existing resources. If we are not able to maintain or increase our resources, our results of operations and our financial condition and prospects could be adversely affected. We face many risks related to the development of our mining projects that may adversely affect our results of operations and profitability. The profitability of mining companies depends, in part, on the actual costs of developing and operating mines, which may differ significantly from estimates determined at the time a relevant mining project was approved. The development of mining projects may also be subject to unexpected problems and delays that could increase the cost of development and the ultimate operating cost of the relevant project. Our decision to develop a mineral property is based on estimates made as to the expected or anticipated project economic returns. These estimates are based on assumptions regarding: future gold prices;anticipated tonnage, grades and metallurgical characteristics of ore to be mined and processed;anticipated recovery rates of gold extracted from the ore; andanticipated capital expenditure and cash operating costs. Actual cash operating costs, production and economic returns may differ significantly from those anticipated by such estimates. There are a number of uncertainties inherent in the development and construction of an extension to an existing mine, or in the development and construction of any new mine. In addition to those discussed above, these uncertainties include the: timing and cost of the construction of mining and processing facilities, which can be considerable;availability and cost of skilled labor, power, water and transportation facilities;need to obtain necessary environmental and other governmental permits and the time to obtain such permits; andavailability of funds to finance construction and development activities. New mining operations could experience unexpected problems and delays during development, construction and mine start-up. In addition, delays in the commencement of mineral production could occur. Finally, operating cost and capital expenditure estimates could fluctuate considerably as a result of changes in the prices of commodities consumed in the construction and operation of mining projects. Accordingly, our future development activities may not result in the expansion or replacement of current production with new production, or one or more new production sites or facilities may be less profitable than currently anticipated or may not be profitable at all. Our operating results and financial conditions are directly related to the success of our project developments. A failure in our ability to develop and operate mining projects in accordance with, or in excess of, expectations could negatively affect our results of operations and our financial condition and prospects. Page 17


---

We may require additional funding in order to continue our operations. Although we have commenced commercial production at the Molejon gold property, cash flow to satisfy our operational requirements, debt repayments and cash commitments is not guaranteed from the operations of our Molejon gold plant. In the past, we have relied on sales of equity securities or debt financing to meet most of our cash requirements, together with project management fees, property payments and sales or joint ventures of properties. There can be no assurance that funding from these sources will be sufficient in the future to satisfy our operational requirements, debt repayments and cash commitments. We do not presently have sufficient financial resources to undertake all of our planned exploration and development programs. The development of our properties depends upon our ability to obtain financing through any or all of the joint venturing of projects, debt financing, equity financing or other means. There is no assurance that we will be successful in obtaining the required financing. Failure to obtain additional financing on a timely basis could cause us to forfeit our interest in our properties and reduce or terminate operations on such properties. We have a history of losses, an accumulated deficit and there is substantial uncertainty regarding our ability to continue as a going concern. We have incurred net losses to date. As at May 31, 2010, we have an accumulated deficit of $146,757,018 and for the year ended May 31, 2010, incurred a loss of $26,982,082 from continuing operations. Continuing operations are dependent on us achieving profitable operations and being able to raise capital, as necessary, to meet our obligations and repay liabilities when they come due. Should we fail to achieve profitability or, if necessary, raise sufficient capital to sustain operations, we may be forced to suspend our operations and possibly even liquidate our assets and wind-up and dissolve our company. The consolidated financial statements are prepared on a going concern basis, which assumes that we will be able to realize our assets at the amounts recorded and discharge our liabilities in the normal course of business in the foreseeable future. Should this assumption not be appropriate, adjustments in the carrying amounts of the assets and liabilities to their realizable amounts and the classifications thereof will be required and these adjustments and reclassifications may be material. Our level of indebtedness could adversely affect our business. We have been unable to meet all of our obligations with respect to scheduled repayments of principal, premium and interest on our Notes and interest on our Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, we have paid $1,200,000. Under the terms of the Indenture an event of default has occurred and the Notes and Convertible Notes are currently due on demand at the option of the Note holders and Convertible Note holders or the Trustee. As of May 31, 2010, we had $71,387,328 in redemption amount of Notes and Convertible Notes outstanding. Subsequent to year end, we entered into a prepaid gold forward facility with Deutsche Bank AG (Deutsche Bank) for $45,000,000. Upon the satisfaction of certain conditions precedent and the successful completion of this transaction, net proceeds of approximately $41,000,000 will be used to extinguish a portion of the Companys Notes and Convertible Notes. (See Note 26 to the Consolidated Financial Statements) We may also incur additional indebtedness in the future. Our high debt levels may have important consequences for us, including, but not limited to the following: Our ability to obtain additional financing for working capital, capital expenditures, general corporate and other purposes or to fund future operations may not be available on terms favourable to us or at all;A significant amount of our operating cash flow is dedicated to the payment of interest and principal on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes; Page 18


---

Increasing our vulnerability to current and future adverse economic and industry conditions;A substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations;Our leveraged capital structure may place us at a competitive disadvantage by hindering our ability to adjust rapidly to changing market conditions or by making us vulnerable to a downturn in our business or the economy in general;We may have to offer debt or equity securities on terms that may not be favourable to us or to our shareholders;Limiting our flexibility in planning for, or reacting to, changes and opportunities in our business and our industry; andOur level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay the principal or interest due in respect of our indebtedness. We face many risks related to our operations that may adversely affect our cash flows and overall profitability. Gold mining is susceptible to numerous events that may have an adverse impact on our mining business, our ability to produce gold and meet our production targets. These events include, but are not limited to: environmental hazards, including discharge of metals, pollutants or hazardous chemicals;industrial accidents;fires;labor disputes;mechanical breakdowns;electrical power interruptions;encountering unexpected geological formations;unanticipated ground conditions;ingresses of water;process water shortages;failure of mining pit slopes, water dams, waste stockpiles and tailings dam walls;legal and regulatory restrictions and changes to such restrictions;safety-related stoppages;other natural phenomena, such as floods, droughts or inclement weather conditions, potentially exacerbated by climate change. Mineral prices can fluctuate dramatically and have a material adverse effect on our results of operations. Our revenues are primarily derived from the sale of gold and the market price for gold fluctuates widely. These fluctuations are caused by numerous factors beyond our control including: speculative positions taken by investors or traders in gold;changes in the demand for gold as an investment;changes in the demand for gold used in jewellery and for other industrial uses, including as a result of prevailing economic conditions;changes in the supply of gold from production, disinvestment, scrap and hedging;financial market expectations regarding the rate of inflation;strength of the US dollar (the currency in which the gold price trades internationally) relative to other currencies;changes in interest rates;actual or expected sales or purchases of gold by central banks and the International Monetary Fund;gold hedging and de-hedging by gold producers;global or regional political or economic events; and Page 19


---

the cost of gold production in major gold producing countries. The market price of gold has recently experienced significant volatility. During 2009, the gold price traded from a record high of $1,226.10 per ounce to a low of $801.65 per ounce. On August 27, 2010, the afternoon fixing price of gold on the London Bullion Market was $1,235.00 per ounce. The price of gold is often subject to sharp, short-term changes resulting from speculative activities. While the overall supply of and demand for gold can affect its market price, because of the considerable size of above-ground stocks of the metal in comparison to other commodities, these factors typically do not affect the gold price in the same manner or degree that the supply of and demand for other commodities tends to affect their market price. In addition, the recent shift in gold demand from physical demand to investment and speculative demand may exacerbate the volatility of gold prices. A sustained period of significant gold price volatility may adversely affect our ability to evaluate the feasibility of undertaking new capital projects or continuing existing operations or to make other long-term strategic decisions. If revenue from gold sales falls below the cost of production for an extended period, we may experience losses and be forced to curtail or suspend some or all of our capital projects or existing operations. In addition, we would have to assess the economic impact of low gold prices on our ability to recover any losses that may be incurred during that period and on our ability to maintain adequate cash reserves. We face risks related to operations in foreign countries. Currently our properties are located only in Panama, a country with a developing mining sector but with no other commercially producing mines. Consequently, we are subject to, and our mineral exploration and mining activities may be affected in varying degrees by, certain risks associated with foreign ownership including inflation, political instability, political conditions and government regulations. Any changes in regulations or shifts in political conditions are beyond our control and may adversely affect our business. Operations may be affected by government regulations with respect to restrictions on production, restrictions on foreign exchange and repatriation, price controls, export controls, restriction of earnings distribution, taxation laws, expropriation of property, environmental legislation, water use, mine safety and renegotiation or nullification of existing concessions, licenses, permits, and contracts. In particular, the status of Panama as a developing country may make it more difficult for us to obtain any required production financing for our properties from senior lending institutions. Failure to comply strictly with applicable laws, regulations and local practices relating to mineral rights applications and tenure could result in loss, reduction or expropriation of entitlements, or the imposition of additional local or foreign parties as joint venture partners with carried or other interests. The occurrence of these various factors and uncertainties cannot be accurately predicted and could have an adverse effect on our operations or profitability. The requirements of the Ley Petaquilla may have an adverse impact on us. Our operations in Panama are governed primarily by Law No. 9 of the Legislative Assembly of Panama (the Ley Petaquilla), a project-specific piece of legislation enacted in February 1997 to deal with the orderly development of the Cerro Petaquilla Concession. The Ley Petaquilla granted a mineral exploration and exploitation concession to Minera Panama, S.A. (formerly known as Minera Petaquilla, S.A. (MPSA)), a Panamanian company formed in 1997 to hold the Cerro Petaquilla Concession covering approximately 136 square kilometers in north-central Panama. Although we no longer hold an interest in the copper deposits therein, we continue to hold the rights to the Molejon gold deposit and, as the Cerro Petaquilla Concession encompasses this deposit, the Ley Petaquilla governs our exploration activities. The Ley Petaquilla contains fiscal and legal stability clauses necessary in order to obtain project financing and includes tax exemptions on income, dividends and imports. The Ley Petaquilla also provides for an increase in the annual available infrastructure tax credit, higher depreciation rates for depreciable assets which cannot be used in the infrastructure tax credit pool, and a favorable depletion allowance. In order to maintain the Cerro Petaquilla Concession in good standing, MPSA must pay to the Government of Panama an annual rental fee of $0.50 per hectare during the first two years of the concession, $1.00 per hectare in the third and fourth years of the concession and $1.50 per hectare thereafter. The concession was granted for a 20-year term with up to two 20-year extensions permitted, subject to the requirement to begin mine development and to make a minimum investment of $400 million in the development of the Cerro Petaquilla Concession. Under the Ley Petaquilla, MPSA was required to begin mine development by May 2001. However, MPSA was able to defer commencing development operations by one month for every month that the price of copper remained below $1.155 per pound for up to a further five years (i.e. until May 2006 at the latest). In September 2005, the multi-phase Petaquilla Mine Development Plan (the Plan) submitted to the Government of Panama by us and MPSA was approved by Ministerial Resolution. The Molejon gold mineral deposit forms part of the Cerro Petaquilla Concession and the first phase of the Plan focused on the advancement of the Molejon gold deposit by us as commenced in 2006. Subsequent phases of the Plan are the responsibility of MPSA. Page 20


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The Ley Petaquilla also requires MPSA to (i) deliver an environmental report to the General Directorate of Mineral Resources of the Ministry of Commerce and Industries (MICI) for evaluation; (ii) submit, prior to extraction, an environmental feasibility study specific to the project area in which the respective extraction will take place; (iii) submit annually a work plan comprising the projections and approximate costs for the respective year to the MICI; (iv) post letters of credit in support of required compliance and environmental protection guarantees; (v) annually pay surface canons; (vi) annually pay royalties for extracted minerals; (vii) annually present to the MICI detailed reports covering operations and employment and training; (viii) create and participate in the administration of a scholarship fund to finance studies and training courses or professional training for the inhabitants of the communities neighboring the Cerro Petaquilla Concession in the provinces of Cocle and Colon; and (ix) maintain all mining and infrastructure works and services of the project, always complying with the standards and regulations of general application in force that pertain to occupational safety, health and construction. For reference, a copy of Law No. 9, as passed by the Legislative Assembly of Panama on February 26, 1997, was provided with our Form 20-F for the fiscal year ended May 31, 2009, as Exhibit 4.V. Our operations are subject to environmental and other regulation. Our current or future operations, including development activities and production on our properties, require permits from various governmental authorities and such operations are and will be subject to laws and regulations governing prospecting, development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety, community services and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. Other than the Molejon gold mine, there can be no assurance that approvals and permits required to commence production on our various properties will be obtained. Additional permits and studies, which may include environmental impact studies conducted before permits can be obtained, may be necessary prior to operation of the properties in which we have interests and there can be no assurance that we will be able to obtain or maintain all necessary permits that may be required to commence construction, development or operation of mining facilities at these properties on terms which enable operations to be conducted at economically justifiable costs. Our potential mining and processing operations and exploration activities in Panama are subject to various federal and provincial laws governing land use, the protection of the environment, prospecting, development, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, mine safety, community services and other matters. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that we obtain permits from various governmental agencies. We believe that we are in substantial compliance with all material laws and regulations that currently apply to corporate activities. There can be no assurance, however, that all permits which may be required for construction of mining facilities and conduct of mining operations will be obtainable on reasonable terms or that such laws and regulations would not have a material adverse effect on any mining project that we might undertake. Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions there under, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in capital expenditures or production costs or reductions in levels of production at producing properties or abandonment or delays in development of new mining properties. To the best of our knowledge, we are currently operating in compliance with all applicable environmental regulations except as to matters under mitigation as requested by the government of Panama. Page 21


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Our directors may have conflicts of interest. As of November 6, 2009, one of our directors, David Levy, holds a position with Platinum Management (NY) LLC, an investment advising firm to Platinum Partners Value Arbitrage Fund LP, a New York based investment fund. Platinum Partners Value Arbitrage Fund LP holds securities in us and a portion of our debt. However, Mr. Levy is not a director of nor is he an officer of Platinum Partners Value Arbitrage Fund LP nor are any of our directors insiders of any other reporting company. While currently none of our directors beneficially owns a 10% or greater interest in the voting power of any other mineral resource companies, they could in the future. To the extent that these other companies may participate in ventures in which we may participate, such directors may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation, which could result in competitive harm to us. In the event that such a conflict of interest arises at a meeting of the directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In appropriate cases, we will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. In accordance with the laws of the Province of British Columbia, the Companys directors are required to act honestly, in good faith and in our best interests. In determining whether or not we will participate in a particular program and the interest therein to be acquired by it, our directors primarily consider the potential benefits to us, the degree of risk to which we may be exposed and our financial position at that time. Other than as indicated, we have no other procedures or mechanisms to prevent conflicts of interest. Environmental protestors are present in Panama. Various independent environmental groups or individuals would like to prevent the operation of mining in Panama. Our operations could be significantly disrupted or suspended by activities such as protests or blockades that may be undertaken by such groups or individuals. Our common shares are subject to penny stock rules, which could affect trading in our shares. Our common shares are classified as penny stock as defined in Rule 15g-9 promulgated under the Exchange Act. In response to perceived abuse in the penny stock market generally, the Exchange Act was amended in 1990 to add new requirements in connection with penny stocks. In connection with effecting any transaction in a penny stock, a broker or dealer must give the customer a written risk disclosure document that (a) describes the nature and level of risk in the market for penny stocks in both public offerings and secondary trading, (b) describes the broker's or dealer's duties to the customer and the rights and remedies available to such customer with respect to violations of such duties, (c) describes the dealer market, including bid and ask prices for penny stock and the significance of the spread between the bid and ask prices, (d) contains a toll-free telephone number for inquiries on disciplinary histories of brokers and dealers and (e) defines significant terms used in the disclosure document or the conduct of trading in penny stocks. In addition, the broker-dealer must provide to a penny stock customer a written monthly account statement that discloses the identity and number of shares of each penny stock held in the customers account and the estimated market value of such shares. The extensive disclosure and other broker-dealer compliance related to penny stocks may result in reducing the level of trading activity in the secondary market for our common shares, thus limiting the ability of our shareholders to sell their shares. U.S. investors may not be able to enforce their civil liabilities against us or our directors, controlling persons and officers. Our company, our officers and some of our directors are residents of countries other than the United States, and all of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or enforce in the United States against such persons judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of United States federal securities laws or state securities laws. We believe that a judgment of a United States court predicated solely upon civil liability under United States securities laws would probably be enforceable in Canada if the United States court in which the judgment was obtained has a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. However, there is doubt whether an action could be brought in Canada in the first instance on the basis of liability predicated solely upon such laws. If we are characterized as a Passive Foreign Investment Company (PFIC), our U.S. shareholders may be subject to adverse U.S. federal income tax consequences. We have not made a determination as to whether we are considered a PFIC as such term is defined in the U.S. Internal Revenue Code of 1986, as amended (the Code), for U.S. federal income tax purposes for the current tax year and any prior tax years. A non-U.S. corporation generally will be considered a PFIC for any tax year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. Page 22


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In general, if we are or become a PFIC, any gain recognized on the sale of our common stock and any excess distributions (as specifically defined in the Code) paid on the common stock must be ratably allocated to each day in a U.S. taxpayers holding period for the common stock. The amount of any such gain or excess distribution allocated to prior years of such U.S. taxpayers holding period for the common stock generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year, and the U.S. taxpayer will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year. For more information, see Material United States Federal Income Tax Consequences-Passive Foreign Investment Company. ITEM 4.
     INFORMATION ON THE COMPANY
  4.A.
     History and Development of the Company
  We are a corporation organized under the laws of the Province of British Columbia, Canada. We were incorporated on October 10, 1985, under the name Adrian Resources Ltd. by registration of our Memorandum and Articles of Association with the British Columbia Registrar of Companies pursuant to the Company Act (British Columbia) (the BCCA). The BCCA was replaced by the Business Corporations Act (British Columbia) (the BCA) in March 2004 and we are now governed by the BCA. Our name was changed from Adrian Resources Ltd. to Petaquilla Minerals Ltd. on October 12, 2004. Our principal office is located at Suite 410, 475 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4M9. The telephone number for our principal office is (604) 694-0021 and the facsimile number is (604) 694-0063. We have twelve subsidiaries and one joint venture interest as detailed below: (i)
     We own all of the issued shares of Adrian Resources (BVI) Ltd., which was incorporated in the British Virgin Islands on December 17, 1999.(ii)
     Adrian Resources (BVI) Ltd. owns all of the issued shares of Petaquilla Minerals, S.A., which was incorporated in the Republic of Panama on April 28, 1992, and holds title to certain of our exploration concessions in the Republic of Panama. Although originally incorporated under the name Adrian Resources, S.A., the name of such subsidiary was changed to Petaquilla Minerals, S.A on February 3, 2005.(iii)
     Petaquilla Minerals, S.A. owns all of the issued shares of Petaquilla Gold, S.A., a Panamanian corporation formed on August 11, 2005. Petaquilla Gold, S.A. holds the Molejon gold property interest and other potential gold deposits within the Cerro Petaquilla Concession lands.(iv)
     Petaquilla Minerals, S.A. owns all of the issued shares of Instituto Petaquilla, S.A., a Panamanian corporation which was formed on April 23, 2007, to conduct training and education programs for our personnel.(v)
     Petaquilla Minerals, S.A. owns all of the issued shares of Brigadas Verdes, S.A., a Panamanian corporation which was formed on March 27, 2007, to coordinate and manage reforestation activities.(vi)
     Compañìa Minera Belencillo, S.A., a Panamanian corporation, was formed on September 21, 2005, in accordance with the agreement signed between Petaquilla Minerals, S.A. and Madison Enterprises (Latin American), S.A. Petaquilla Minerals, S.A. owns 68.88% of Compañìa Minera Belencillo, S.A., which in turn holds a 100% interest in Zone 2 of the Rio Belencillo Concession and 68.88% of Zone 1, subject to an option by Madison Enterprises (Latin American), S.A. to earn a 31.12% interest in Zone 1 of the Rio Belencillo Concession. On May 7, 2005, we entered into an option agreement with Gold Dragon Capital Management Ltd. (Gold Dragon) whereby Gold Dragon could earn a 100% interest in the concession lands by the expenditure of $500,000 over two years on mutually agreed upon property expenditures.(vii)
     Petaquilla Gold, S.A. owns 50.2% of the shares of Petaquilla Infraestructura, S.A. (formerly named Petaquilla Power & Water, S.A.), a Panamanian corporation formed on September 21, 2006, primarily for the purposes of(i) designing, constructing, operating, maintaining and installing equipment and networks for the generation, transmission and commercialization of electrical energy; and (ii) developing projects for the production, distribution and commercialization of potable water.(viii)
     Petaquilla Gold, S.A. also owns all of the issued shares of Aqua Azure, S.A., a Panamanian corporation which was formed on October 10, 2006, to purchase, sell, lease, manage, commercialize and hold investment in various moveable goods.
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(ix)
     We own 47.78% of the issued shares of Panamanian Development and Infrastructure Ltd., formerly Petaquilla Infrastructure Ltd., incorporated in British Columbia, Canada, on May 29, 2009.(x)
     We own all of the issued shares of Petaquilla Infraestructura Ltd., which was incorporated in the British Virgin Islands on February 21, 2008.(xi)
     Petaquilla Infraestructura Ltd. owns all of the issued shares of Panama Desarollo de Infraestructuras, S.A., formerly Petaquilla Hidro, S.A., a Panamanian corporation formed on October 10, 2008.(xii)
     Panama Desarollo de Infraestructuras, S.A. owns all of the issued shares of Petaquilla Security, S.A., a Panamamanian corporation formed on April 25, 2007.(xiii)
     Panama Desarollo de Infraestructuras, S.A. owns all of the issued shares of Panama Central Electrica, S.A., a Panamanian corporation formed on February 16, 2009.
  We are engaged in the acquisition, exploration, exploration management and sale of mineral properties, with the primary aim of developing them to a stage where they can be exploited at a profit. We are currently active in the production of gold from our open pit mine at our Molejon gold project, which achieved commercial production status on January 8, 2010, in Panama as well as the exploration of a number of our adjacent mineral concessions in the Republic of Panama. Molejon Property  Panama Our interest in the Molejon deposit was acquired in 1992 and 1993 through two separate series of transactions and in 2005 by way of an agreement amongst the shareholders of MPSA. Specifically, in June 2005, the shareholders of MPSA agreed to separate the gold deposit and other precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession from the copper mineral deposits within the Cerro Petaquilla Concession. The agreement provided for us, through our subsidiary, Petaquilla Gold, S.A., to own a 100% interest in the Molejon gold deposit, as well as all other gold and precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession, subject to a graduated 5% - 7% Net Smelter Return, based on the future gold price at the time of production, payable to others. In September 2005, the multi-phase Petaquilla Mine Development Plan (the Plan) submitted to the Government of Panama by us and MPSA was approved by Ministerial Resolution. The Molejon gold mineral deposit forms part of the Cerro Petaquilla Concession lands and the first phase of the Plan focused on the advancement of the Molejon gold deposit by us commencing in 2006. Subsequent phases of the Plan are the responsibility of MPSA, the joint venture company in which we no longer hold an interest. Principal Capital Expenditures and Divestitures Over Last Three Fiscal Years As at May 31, 2010, we have incurred $62,408,006, net of revenue of $27,908,659 in Molejon property costs which have been capitalized as mineral properties as noted below. Plant
     $
     46,876,372Camp
     
     5,553,824Plant equipment
     
     2,973,133Tailings ponds
     
     1,599,202Reclamation costs
     
     3,166,947Site improvements under construction
     
     238,734Capitalized interest expense
     
     1,999,794$
     62,408,006
  A total of $60,843,501, net of revenue of $653,941 was capitalized in mineral property cost as at May 31, 2009. Current Principal Capital Expenditures and Divestitures We have either ongoing or anticipated capital expenditures during the fiscal year ending May 31, 2011. With respect to the planned exploration and advancement of the Molejon property, we anticipate having capital expenditures of approximately $3,000,000 to $5,200,000 during the fiscal year ending May 31, 2011. However, such expenditures are subject to further consideration and to our ability to obtain external financing. There is no assurance that we will be successful in obtaining such financing. Page 24


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Public Takeover Offers During the 12 month period ended May 31, 2010, and during the current fiscal year, we did not receive any public takeover offers from third parties nor did we make any such takeover offers. 4.B.
     Business Overview
  Molejon Property  Panama We currently have no significant properties in Canada and we are not actively exploring, or seeking to acquire interests in, mineral properties in Canada. Our primary focus has been the exploration of the Molejon gold deposit, and, commencing January 8, 2010, the production thereof, and other mineral properties in the Republic of Panama. We have generated revenues of $27,827,935 from our commercial production operations. We received an operating permit from the Government of Panama on November 18, 2009, authorizing us to proceed to commercial production, which was achieved on January 8th, 2010, after having run our gold production plant at an average of 70% of its normal capacity for a consecutive period of 30 days. Actual production during the fourth quarter of the fiscal year was lower than anticipated due to operational difficulties arising from the breakdown of two of our three ball mills. One of the ball mills was put out of commission from a lightning strike and the other was down due to inadequate preventative maintenance. We have now hired a new maintenance team as well as a maintenance planner to rectify this problem. All three ball mills are now operational. Full commissioning of the primary crusher and complementary scrubber line was achieved during the fourth quarter of fiscal 2010. Construction of the walls for tailings pond #2, to a level of 106 metres, was completed in the fourth quarter and construction commenced on tailings pond #1. Construction of tailings pond #1 will extend over a period of 11 months. Construction is ongoing for an on-site test facility for the second phase of the heap leach project, which will test the recoverability of the different ore types and particle sizes for the potential heap leach operation to process low grade ores. Independent consultant, Geovectra, S.A., completed the design of the open pit and respective life of mine plan and a 43-101 statement on mineable reserves will be issued in the second quarter of fiscal 2011. Pre-stripping and blasting activities continued on the main zone of the deposit along with the works required for the deviation of two water ridges crossing the pit area. The Republic of Panama, through the Ministry of Commerce and Industry, is the regulatory body overseeing the Cerro Petaquilla Concession and potential future development thereof. Law No. 9 , the Ley Petaquilla, passed by the Legislative Assembly of Panama on February 26, 1997, is a project-specific piece of legislation dealing with the orderly development of the Cerro Petaquilla Concession, including the Molejon gold deposit. The Ley Petaquilla could be amended by the government of Panama through the enaction of a subsequent law but no such law has been enacted since the Ley Petaquilla legislation was adopted in February 1997. At such time, the Ley Petaquilla granted a mineral exploration and exploitation concession to MPSA, a Panamanian company which was formed in 1997 to hold the 136 square kilometre Cerro Petaquilla Concession. Our Molejon property comprises approximately 10% of the Cerro Petaquilla lands. The Ley Petaquilla contains fiscal and legal stability clauses necessary in order to obtain project financing and includes tax exemptions on income dividends and imports. The Ley Petaquilla also provides for an increase in the annual available infrastructure tax credit, higher depreciation rates for depreciable assets, which cannot be used in the infrastructure tax credit pool, and a favourable depletion allowance. There were no competing bidders for the concession at the time the Ley Petaquilla was enacted and the concession was granted for an initial 20-year term with two 20-year extensions permissible subject to the requirements to begin mine development and to make a minimum required investment. In 2005, we and our former partners in MPSA delivered the Plan to the Government of Panama and the Plan was approved by Ministerial Resolution in September 2005. Development of the Molejon gold mineral deposit by us, which commenced in 2006 forms the first phase of the Plan. Subsequent phases of the Plan will be the responsibility of MPSA. Page 25


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Such government approval of the Plan resulted in the extension of the land tenure for an initial 20-year period which commenced September 2005, subject to MPSA meeting certain other ongoing development and operational conditions. In addition, pursuant to the Ley Petaquilla, in order to maintain the Cerro Petaquilla Concession in good standing, we and MPSA must continue to meet certain obligations. The Ley Petaquilla comprises the agreement between the Republic of Panama and MPSA and its affiliates and it identifies each partys rights and obligations. The majority of our obligations require that the Republic of Panama be provided with a variety of reports, studies and work plans, payment of surface canons, access and use of port installations, evidence of bonding, etc. An example of an obligation that requires government approvals concerns the environment and states that an Environmental Feasibility Study specific to the project area in which the respective extradition will take place must be submitted to the General Direction of Mineral Resources of the Ministry of Commerce and Industries. Said study shall be evaluated and its approval, modification or rejection shall be defined within a term of 45 days counted as of the date of its presentation to the General Direction of Mineral Resources. After the end of this term, if there is no statement from the General Direction of Mineral Resources, the Environmental Feasibility Study shall be considered approved. For complete disclosure of Panamas requirements, please refer to Law No. 9 as passed by the Legislative Assembly of Panama on February 26, 1997, or the English translation thereof, attached as Exhibits 4.V. and 4.W. to our Form 20-F for the fiscal year ended May 31, 2009. 4.C.
     Organizational Structure
  The following chart sets out our corporate structure and the mineral properties held by each of our subsidiaries. Page 26


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4.D.
     Property, Plant and Equipment
  With the exception of our Molejon gold project, which has reached commercial production, all of our other properties are in the exploration stage and are without a known body of commercial ore. Commercial production at the Molejon gold mine commenced January 8, 2010, when an average of 70% of design capacity was maintained continuously for a period of 30 days with metallurgical recoveries approaching forecast levels. As at May 31, 2010, including the commissioning period of the Molejon gold plant, we produced approximately 55,871 ounces of gold and 33,449 ounces of silver since April 7, 2009. Mineral Concession Lands Introduction We brought our Molejon gold project located on the Cerro Petaquilla Concession to commercial production on January 8, 2010. We also hold the rights to 842 square kilometres of virtually unexplored land surrounding the known deposits of the Cerro Petaquilla Concession. Our concession lands are located approximately 120 kilometres west of Panama City and 10 kilometres from the Caribbean coast within the Donoso District of the Province of Colon in the Republic of Panama. Property Location Figure 1
Mineral Property Location Map  A map identifying the various concession lands, including the Cerro Petaquilla Concession held by MPSA and our Molejon gold deposit, follows on the next page as Figure 2. Page 28


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Figure 2 
Concession Map  Page 29


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Figure 3 is a diagram focusing primarily on the 136-square kilometre Cerro Petaquilla Concession with our Molejon gold deposit area cross-hatched in red: Figure 3
Cerro Petaquilla Concession  The Cerro Petaquilla Concession is largely held by MPSA although, pursuant to the Molejon Gold Project Agreement dated June 2, 2005 (the Molejon Gold Project Agreement), the full text of which was filed as Exhibit 4.T. to our Annual Report on Form 20-F for the fiscal year ended May 31, 2009, we hold the rights to the Molejon gold deposit found within the concession lands as well as to other gold and precious metal mineral deposits that might be developed within Cerro Petaquilla Concession. This concession contains a large copper-gold porphyry system and our epithermal gold deposit, Molejon, amenable to open pit mining. To date, exploration has identified eight copper-gold porphyry deposits along with our Molejon gold deposit. Our activities are focused on the Molejon gold deposit and the first phase of the Plan submitted by us and MPSA and approved by the government of Panama in 2005. In addition, we intend to perform further exploration on other identified gold targets within the Cerro Petaquilla Concession and those within our wholly-owned properties surrounding the Cerro Petaquilla Concession. Location, Access & Physiography The Cerro Petaquilla Concession is located 20 kilometres inland from the Caribbean coast and elevation within the concession boundaries ranges between 70 metres and 350 metres above sea level. The Cerro Petaquilla Concession falls within the rainfall shadow of the Continental Divide and the terrain is generally rugged and covered with heavy rainforest vegetation. The climate of the Cerro Petaquilla Concession is characteristic of tropical rainforests. Precipitation is high throughout the year with annual rainfall averaging at least 4,700 mm in the concession area. The heaviest precipitation is evenly distributed from May to December and the months of January to April are typically the driest months. The Molejon gold property within the Cerro Petaquilla Concession is accessible by road or helicopter. We have completed construction of the 28-kilometre Llano GrandeCoclesito dirt road from Coclesito, a village of approximately 700 inhabitants, to the mine site. As part of the Llano Grande-Coclesito Road Improvement Project, the Cascajal Bridge has been completed and was inaugurated on January 16, 2007, by the Minister of Public Works of Panama. An additional bridge spanning the San Juan River has also been completed. This road replaces a network of trails, which was the previous access, and the new road portion will ultimately be upgraded to rural paved status as part of ongoing development work. While the road has initially been designed to provide access to the mine site, it will ultimately comprise part of a future expansion of the national road network connecting communities with the region. Thirty kilometres of gravel road connects Coclesito with La Pintada, a town of 5,000 people on the country's paved highway network, and the Pan-American Highway to the south. This road will also be upgraded to rural paved status as part of ongoing development work. Page 30


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Plant and Equipment We have constructed a gold-processing surface plant at our Molejon gold project, where ore treatment utilizes a three stage crushing plant followed by milling in three parallel ball mills. Subsequent gold recovery is done by a carbon-in-pulp leaching operation as well as a five stage carbon-in-column process. Carbon elution and electrowinning of the gold is performed to produce a gold doré product that is sent for further refinement. Detoxification of the tailings is followed by storage in the sites 40 hectare high-density polyethylene lined tailings facility. Figure 4
Molejon Gold Project  Molejon Gold Plant   Mine Operations Mining at our Molejon gold project, which is divided into three principal regions namely the Northwest Zone, Tajo Abierto Zone and Main Zone, is completely open pit in nature and currently performed under contract. Current production at the pit is conducted through a combination of mechanized mining and blasting. Page 31


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Figure 5
Molejon Gold Project  Northwest Zone Pit   Figure 6
Molejon Gold Project  Crushing and Conveying   Page 32


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Figure 7
     Figure 8Leaching Tanks
     Carbon Column Systems
  Figure 9
     Figure 10Tailings Thickener
     View of Tailings Pond
  Exploration and Advancement of the Molejon Property With respect to the planned exploration and advancement of the Molejon property, we anticipate having capital expenditures of approximately $3,000,000 to $5,200,000 during the fiscal year ending May 31, 2011, with such funds to be used for the third stage of the tailings pond construction, spare parts, supplies and other materials and equipment items as needed. However, such expenditures are subject to further consideration and to our ability to obtain external financing. There is no assurance that we will be successful in obtaining such financing. Title Cerro Petaquilla Concession  Panama Prior to October 18, 2006, we owned, through our indirect share ownership of MPSA, a 52% interest in the Cerro Petaquilla Concession. Specifically, our 52% ownership of MPSA was held through our then wholly-owned subsidiary of Georecursos Internacional, S.A. (Georecursos). On October 18, 2006, we entered into a Plan of Arrangement with Petaquilla Copper Ltd. (Copper), whereby we effectively transferred ownership of Georecursos to Copper and, thereby, our interest in the copper assets within the Cerro Petaquilla Concession lands to Copper. We retain the rights to the Molejon gold deposit as well as to other gold and precious metal mineral deposits that may be developed within the Cerro Petaquilla Concession and continue to operate under the Ley Petaquilla as does MPSA. Page 33


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Molejon Property - Panama With the above noted and pursuant to the Molejon Gold Project Agreement, the shareholders of MPSA agreed to separate the gold deposit and other precious metal mineral deposits that might be developed from the copper mineral deposits within the Cerro Petaquilla Concession. Such agreement provides for us, through our subsidiary, Petaquilla Gold, S.A., to own a 100% interest in the Molejon gold deposit, as well as all other gold and precious metal mineral deposits that might be developed within the Cerro Petaquilla Concession, subject to a graduated 1% - 5% Net Smelter Return, based on the future gold price at the time of production, payable to shareholders of MPSA. Pursuant to the contract law under which the Cerro Petaquilla Concession was granted by the government of the Republic of Panama, we with our then partners delivered the phased Plan to the government of Panama. In September 2005, the multi-phase Plan submitted to the Government of Panama by us and MPSA was approved by Ministerial Resolution. This approval resulted in the extension of the land tenure for an initial 20 year period which commenced in September 2005, subject to MPSA meeting certain other development and operational conditions on an ongoing basis. The land tenure provides for two additional 20-year terms that are also subject to MPSA meeting certain other ongoing development and operational conditions. The Molejon gold mineral deposit, owned 100% by us, forms part of the Cerro Petaquilla Concession lands and the first phase of Plan focuses on the development of the Molejon gold deposit by us which commenced in 2006. The development of the Cerro Petaquilla copper deposit is included in subsequent phases of the Plan, and is the responsibility of MPSA. Exploration History Although the Cerro Petaquilla Concession has been investigated since 1968 when the potential for copper porphyry mineral deposits within the area was first recognized, no former exploration program analyzed the drilling and surface sampling for gold. As such, the only existing gold data is that accumulated by us. Drilling to date has shown that the distribution and intensity of gold values within mineralized zones varies directly with areas of elevated copper and depleted molybdenum contents. Exploration - Results Obtained by Us or on Our Behalf In October 2005, we received an NI 43-101 compliant mineral resource estimate on the Molejon gold deposit from SRK Consulting (Canada) Inc. (SRK). SRK estimated inferred mineral resources at 0.5 g/t cutoff were 11.2 million tonnes at 2.48 g/t Au. We used a cutoff grade at 0.5g/t for all resources estimates since other mines in the Central America region have operated profitably at a gold price of $500 per ounce using a resource estimate at such cutoff. Inferred mineral resources at 0.5, 0.6 and 0.7 g/t Au cut-offs are included in the following table. Table: Mineral Resource Estimate at 0.5, 0.6 and 0.7 g/t Au Cut-OffsInferred ResourcesAu g/t Cut-Off
     Million Tonnes *
     Au g/t
     Contained Ounces Au *0.5
     11.2
     2.48
     893,0000.6
     10.8
     2.56
     889,0000.7
     10.1
     2.68
     870,000(* Note: Tonnes and ounces have been rounded to reflect relative accuracy of the resource estimate.)
  SRK found the drilling, sampling methods and approach, sample preparation, analysis, security (chain of custody) and quality assurance/quality control procedures (QA/QC) used during the exploration and delineation of the Molejon gold mineralization to be acceptable for resource estimation. Based on the results of the resource estimate, SRK recommended that we proceed with the planned infill drill program, use the infill drill data along with twinned holes to revalidate the previous drilling and surface trench results and complete specific gravity and mineralogical testwork. Upon completion of this work, a re-estimation of resources would be warranted in preparation for subsequent engineering studies. Additional metallurgical and geotechnical work was also recommended in preparation for future engineering work. The October 2005 SRK report represents an increase of 35% over a pre-NI 43-101 resource estimate of 7.8 million tonnes grading 2.63 grams for total contained gold of 661,000 ounces using a bottom cut-off grade of 0.500 g/t Au. Page 34


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In January 2006, during a follow-up trenching program on the Molejon gold deposit, a 200-metre strike length of high-grade gold mineralization in the Central Zone was delineated. Overall, the trenching program resulted in a significant reinterpretation of the Molejon mineralization -three or more mineralization trends in quartz breccia and silicified andesite breccia extend across the deposit. During 2006, we also commenced and completed a 14,005-metre diamond-drilling program at the Molejon gold deposit. The drilling program was threefold. First, the majority of drilling, or 11,398 metres, consisted of infill drilling in the southern part (the starter pit area) of the deposit to reduce the separation between existing drill holes to 20 to 35 metres. The Molejon gold deposit was previously diamond drilled in a 124-hole program conducted by Teck Corporation, Inmet Mining Corporation and us (formerly Adrian Resources Ltd.) in 1994-1995 on 50-metre grid lines with 40 to 70 metres between holes. Second, additional resource drilling totaling 1,627 metres was performed on areas where trenching had identified new targets. Third, the remainder of the drilling, which consisted of approximately 980 metres focused on condemnation drilling and established the location for the 2,200 tonne per day plant currently being constructed. Geotechnical drilling was also performed in order to characterize construction conditions. One of our objectives when we commenced the 2006 drill program was to confirm the location of the starter pit and to upgrade SRKs October 2005 inferred mineral resource estimate to an indicated and measured category. In April 2007, we received an NI 43-101 compliant gold resource estimate completed by AAT Mining Services (AquAeTer, Inc. d/b/a AAT Mining Services) that significantly upgraded the prior resource estimate of 893,000 ounces of inferred gold ounces. The new resource calculation outlined 405,141 ounces of measured resources, 109,192 ounces of indicated resources and 361,011 ounces of inferred resources at the Molejon Gold deposit. AAT Mining Services also estimated that 179,934 ounces of the measured and indicated ounces contained in the low-grade material have potential for blending with the high-grade to achieve an optimum mill feed without loss of resources. Moreover, drilling confirmed the high-grade area of 1.667 mm tonnes grading 5.0 g/tonne at a cutoff grade of 2.5 g/tonne. Category
     Tonnage
     Cut-off (g/tonnes)
     Average Grade
     OuncesMeasured
     6.846 Mio
     0.5
     1.84
     405,141Indicated
     3.121 Mio
     0.5
     1.09
     109,192Inferred
     10.473 Mio
     0.5
     1.07
     361,011
  The 361,011 ounces of gold presently defined as inferred resources are currently being evaluated by infill drilling to 25 metre centres with an aim to convert this resource to measured and indicated resources for the Molejon Gold Plant Expansion Feasibility Study. Most of these mineralized drill holes are 50 to 75 metres away from measured and indicated mineralized resources. The on-site Qualified Person, Sean C. Muller, P. Geo., observed and verified that the 2006 drilling and laboratory procedures on the Molejon gold project met or exceeded NI 43-101 standards. Strict quality assurance and quality control protocols were defined and implemented under his supervision including the submission of blanks, standards and duplicate core samples to the laboratory. More than 120 new test holes were used to update SRKs October 2005 resource estimate. The second objective was to test for additional mineralization. The additional resource drilling discovered another deeper mineralization trend north of the known resource at the Molejon property. This new trend, known as the NW Deep, exhibits two cohesive blocks of mineralization, one near the surface and another at a depth of approximately 100 metres. The extension of the known mineralization trends to the NNE, and the WSW continues to be extended through step-out drilling. The third objective was to confirm the location of the gold processing plant. Thus, condemnation drilling was conducted to ensure that ore zones do not underlie the proposed plant, related infrastructure and tailings impoundment sites. In addition, the results obtained from both the 1994-1995 and 2006 diamond-drilling programs will be used to assist in the completion of pit modeling and a feasibility study. In early 2007, we continued drilling by commencing a minimum 40,000 metre exploration and development diamond-drill program focusing on the 20 square kilometer area knows as the El Real Trend, which includes our 100% owned Molejon deposit and Coppers Botija Abajo/Brazo project zones, and which is open in three directions. In August and September 2007, we released results and details concerning this drill program along the El Real copper gold trend. At the time, we and Copper had jointly been active in five different zones in the Cerro Petaquilla Concession with six drill rigs working on the El Real mineralized gold and copper trend between Molejon and Botija Abajo/Brazo. Results from several drill holes indicated the zone may be much larger in size than previously estimated, that the area had a new silver zone and confirmed the mineralized trend between the Botija Abajo, Botija Abajo West, Brazo and Molejon open pit. The overall goal of this large scale, wide spaced drill program was to identify and delineate the many targets on the El Real Trend and tie the Botija Abajo/Brazo zone to the Molejon open pit gold deposit. Page 35


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Two drill rigs were also working on a new extension of the Molejon deposit in the North Central zone outside of the current pit outline. Drill hole 332, included in the first results from this program and located within the southwestern part of the current pit design, intercepted high grade mineralization near the surface: 9 metres @ 17.24g/t Au. In addition, deep mineralization found in several holes confirmed our structural model and indicated a significant extension of known mineralized breccias outside of the current designed pit limits. The results offered encouraging support for our stated goal of increasing resources. The new hole locations were designed to test mineralization trends suggested by recent resource modeling. Results from several holes located within the south-western part of the current pit indicated a significant volume of near surface, higher grade material in an area drilled previously on a wide spacing and previously interpreted as a lower grade zone. The results supported upgrading previously low grade material, with new higher grade intervals. In October 2007, we announced the results of an updated NI 43-101 compliant gold resource estimate based on results obtained through September 2007. AAT Mining Services has estimated a total measured resource of 532,801 ounces and an indicated resource of 223,785 ounces at the Molejon gold deposit (see table below). Additionally, an inferred resource of 342,111 ounces at an average grade of 0.872 g/t above a cutoff of 0.5 g/t was estimated. The 123,000 indicated resource ounces of gold delineated at the nearby Botija Abajo deposit through June 2007 increases the total gold resources at the global Molejon project by 40% since the last resource estimate announced in April 2007. MeasuredGrade cutoff
     Tonnes
     Au
     Au
     Auin g/t
     
     grams/tonne
     grams
     ounces.5
     7,683,176
     1.013
     7,784,218
     250,2722.5
     1,170,618
     3.469
     4,060,956
     130,5655.0
     591,315
     7.993
     4,726,538
     151,964Total
     9,445,109
     1.75
     16,571,712
     532,801IndicatedGrade cutoff
     Tonnes
     Au
     Au
     Auin g/t
     
     grams/tonne
     grams
     ounces.5
     5,873,534
     0.924
     5,426,666
     174,4742.5
     345,516
     3.236
     1,117,982
     35,9445.0
     62,508
     6.651
     415,769
     13,367Total
     6,281,558
     1.11
     6,960,417
     223,785InferredGrade Cutoffg/Tonne
     InferredTonnes
     Average GoldGradeg/Tonne
     InferredGold Grams(contained)
     InferredGold TroyOunces(contained)0.5
     12,190,533
     0.869
     10,589,925
     340,4792.5
     18,471
     2.747
     50,747

     1,632Total
     12,209,004
     0.872
     10,640,672
     342,111
  Page 36


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Another 342,111 inferred ounces have been geostatistically shown in a new area northwest of the Molejon measured and indicated resources. In 2006, about 500,000 ounces of gold were in the inferred category of which over 50% were converted to measured and indicated resources by infill drilling in 2007. Over 22,000 metres were cored at Molejon in 2007 bringing the total drilling along the gold trend to about 40,000 metres since the beginning of the program in 2006. As at October 18, 2007, seven rigs were currently drilling in the area, three in Molejon and four elsewhere along the El Real trend. The recent modeling effort included a complete review of the drilling, geology, sampling methods and approach, sample preparation, analysis, security (chain of custody) and QA/QC procedures used during the exploration of the Molejon gold deposit. The on-site independent qualified person, Sean C. Muller, P. Geo., a Qualified Person under NI 43-101, oversaw the drilling program ensuring that the appropriate quality assurance protocols were being followed and that the data was being qualified under strict quality controls. He observed and verified that recent drilling, sample preparation and ALS Chemex laboratory procedures utilized for the Molejon project meet NI 43-101 standards. Strict QA/QC protocols have been defined and implemented under Mr. Mullers supervision, including the submission of blanks, standards and duplicate core samples to the laboratory. In March 2008, we announced drill hole results received for 132 holes added since the last resource model update of the Molejon gold deposit in October 2007. The two objectives of the drill program were to provide infill information to complement data obtained from previous drilling and to advance towards delineating the mineral deposit. The program succeeded in meeting both its objectives. First, the results obtained from infill drilling would allow for the conversion of inferred and indicated resources to indicated and measured resources, respectively. Second, as the condemnation holes supported the model, the results obtained from delineation drilling have verified the geologic interpretation and have also provided for important increases in geologic understanding. The holes that did not intercept mineralization were effectively around the perimeter of the known deposit. The holes that did intersect mineralization were drilled to define the suspected high grade and, while important for increasing the high grade envelope, also verified the model. Additionally, these results provided the basis to expand the previously modeled high grade ore shell to encompass a previously undrilled region. The independent Qualified Person, Cathryn Stewart, P. Geo., verified that recent drilling, sample preparation and laboratory procedures utilized for the Molejon project met NI 43-101 standards. Strict QA/QC protocols have been defined and implemented for the submission of blanks, standards and duplicate core samples to the laboratory. Samples were analyzed at ALS Chemex Labs Ltd. During the fiscal year ended May 31, 2010, in conjunction with attaining commercial production at our Molejon gold project, we increased our grass-roots exploration programs focusing on our Oro del Norte concession located 22 kilometres north-east from our Molejon gold processing plant. In the first quarter of 2009, we initiated the first phase of our regional exploration field program, which included detailed mapping, soil sampling and rock chip sampling on our Oro Del Norte concession. The work initially focused on zones of historical (1990s) soil and rock chip sampling with the primary objective of confirming the initial results and, secondly, extending the areas of mineralization by mapping and surface sampling. Early work highlighted a 12 kilometre by 4 kilometre gold in soil anomaly. By December 2009, approximately thirty percent (30%) of this soil anomaly had undergone detailed mapping and surface rock chip sampling within which sixty two (62) rock chips with grades greater than 1g/t Au had been identified. A total of 1054 samples were collected across various zones within this anomaly and we released peak gold assay results including 151.5 g/t, 59.8 g/t, 58.5 g/t, 48.4 g/t, 27.7 g/t, 19.25 g/t and 15.4 g/t Au as analyzed by ALS Chemex, an independent laboratory. Based on the results of the rock chip sampling, we advanced an aggressive exploration program on our Oro del Norte concession with work consisting of follow-up soil sampling, rock chip sampling and detailed mapping adjacent to anomalous areas identified during the 2009 exploration program. Additional surface rock chip samples collected have resulted in the collection of forty two (42) rock chips with grades greater than 1g/t Au from a total of 211 samples collected. Peak gold assay results included 17.4 g/t, 13.0 g/t, 7.66 g/t, 6.88 g/t, 5.94 g/t, 5.48 g/t, 5.20 g/t Au. These samples were analyzed by our on-site analytical laboratory, which is not a certified independent laboratory, located at our Molejon Gold Project. Page 37


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We recently commenced Phase I of our planned 5,000 metre diamond drilling program targeting the initial geochemical anomalies and announced initial drill results from the Tucan Project on our Oro del Norte concession in August 2010. As at August 9, 2010, we had three drill rigs complete 17 diamond drill holes for a total of 2,741 metres on the initial four target areas within the Tucan Project testing the mineralized structures identified by surface mapping and trenching. These initial drill holes were completed on the first four drill targets to determine both the style and grade of mineralization in addition to the attitude of the mineralization in this structurally controlled environment. The mineralized structures tested to date are both steeply southwest and northeast dipping and have a northwest to southeast strike. Additional data obtained from oriented drill core samples has identified the mineralization to be predominantly structurally controlled, having multiple phases of mineralization and containing post mineralization cross cutting structures which offset the main mineralized body. This drilling has identified numerous gold intercepts in three sub-parallel epithermal vein systems over an area of 1.3 kilometres x 0.4 kilometre. All three veins systems are open along strike and will continue to be the focus of the drilling effort during this next phase of the drilling program which will now progressively step out toward the southeast of the project area to evaluate their strike extent. In addition to the above, numerous drill ready targets identified during the late 2009/early 2010 exploration work remain untested and will be drilled during this second phase. In conjunction with the diamond drilling program now underway, we have completed 243 trenches for a total of 3,972 metres. The trenching program has resulted in the discovery of two additional sub parallel gold mineralized structures located 170 metres north and 80 metres south respectively to the principle structure which was identified by detailed mapping and sampling completed in the first quarter of 2010. Results for the first 227 trenches totaling 3,636 metres have been received and were released earlier this month. The trenching program will continue aggressively expanding into new areas on the concession which we believe is prospective for intrusive related epithermal gold bearing vein systems as evidenced by the discovery during this phase of work. Mr. John Kapetas, P. Geo., a Qualified Person as defined by National Instrument 43-101 and our Vice President Exploration & Resources Development, has been overseeing the exploration field program. He is ensuring that the appropriate quality assurance protocols are being followed and that the data is being qualified under strict quality controls. Outlook - 2011 We are focusing on continuing gold production at our Molejon gold project and continuing exploration efforts on our Oro del Norte concession during the fiscal year ending May 31, 2011. Regional and Local Geology Panama is underlain by an island arc built upon late Cretaceous oceanic crust and is considered prospective for porphyry copper-gold-molybdenum deposits. Andesitic tuffs and flows of presumed early to middle Tertiary age cover the majority of the Cerro Petaquilla Concession lying at the southern limit of a 400 square kilometre batholith, dated at 32.6+2 million years, which has intruded the older volcanic sequence. The core of the batholith is composed of quartz monzonite, grading outward to granodiorite and porphyritic granodiorite. The Petaquilla and Botija deposits are centered on porphyritic stocks and dykes lying peripheral to the southern margin of the batholith. At the Botija deposit, the intrusive is a medium-grained, crowded porphyry composed of 25% plagioclase phenocrysts, 15% hornblende phenocrysts and 5-10% quartz grains in a feldspar rich matrix. At the Petaquilla deposit, the intrusive is more obviously porphyritic, with a generally lower percentage of phenocrysts. Contact phases and dykes at each deposit are finer-grained varieties of the main intrusive. In particular, feldspar, hornblende, quartz porphyry dykes appear to be late stage phases of the granodiorite. Most of these porphyry dykes post-date the mineralization, indicating that they were introduced during the waning stages of hydrothermal alteration and mineralization. The youngest units encountered on the property are the unmineralized basalt and andesite dykes. Page 38


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Copper-gold-molybdenum porphyry deposits have been identified and partially delineated at the Petaquilla and Botija deposits, which are centred four kilometres apart on an east-west trend within the Cerro Petaquilla Concession. Four types of well-developed alteration have been observed within the various intrusive units: potassic, phyllic, quartz-chloritic and propylitic. Potassic alteration is found near the core of the porphyry system and is not extensive. It is characterized by quartz, potassium feldspar, biotite, sericite and lesser amounts of anhydrite and magnetite. The majority of copper mineralization is hosted in the phyllic altered rock, which is composed of quartz and sericite with minor kaolinite and K-spar. Propylitic alteration, marked by chlorite, pyrite, calcite and epidote, marks the outer extent of alteration in a porphyry system. The phyllic and quartz-chlonite alteration zones are usually found between the potassic core and the peripheral propylitic zone, although either may be missing. Alteration of the andesitic volcanic units, characterized by prograde biotite hornfels and fine grained sulphide mineralization occurs when they are found to be proximal to the intrusive contact or within zones of intrusive dyking. The Petaquilla deposit is largely hosted by porphyritic granodiorite below its intrusive contact with andesite forming a flat-lying to gently dipping sheet, trending east-west and dipping to the north. It has been drilled for 1,600 metres along strike and remains open along strike to the south, east and west and at depth. The Valle Grande deposit is hosted dominantly by prophyritic granodiorite and, similar to the Petaquilla deposit, is a flat-lying sheet, trending northwest-southeast and dipping to the north. It has been drilled for 2,400 meters along strike and is considered to have limited expansion potential. The Botija deposit trends east-west and dips 20-30 degrees to the north or northeast. It has been intersected by drilling along strike for 1,800 metres and up to 600 metres down dip. The Botija deposit remains open near the surface to the south, along strike to the east and the west, and in many places at depth both vertically and down dip to the north. The general geology of the Molejon epithermal gold target is dominated by volcanic and subvolcanic intrusives, including massive andesite flows, feldspar-porphyritic andesite flows, andesitic tuffs and andesitic agglomerates. This volcanic package has been intruded by feldspar-quartz porphyry and feldspar porphyry units. A northeast trending fault is believed to be the major structural control for the emplacement of the hydrothermally altered quartz-carbonate breccia. Mineralization Mineralization at the nearby Petaquilla, Valle Grande and Botija deposits is largely concentrated within potassic or phyllic altered porphyritic intrusives of granodioritic composition. Volcanic-hosted copper mineralization, associated with strong biotite alteration, is widespread at the Petaquilla deposit and contributes significantly to its tonnage. Mineralization in each deposit consists of chalcopyrite and pyrite as disseminations, within quartz veinlets and filling brittle, irregular fractures. Pyrite content generally decreases with higher grade copper mineralization and increases towards the periphery of the deposits. Chalcopyrite occurs most commonly as very fine disseminations within an altered intrusive matrix or biotite hornfels. It is often associated with magnetite and/or chlorite or biotite altered mafic minerals, most notably in lower-grade sections of propylitic alteration. Stockwork quartz veinlets are best developed within potassic alteration, where they crosscut pervasive silicification. The irregular fracture-filling style of copper mineralization, which locally approaches a sulphide net, is largely confined to biotite-altered andesite at the Petaquilla deposit. This is cut in places by narrow quartz-chalcopyrite veins which have developed bleached selvages of biotite destruction. A fourth style of mineralization, consisting of chalcopyrite and pyrite coatings along steep, widely spaced cooling joints is confined to granodiorite along the eastern periphery of the Botija deposit. Molybdenite is present mainly in quartz, carbonate, chalcopyrite veinlets hosted by granodiorite within the most intensely altered and mineralized portion of each deposit. Bornite occurs locally with chalcopyrite and contributes significantly to the copper grade in some sections, mainly within hornfelsed andesites in the Petaquilla deposit. Although leaching is widespread throughout the upper 10 to 30 metres of the deposits, supergene copper mineralization is not present in significant amounts. Magnetite is an important accessory in both deposits, disseminated throughout both the porphyritic intrusives and the intruded andesite. Page 39


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At our Molejon deposit, epithermal gold-silver mineralization occurs within structurally controlled zones of hydrothermal quartz-carbonate breccia and the fractured and altered rocks marginal to the quartz-carbonate breccia. Assay boundaries of gold-silver mineralization are not sharply constrained by geological contacts. Highest grade mineralization usually occurs in the quartz-carbonate breccia but economic mineralization also occurs in feldspar-quartz porphyry, and more rarely in feldspar-porphyritic andesite flows. Doing Business in Panama The following briefly summarizes our understanding of the economic and political climate in Panama based on research and information compiled by us from various sources that we believe to be reliable. Democracy was restored in Panama in December 1989, following the invasion of Panama by the U.S. military. In May 1994, Panama held its first democratic elections in almost 30 years. Pursuant to the constitution of Panama, the president of the country holds office for five years. Therefore, elections were subsequently held in May 1999, 2004, and, most recently, in May 2009. On May 3, 2009, Ricardo Martinelli won Panamas presidential election, reversing a recent trend of left-wing victories in Latin America. Ricardo Martinelli and his right-wing alliance led by his Democratic Change party won 61% of the vote and took office on July 1, 2009. Mr. Martinellis business experience impressed voters worried about their livelihoods in a global recession that has stunted Panamas recent strong economic growth. Panama's U.S. dollarized economy has led Latin America with growth of near or above 10% in recent years, fueled by U.S.-Asia trade through Panamas transoceanic canal and robust banking activity,. Per the International Monetary Fun, projected growth in 2010 is 5%, and in 2011, 6.3%. Mr. Martinelli, a U.S.-educated, political conservative and self-made businessman leads a business empire including supermarkets, banks and agricultural firms, and has promised a massive public works program to return Panama to growth. Potential projects have included construction of ports, highways and a Panama City subway. In general, Mr. Martinelli was viewed as more supportive of business than other candidates. Although launched by the former Panamanian president, Martin Torrijos, and his Democratic Revolutionary Party, Mr. Martinelli will oversee the $5.25 billion expansion of the Panama Canal. The expansion programme, scheduled to be completed in 2014, aims to increase the capacity of the Panama Canal, making it large enough to accommodate supertankers and the largest container ships. Panama has long had close ties to the United States, which built the Panama Canal and ousted dictator General Manuel Noriega in 1989. We note that the comparative sovereign rating for Panama by The Economist Intelligence Unit is in the mid-range, both globally and regionally, as shown below. The sovereign rating measures the risk of a build-up in arrears of principal and/or interest on foreign- and/or local-currency debt that is the direct obligation of the sovereign or guaranteed by the sovereign. Countries
     Month
     SovereignRisk
     CurrencyRisk
     BankingSectorRisk
     PoliticalRisk
     EconomicStructureRiskArgentina
     June 2010
     CCC
     B
     B
     B
     BBolivia
     June 2010
     B
     BB
     B
     CCC
     BBrazil
     July 2010
     BB
     BB
     BB
     BBB
     BBBChile
     June 2010
     A
     BBB
     BBB
     A
     AColombia
     June 2010
     BB
     BB
     BB
     BB
     BBCosta Rica
     July 2010
     BB
     BB
     BB
     BBB
     BEcuador
     July 2010
     CCC
     B
     CCC
     C
     CCCHonduras
     June 2010
     CCC
     CCC
     CCC
     CCC
     CCCMexico
     July 2010
     BBB
     BBB
     BBB
     BB
     BBBPanama
     June 2010
     BBB
     BBB
     BBB
     BBB
     B
  Page 40


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Peru
     July 2010
     BBB
     BBB
     BBB
     BB
     BBBVenezuela
     July 2010
     CCC
     CC
     CC
     CCC
     CCC
  Rating Band CharacteristicsAAA
     Capacity and commitment to honour obligations not in question under any foreseeable circumstances.AA
     Capacity and commitment to honour obligations not in question.A
     Capacity and commitment to honour obligations strong.BBB
     Capacity and commitment to honour obligations currently, but somewhat susceptible to changes in economic climate.BB
     Capacity and commitment to honour obligations currently, but susceptible to changes in economic climate.B
     Capacity and commitment to honour obligations currently, but very susceptible to changes in economic climate.CCC
     Questionable capacity and commitment to honour obligations. Patchy paymentCC
     Somewhat weak capacity and commitment to honour obligations. Patchy payment record.C
     Weak capacity and commitment to honour obligations. Patchy payment record. Likely to be in default on significant amount of obligations.D
     Very weak capacity and commitment to honour obligations. Poor payment record. Currently in default on significant amount of obligations.
  Source: Economist Intelligence Unit  Country Risk Summaries Mining has not historically been a significant factor in the Panamanian economy and, consequently, Panama does not have the infrastructure and trained personnel required for modern mining operations. The government of Panama has, however, included the development of mineral resources in its economic plan to diversify the Panamanian economy and has taken steps to put in place the legislative framework needed to foster development of these resources. The Code of Mineral Resources of the Republic of Panama has been subject to substantial modifications, among which the most important are Law No. 3 of January 28, 1988, and Law No. 32 of February 9, 1996. The main purpose of such amendments was to simplify the procedure for filing the necessary petitions to obtain concessions, either for conducting mining exploration or mining extraction operations and property rights over the minerals extracted. These amendments grant total exemption from import taxes and customs duties for all equipment, spare parts and materials used in the development of any type of mining operations and there are no export taxes on mineral production. An exploration concession permits the holder to explore for the minerals specified in the concession. The rental rates payable by the holder to the Government of Panama are $0.50 per hectare for the first two years, $1.00 per hectare for the third and fourth years and $1.50 for the fifth year and thereafter. A 2% gross overriding royalty on the value received for all minerals of higher commercial value (e.g. gold and silver) mined from the concession is payable to the government of Panama. The holder of an exploration concession has the exclusive right to obtain an exploitation concession for the subject area upon determining that the minerals covered by the concession may be produced in commercial quantities through a separate request to the Government of Panama. Rental rates for exploitation concessions fluctuate, depending on the mineral concerned and the extraction period, between $0.75 and $4.00 per hectare. Rental rates for metallic minerals such as copper, iron, zinc, aluminum and precious metals are $1.00 per hectare for the first five years, $2.00 from the sixth to the tenth year and $3.00 the eleventh year and thereafter. A 2% gross overriding royalty on the value received for all minerals mined from the concession is payable to the Government of Panama. However, this overriding royalty will be 2% for minerals of higher commercial value such as gold and silver. Exploitation concessions generally permit the holder to carry out additional pre-development exploration, to construct all necessary production facilities and to extract, process, store, transport, market and export the minerals subject to the concession so long as production is ongoing. In 1995, the Panamanian Tax Reform Law was enacted to simplify the corporate income tax rates applicable to income earned in Panama (Law No. 28 of June 20, 1995). Since June 1995, the corporate income tax rate has been 30%. In addition to corporate income tax, Panamanian law provides for a dividend tax. With the exceptions provided for in the Fiscal Code of the Republic of Panama, all corporations must retain 10% of the amounts they may distribute among their shareholders as dividends or share quotas. In case dividends are not distributed, or the entire amount distributed as dividend or share quota is less than 40% of the net profit of that fiscal period, minus taxes paid by the corporation, the corporation must cover 10% of the remainder. Page 41


---

The Fiscal Code of the Republic of Panama indicates certain expenses which may be deducted from the income tax, applicable to companies conducting mining activities. Additionally, the Code of Mineral Resources establishes certain expenses related to such activities that may be deducted from income tax as well. There are currently no significant restrictions on repatriation from Panama of earnings to foreign entities other than the income tax and the dividends tax referred to above. There are currently no material currency exchange or foreign investment restrictions. Based on our understanding of current Panamanian environmental laws and regulations, we do not anticipate that such laws will have an adverse material impact on the operations we may conduct in the future. Based on geochemical analysis and reporting, we anticipate that our Molejon gold project will meet or exceed the effluent and leachate requirements of Panamanian environmental laws and regulations. We use a carbon-in-pulp (CIP) floatation process, which allows in process cyanide destruction before effluent is discharged. This process is inherently safer and more controllable than traditional acid and cyanide open-air heap leach processing. Any acidity produced at the experimental pH is expected to be buffered by the receiving waters around the Molejon project, which have a pH between 7.4 and 7.8 and total alkalinity between 15 mg/L and 27 mg/L (as CaCO3). Results for both tails and waste rock leachate indicate that the Molejon project will have net acid neutralizing potential. The results of the continuous tests showed that the INCO SO2 cyanide destruction method is an efficient process for decreasing the total cyanide concentrations in the our CIP leach pulp. The foregoing laws of general application apply to our Panamanian mineral properties other than the Cerro Petaquilla Concession which is governed primarily by the Ley Petaquilla. Please refer to Item 4 - Information on Our Company - B. Business Overview. Panama's currency, the Balboa, is at parity with the U.S. dollar. Exchange transactions are allowed in U.S. dollars and, as a result, foreign currency fluctuations may be material for us to the extent that fluctuations between the Canadian and U.S. dollar are material. Item 4A.
     UNRESOLVED STAFF COMMENTS
  None. ITEM 5.
     OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  5.A.
     Operating Results
  We are in the business of the acquisition and exploration of mineral properties, with the primary aim of developing them to a stage where they can be exploited at a profit. At that stage, our operations would, to a significant extent, be dependent on the prevailing market prices for any of the minerals produced by such operations. We currently have one gold producing mine. During the year ended May 31, 2010, we were primarily engaged in the commissioning of our Molejon property in Panama and succeeded in bringing the Molejon gold project to commercial production on January 8, 2010. Our future mineral exploration and mining activities may be affected in varying degrees by Panama's political stability and government regulation, all of which are beyond our control. Please refer to "Item 3 - Key Information  3.D. Risk Factors. Historically our fiscal year end was January 31. During the period ended April 30, 2007, we changed our fiscal year end from January 31 to April 30 due to the complexities of the Plan of Arrangement with Copper. We changed our fiscal year end again in 2008 from April 30 to May 31. We made this change because we wanted to demonstrate to the Panamanian government that we had sufficient funds to continue work on the mine. Page 42


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Year Ended May 31, 2010, Compared to Year Ended May 31, 2009 Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and all amounts are expressed in United States dollars unless otherwise indicated. Our operating results reflect ongoing administrative costs, net of interest and other income, revenue from the sale of gold, production and operating expenses and amortization and depletion. Commercial production at the Molejon Gold mine commenced on January 8, 2010. Metal sales were $27,827,935 and cost of sales was $(16,523,160) during the year ended May 31, 2010. Prior to the attainment of commercial production, all revenue and operating costs associated with the commissioning of the mill were capitalized as part of mineral properties. The revenue and cost of sales recognized in the current year represent operations from January 8, 2010. Amortization of production equipment and depletion of mineral properties were $(4,839,420) for the year ended May 31, 2010, compared to $Nil for the year ended May 31, 2009. During the pre-operating period, amortization of production equipment was capitalized to mineral properties up until the start of commercial production on January 8, 2010. Depletion of mineral resources commenced on the date of commercial production and is being charged over the life of the mine using the unit-of-production method. During the year ended May 31, 2010, other income decreased by $21,045,592 to $(16,541,747) compared to $4,503,845 for the year ended May 31, 2009. The decrease in other income is largely due to a gain on sale of equity investment of $Nil during the year ended May 31, 2010, related to the sale of Petaquilla Copper Ltd. (Copper) shares compared to $40,604,938 for the year ended May 31, 2009. There was also a dilution gain of $Nil for the year ended May 31, 2010, compared to $2,238,492 for the year ended May 31, 2009, related to our investment in Copper. The dilution gain resulted from the difference between our carrying cost of Copper and the amount paid up for each Copper share issued. The decrease in the dilution gain is due to the sale of Copper in the second quarter of fiscal 2009. There was also a mark-to-market loss on senior secured notes of $(15,849,408) resulting from an increase in the fair value of the senior secured notes (Notes) due to mark-to-market accounting during the year ended May 31, 2010, compared to $(14,939,298) for the year ended May 31, 2009. There was also interest on long term debt of $501,574 for the year ended May 31, 2010, compared to $37,382 for the year ended May 31, 2009, due to the fact that interest on capital lease obligations was capitalized as part of mineral properties up until the start of commercial production on January 8, 2010. This decrease in other income was partially offset by a redemption loss on senior secured notes of $(240,000) for the year ended May 31, 2010, compared to $(13,130,982) for the year ended May 31, 2009, related to partial early redemption of the senior secured notes during that period. There was also a foreign exchange loss of $(93,159) for the year ended May 31, 2010, compared to $(8,157,720) for the year ended May 31, 2009. This primarily resulted from the significant decrease in the Canadian dollar, impacting the majority of our liabilities which are denominated in United States dollars coupled with a significant increase in U.S. denominated liabilities (senior secured notes) which occurred during fiscal 2009, prior to our adoption of the U.S. dollar as our functional currency. There was also an equity loss of $Nil for the year ended May 31, 2010, compared to $(2,396,011) for the year ended May 31, 2009, related to our investment in Copper. The equity loss reflects our portion of the losses that are attributed to our percentage ownership in Copper. The decrease in the equity loss is due to the sale of Copper in the second quarter of fiscal 2009. Expenses for the year ended May 31, 2010, decreased by $8,698,021 to $(16,905,690) compared to $(25,603,711) for the year ended May 31, 2009. The decrease in expenses is primarily due to a decrease of $5,785,581 in debt issuance costs. Debt issuance costs were $613,244 for the year ended May 31, 2010, compared to $6,398,825 for the year ended May 31, 2009, as less debt was issued during the current period. In addition, there was a decrease of $3,457,559 in exploration and development costs. Exploration and development costs were $4,304,303 for the year ended May 31, 2010, compared to $7,761,862 for the year ended May 31, 2009. This was due to the change in activities from exploration and development of the Molejon property in the prior period to pre-operations, mill commissioning and production during the current period. Approximately 77% of the exploration and development costs incurred in the current fiscal year relate to work performed on the Oro del Norte property, located near Molejon. As well, there was a decrease of $577,274 in office administration. Office administration costs were $1,609,746 for the year ended May 31, 2010, compared to $2,187,020 for the year ended May 31, 2009. This was due to the fact that during the 2010 fiscal year insurance costs and other administrative expenses were capitalized to mineral properties during the pre-operating period and were then included as production costs after the commencement of commercial production. The decreases in expenses were partially offset by an increase of $511,855 in wages and benefits. During the year ended May 31, 2010, we incurred $3,428,470 in wages and benefits compared to $2,916,615 for the year ended May 31, 2009. The increase is related to termination costs incurred during the current fiscal year as well as additional senior personnel hired to develop our infrastructure business. In addition, there was an increase of $452,652 in stock-based compensation. Stock-based compensation was $1,351,106 for the year ended May 31, 2010, compared to $898,454 for the year ended May 31, 2009, due to a larger number of options, some of which vested immediately, being issued in the current fiscal year. During the current year, 5,365,000 options were granted compared to 1,370,000 granted during the prior fiscal year. There was also an increase of $291,208 in donations and community relations. Donations and community relations was $1,240,479 for the year ended May 31, 2010, compared to $949,271 for the year ended May 31, 2009. This was due to an agreement reached with the government to fund the charity Petaquilla Fundacion by a minimum of $100,000 per month. There was also an increase of $293,548 in consulting fees. During the year ended May 31, 2010, we incurred $663,796 in consulting fees compared to $370,248 for the year ended May 31, 2009. The increase is largely due to financial consultants hired to facilitate the refinancing of our debt facilities. Page 43


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The net loss and comprehensive loss for the year ended May 31, 2010, was $(26,982,082) or $(0.25) per basic and diluted share compared to a net loss and comprehensive loss of $(25,748,582) or $(0.22) per basic and diluted share for the year ended May 31, 2009. Year Ended May 31, 2009, Compared to Year Ended May 31, 2008 Financial Results for the Year Ended May 31, 2009, and May 31, 2008
  One Month
Ended May
31,2008
     
     
     Year
Ended April
30,2008
     
     
     One Month
Ended May
31,2007
(unaudited)
     
     
     Year
Ended May
31,2008
(unaudited)
     
     
     Year
Ended May
31, 2009EXPENSESAccounting and legal
     $
     15,536
     
     $
     1,306,921
     
     $
     58,159
     
     $
     1,264,298
     
     $
     1,944,302Accretion of assetretirement obligation
     
     52,098
     
     
     305,692
     
     
     25,640
     
     
     332,150
     
     
     331,504Consulting fees
     
     21,170
     
     
     943,250
     
     
     90,363
     
     
     874,057
     
     
     370,248Filing fees
     
     280
     
     
     87,005
     
     
     6,907
     
     
     80,378
     
     
     115,295Investor relations and shareholder information
     
     54,595
     
     
     1,012,822
     
     
     62,249
     
     
     1,005,168
     
     
     475,092Office administration
     
     213,168
     
     
     2,711,908
     
     
     324,369
     
     
     2,600,707
     
     
     2,187,020Rent
     
     1,630
     
     
     122,495

     
     
     13,603
     
     
     110,522
     
     
     240,693Donations and community relations
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     949,271Exploration and development costs
     
     562,237
     
     
     11,690,204
     
     
     723,000
     
     
     11,529,441
     
     
     7,761,862Stock-based compensation
     
     77,890
     
     
     5,561,247
     
     
     641,848
     
     
     4,997,289
     
     
     898,454Travel
     
     121,849
     
     
     857,907
     
     
     79,603
     
     
     900,153
     
     
     1,014,530Debt issuance costs
     
     3,894,873
     
     
     -
     
     
     -
     
     
     3,894,873
     
     
     6,398,825Wages and benefits
     
     177,329
     
     
     1,668,455
     
     
     150,029
     
     
     1,695,755
     
     
     2,916,615Total expenses
     
     (5,192,655
     )
     
     (26,267,906
     )
     
     (2,175,770
     )
     
     (29,284,791
     )
     
     (25,603,711
     )OTHER INCOME (EXPENSE)Foreign exchange gain (loss)
     
     295,059
     
     
     1,342,442
     
     
     (144,621
     )
     
     1,782,122
     
     
     (8,157,720
     )Interest income
     
     78,658
     
     
     51,926
     
     
     8,542
     
     
     122,042
     
     
     169,366Asset usage fees
     
     (695
     )
     
     126,775
     
     
     59,649
     
     
     66,431
     
     
     (4,155
     )Gain on sale of equity investment
     
     -
     
     
     4,347,077
     
     
     -
     
     
     4,347,077
     
     
     40,604,938Interest on long term debt
     
     (15,613
     )
     
     (68,465
     )
     
     -
     
     
     (84,078
     )
     
     (37,382
     )Power and drilling services
     
     70,094
     
     
     76,430
     
     
     -
     
     
     146,524
     
     
     156,597Loss from equity investment
     
     (779,846
     )
     
     (8,301,371
     )
     
     (323,150
     )
     
     (8,758,067
     )
     
     (2,396,011
     )Gain on dilution of equity investment
     
     -
     
     
     12,582,085
     
     
     2,913,982
     
     
     9,668,103
     
     
     2,238,492Redemption loss on senior secured notes
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (13,130,982
     )
  Page 44


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Mark-to-market loss on senior secured notes
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (14,939,298
     )(352,343
     )
     
     10,156,899
     
     
     2,514,402
     
     
     7,290,154
     
     
     4,503,845Net earnings (loss) for the period
     $
     (5,544,998
     )
     $
     (16,111,007
     )
     $
     338,632
     
     $
     (21,994,637
     )
     $
     (21,099,866
     )
  We did not generate revenue from operations during the year ended May 31, 2009, or the year ended May 31, 2008. Expenses for the year ended May 31, 2009, were $25,603,711 compared to $29,284,791 for the year ended May 31, 2008, a decrease of $3,681,080. The decrease was attributable to a decrease in exploration and development costs due to the change in activities from exploration and development in 2008 to pre-operations and mill commissioning during the second half of fiscal 2009. The decrease was also attributable to a decrease in stock-based compensation due to a fewer number of options vesting in fiscal 2009. These decreases were partially offset by an increase in debt issuance costs as a result of the issuance of the second, third and supplemental tranches of senior secured notes and the issuance of convertible senior secured notes during the current fiscal year. Only one tranche of senior secured notes was issued in the year ended May 31, 2008. Other income for the year ended May 31, 2009, was $4,503,845 compared to $7,290,154 for the year ended May 31, 2008. The decrease in other income is due to the redemption losses and mark-to-market losses on the senior secured notes and the convertible senior secured notes totalling $28,070,280 which resulted from an increase in the fair value of the senior secured notes (Notes) due to mark-to-market accounting, a change in the discount rate on the Notes from 26.65% to 20.58% as at February 28, 2009, and the partial redemption of Notes during the year ended May 31, 2009. As the Notes issued in the year ended May 31, 2008, fiscal year were issued close to year end there were no such mark-to-market losses during this comparative period. The decrease in other income was also due to a lower gain on dilution of equity investment as the equity investment was sold in the second quarter of fiscal 2009 and a foreign exchange loss of $8,157,720 compared to a foreign exchange gain of $1,782,122 in the prior year. This primarily resulted from the significant decrease in the Canadian dollar, impacting the majority of our liabilities which are denominated in United States dollars coupled with a significant increase in U.S. denominated liabilities (senior secured notes) which occurred during the first nine months of fiscal 2009, prior to the adoption of the U.S. dollar as our functional currency. The decreases in other income were partially offset by a lower loss from equity investment due to the sale of the equity investment in the second quarter of fiscal 2009 as well as a higher gain on sale of the equity investment. The net loss for the year ended May 31, 2009, was $21,099,866 or $(0.22) per share compared to a net loss of $21,994,637 or $(0.24) per share for the year ended May 31, 2008. One Month Ended May 31, 2008, Compared to One Month Ended May 31, 2007 Summarized Financial Information
  One Month Ended
     
     
     One Month EndedMay 31, 2008
     
     
     May 31, 2007(unaudited)EXPENSESConsulting fees
     $
     21,170
     
     $
     90,363Amortization
     
     35,511
     
     
     133,036Stock-based compensation
     
     77,890
     
     
     641,848Debt issuance costs
     
     3,894,873
     
     
     -Other expenses
     
     1,163,211
     
     
     1,310,523Total expenses
     
     (5,192,655
     )
     
     (2,175,770
     )OTHER INCOME (EXPENSE)Foreign exchange gain (loss)
     
     295,059
     
     
     (144,621
     )Loss from equity investment
     
     (779,846
     )
     
     (323,150
     )Gain on dilution of equity investment
     
     -
     
     
     2,913,982
  Page 45


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Other
     
     132,444
     
     
     68,191(352,343
     )
     
     2,514,402Net earnings (loss) for the period
     $
     (5,544,998
     )
     $
     338,632Basic and diluted earnings (loss) per share
     
     (0.06
     )
     
     0.00Basic weighted average number of common shares outstanding
     
     93,131,030
     
     
     90,893,766Diluted weighted average number of common shares outstanding
     
     93,131,030
     
     
     95,811,357
  We did not generate revenue from operations during the one month ended May 31, 2008 or the one month ended May 31, 2007. Expenses for the one month ended May 31, 2008, were $5,192,655 compared to $2,175,770 for the one month ended May 31, 2007, an increase of $3,016,885. The increase was attributable to debt issuance costs of $3,894,873 related to the senior secured notes financing in May 2008. There were no debt issuance costs during the one month ended May 31, 2007. This increase was partially offset by a decrease of $563,958 in stock-based compensation expense. The decrease is related to a lower number of options vesting during the one month ended May 31, 2008. Other expense for the one month ended May 31, 2008, was $352,343 compared to income of $2,514,402 for the one month ended May 31, 2007. The decrease in other income is largely due to the gain on dilution of equity investment of $2,913,982 recorded in the one month ended May 31, 2007. There was no dilution gain recorded during the one month ended May 31, 2008, as there were no additional shares issued by Copper during that period. This decrease was partially offset by a foreign exchange gain of $295,059 for the one month ended May 31, 2008, compared to a foreign exchange loss of $144,621 for the one month ended May 31, 2007. The foreign exchange gain reflects the increase in value of the Canadian dollar relative the United States dollar, affecting the valuation of our liabilities which are predominantly denominated in United States dollars. The net loss for the one month ended May 31, 2008 was $5,544,998 or $(0.06) per share compared to net earnings of $338,632 or $0.00 per share for the one month ended May 31, 2007. Year Ended April 30, 2008, Compared to Year Ended April 30, 2007 Year EndedApril 30, 2008EXPENSESAccounting and legal
     
     1,306,921Accretion of asset retirement obligation
     
     305,692Consulting fees
     
     943,250Filing fees
     
     87,005Investor relations and shareholder information
     
     1,012,822Office administration
     
     2,711,908Rent
     
     122,495Exploration and development costs
     
     11,690,204Stock-based compensation
     
     5,561,247Travel
     
     857,907Wages and benefits
     
     1,668,455Total expenses
     
     (26,267,906
     )
  Page 46


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OTHER INCOME (EXPENSE)Foreign exchange gain (loss)
     
     1,342,442Interest income
     
     51,926Interest on long-term debt
     
     (68,465
     )Asset usage fees
     
     126,775Gain on sale of equity investment
     
     4,347,077Power and drilling services
     
     76,430Loss from equity investment
     
     (8,301,371
     )Gain on dilution of equity investment
     
     12,582,085Total other income (expenses)
     
     10,156,899Net (loss) for the period
     
     (16,111,007
     )Basic and diluted (loss) per share
     
     (0.17
     )Basic and diluted weighted average number of common shares outstanding
     
     93,131,030
  Financial Results for the Year Ended April 30, 2007 Year
     
     
     Three Months
     
     
     Three Months
     
     
     YearEnded
     
     
     Ended
     
     
     Ended
     
     
     EndedJanuary 31, 2007
     
     
     April 30, 2007
     
     
     April 30, 2006
     
     
     April 30, 2007(unaudited)
     
     
     (unaudited)EXPENSESAccounting and legal
     $
     433,266
     
     $
     204,246
     
     $
     82,011
     
     $
     555,501Consulting fees
     
     667,788
     
     
     277,051
     
     
     135,543
     
     
     809,296Amortization
     
     296,442
     
     
     116,893
     
     
     29,063
     
     
     384,272Filing fees
     
     67,027
     
     
     5,473
     
     
     3,611
     
     
     68,889Investor relations and shareholderinformation
     
     979,155
     
     
     132,438
     
     
     130,023
     
     
     981,570Office administration
     
     700,350
     
     
     152,031
     
     
     99,576
     
     
     752,805Rent
     
     124,344
     
     
     33,074
     
     
     15,510
     
     
     141,908Exploration and development costs
     
     10,930,276
     
     
     2,167,355
     
     
     1,954,609
     
     
     11,143,022Stock-based compensation
     
     14,962,731
     
     
     2,915,884
     
     
     50,486
     
     
     17,828,129Travel
     
     1,248,787
     
     
     230,293
     
     
     147,563
     
     
     1,331,517Wages and benefits
     
     1,591,959
     
     
     154,811
     
     
     144,010
     
     
     1,602,760Total expenses
     
     (32,002,125
     )
     
     (6,389,549
     )
     
     (2,792,005
     )
     
     (35,599,669
     )OTHER INCOME (EXPENSE)Foreign exchange gain (loss)
     
     23,723
     
     
     (757,632
     )
     
     (30,567
     )
     
     (703,342
     )Gain on sale of marketable securities
     
     18,584
     
     
     -
     
     
     18,584
     
     
     -Interest income
     
     260,393
     
     
     49,080
     
     
     72,015
     
     
     237,458Interest on long-term debt
     
     -
     
     
     (59,845
     )
     
     -
     
     
     (59,845
     )Asset usage fees
     
     -
     
     
     90,635
     
     
     -
     
     
     90,635Loss from equity investment
     
     (714,756
     )
     
     (2,057,724
     )
     
     -
     
     
     (2,772,480
     )Gain on dilution of equity investment
     
     1,701,589
     
     
     632,396
     
     
     -
     
     
     2,333,985Total other income (expenses)
     
     1,289,533
     
     
     (2,103,090
     )
     
     60,032
     
     
     (873,589
     )Net loss for the period
     $
     (30,712,592
     )
     $
     (8,492,639
     )
     $
     (2,731,973
     )
     $
     (36,473,258
     )Basic and diluted loss per share
     
     
     
     
     
     
     
     
     
     $
     (0.46
     )Basic and diluted weighted averagenumber of common shares outstanding
     
     
     
     
     
     
     
     
     
     
     79,992,262
  Page 47


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Expenses for the year ended April 30, 2008, decreased by $9,331,763 to $26,267,906 compared with $35,599,669 for the year ended April 30, 2007, due to a decrease in stock-based compensation of $12,266,882, which is attributable to fewer options being granted and the decreasing fair market value of our common shares, and a decrease in travel of $473,610 due to fewer employees and consultants traveling abroad. These decreases were partially offset by an increase in office administration of $1,614,135 related to an increase in insurance expense, additional employees, rent for new offices in Panama and donations to local social programs, an increase in accounting and legal of $751,420 due to additional work performed as a result of the increase in activities, an increase in exploration and development costs of $547,182 related to construction of the processing mill and the mine, and accretion of the asset retirement obligation of $305,692. In the year ended April 30, 2008, other income increased by $11,030,488 to $10,156,899 compared with a net expense of $873,589 for the year ended April 30, 2007. The increase in other income is due to a foreign exchange gain of $1,342,442 compared with a foreign exchange loss of $703,342 for the year ended April 30, 2007, which was primarily the result of a significant increase in the exchange rate from Canadian dollars to United States dollars, a gain of $4,347,077 on the transfer of 1,815,069 Copper shares back to Copper in settlement of the amount owing to Copper as at December 31, 2007, with no such gain recorded in the prior year, and a dilution gain of $12,582,085 during the year ended April 30, 2008 compared with $2,333,985 during the prior year. The dilution gain resulted from the difference between our carrying cost of Copper and the amount paid up for each Copper share issued. These income increases were partially offset by interest income of $51,926 earned during the year ended April 30, 2008 compared to $237,458 for the year ended April 30, 2008 due to lower cash balances on hand during the 2008 period as well as an equity loss of $8,301,371 for the year ended April 30, 2008 compared to $2,772,480 for the prior year. The equity loss reflects our portion of the losses that are attributed to our percentage ownership in Copper. The net loss for the year ended April 30, 2008, was $16,111,007 or $(0.17) per basic and diluted share compared to a net loss for the year ended April 30, 2007 of $36,473,258, or $(0.46) per basic and diluted share. 5.B.
     Liquidity and Capital Resources
  We have generated revenues of $27,827,935 to date, but have experienced recurring operating losses and have accumulated an operating deficiency of $146,757,018 as at May 31, 2010 (May 31, 2009 - $119,774,936, May 31, 2008 - $98,675,070, and April 30, 2008 - $93,130,072) and a shareholders deficiency of $21,353,115 at May 31, 2010. We also had a working capital deficiency of $87,329,354 at May 31, 2010 (May 31, 2009 - $24,386,116, May 31, 2008 - $3,714,457, and April 30, 2008 - $27,645,485 net working capital). Working capital is defined as current assets less current liabilities and provides a measure of our ability to settle liabilities that are due within one year with assets that are also expected to be converted to cash within one year. At May 31, 2010, we have $21,300,957 outstanding in senior secured notes (Notes) and $40,000,000 outstanding in convertible senior secured notes (Convertible Notes). The Notes mature five years from dates of issuance (May 21, 2008, July 9, 2008, and October 3, 2008) at 120% of principal. After 18 or 24 months from the date of issuance of the Notes, depending upon the agreement reached with the Note holders, the holders of the Notes can give six months notice to cause us to purchase all of the Notes then outstanding at a price equal to the sum of (a) 120% of the principal amount of such Notes to be purchased and (b) accrued and unpaid interest on the principal amount of the Notes. The Convertible Notes bear interest at an annual rate of 15%, of which the first year is prepaid. The Convertible Notes mature two years from the date of issuance at 110% of the principal. On an annual basis, commencing November 1, 2009, the Note holders and Convertible Note holders can cause us to redeem an amount of Notes and Convertible Notes equal to 35% of Distributable Cash. Distributable Cash is defined as cash available after: (a)
     satisfaction of our debt obligations (principal and interest);(b)
     satisfaction of our general and administrative expenses, capital expenditures and other expense obligations;(c)
     deduction for income tax obligations; and(d)
     retaining reasonable working capital or other reserves.
  Reasonable working capital and other reserves are to be defined mutually between the Note holders and Convertible Note holders and the Company. As of May 31, 2010, neither of these has been defined. Page 48


---

On a semi-annual basis, commencing September 15, 2009, for the Notes and September 15, 2010, for the Convertible Notes, we are required to make principal payments ranging from $Nil to $8,000,000 depending upon the weighted average market price of gold for the six months prior to the payment date as follows: Weighted Average Market Gold Price
     Aggregate Pro Rata Principal PaymentOver $1,000
     $
     8,000,000$900 to $1,000
     $
     6,000,000$800 to $900
     $
     4,000,000Less than $800
     
     -
  On September 15, 2009, we redeemed 5,000 Notes at 120% of their principal value plus interest for a total payment of $6,208,844. This payment was financed in part by a $5,129,600 prepayment on forward gold sales of 5,600 ounces at a net price of $916 per ounce. We have been unable to meet all of our obligations with respect to scheduled repayments of principal, premium and interest on our Notes and interest on our Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, we have paid $1,200,000. Under the terms of the Indenture an event of default has occurred and the Notes and Convertible Notes are currently due on demand at the option of the Note holders and Convertible Note holders or the Trustee. As of May 31, 2010, the Company had $71,387,328 in redemption amount of Notes and Convertible Notes outstanding. Subsequent to year end, we entered into a prepaid Forward Gold Purchase Agreement with Deutsche Bank AG (Deutsche Bank) for $45,000,000. Upon the satisfaction of certain conditions precedent and the successful completion of this transaction, net proceeds of approximately $41,000,000 will be used to extinguish a portion of our Notes and Convertible Notes. As a condition precedent of the Forward Gold Purchase Agreement, holders of the Notes and Convertible Notes will be required to enter into an Inter-Creditor Agreement with Deutsche Bank and us. While these agreements are not final, management expects that under the Inter-Creditor Agreement no interest or principal payments will be required on the Notes or Convertible Notes for the first six months after the effective date of the agreement. After the first six months, we are required only to make scheduled interest payments on the Notes and Convertible Notes as they become due until the Notes and Convertible Notes mature five years and one day after closing of the Forward Gold Purchase Agreement with Deutsche Bank. Our operating cash flow and profitability are affected by various factors, including the amount of gold produced and sold, the market price of gold, operating costs, interest rates, environmental costs, the level of exploration activity, labour risk, the risk of business disruption due to environmentalist activities and political risk. We seek to manage the risks associated with our business; however, many of the factors affecting these risks are beyond our control. On January 8, 2010, we commenced commercial production. If we are unable to generate positive cash flow from production activities, we may have to raise additional funds for further exploration of the surrounding concessions, to meet our operating obligations and to continue operations. We may pursue additional sources of financing and while we have been successful in the past there can be no assurance that we will be able to do so in the future. Our mineral exploration activities have been funded primarily through sales of common shares and through debt financing and we expect that we will continue to be able to utilize these sources of financing until we develop further cash flow from our operations. We have not made use of any financial instruments for hedging purposes. Proceeds from two private placements and exercise of warrants and options provided $13,198,149 net of share issuance costs for the year ended May 31, 2010, compared to $37,662 for the year ended May 31, 2009. Proceeds from the issuance of senior secured notes and convertible senior secured notes were $Nil for the year ended May 31, 2010, compared to $74,587,500 for the year ended May 31, 2009. We have $566,708 in term deposits which are being held to guarantee credit cards and a performance bond for compliance with the environmental laws in Panama. Page 49


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Our management reviews annually the carrying value of our interest in each mineral property and where necessary, properties are written down to the estimated recoverable amount determined on a non-discounted basis after giving effect to any property option agreements and cost recovery agreements. Costs relating to properties abandoned are written off when the decision to abandon is made. May 31, 2010, Compared with May 31, 2009 At May 31, 2010, our current assets totaled $9,066,842 and our working capital deficiency was $87,329,354 compared with current assets of $5,350,239 and a working capital deficiency of $24,386,116 at May 31, 2009, due to the entire amount of the Notes and Convertible Notes being classified as current liabilities, as a result of the anticipated redemption of senior secured notes and convertible senior secured notes in fiscal 2011. At May 31, 2010, total liabilities were $101,615,310 compared to $90,464,111 at May 31, 2009. The increase was largely due to an increase in accounts payable, from $8,746,892 in 2009 to $17,586,683 in 2010. At May 31, 2010, we had total assets of $80,262,195 compared to $81,543,823 at May 31, 2009. Share capital at May 31, 2010, was $102,334,997 (125,281,951 shares) compared to $89,208,668 (96,040,121 shares) at May 31, 2009. May 31, 2009, Compared with May 31, 2008 At May 31, 2009, our current assets totaled $5,350,239 and our working capital deficiency was $24,386,116 compared with current assets of $13,611,277 and a working capital deficiency of $3,714,457 at May 31, 2008, due to expenditures required to complete the construction of the processing mill. At May 31, 2009, total liabilities were $90,464,111 compared to $56,602,043 at May 31, 2008, due to the issue of three additional tranches of Notes and the issue of Convertible Notes in fiscal 2009. At May 31, 2009, we had total assets of $81,543,823 compared to $71,208,177 at May 31, 2008. Share capital at May 31, 2009, was $89,208,668 (96,040,121 shares) compared to $89,002,273 (95,958,641 shares) at May 31, 2008. The most significant contribution to working capital in the year ended May 31, 2009, came from proceeds of $43,238,852 from the sale of the equity investment, whereas, in the one month ended May 31, 2008, the most significant contribution to working capital came from the issue of senior secured notes for net proceeds of $23,517,628. In June 2008, we closed on a gross amount of $10,000,000 comprising the second tranche of our $60 million Notes financing and, in July 2008, we closed on a gross amount of $17,750,000 comprising the third tranche of our $60 million Notes financing. The first tranche of $32,250,000 had been closed on May 21, 2008. The Notes issued with respect to this debt financing bear interest at an annual rate of 15% and mature five years from the date of issuance at 120% of the principal and are guaranteed, on a joint and several basis, by all of our assets and by those of our subsidiaries. After 18 or 24 months from the date of issuance of the Notes, depending upon the agreement reached with the Note holders, the holders of the Notes can give six months notice to cause us to purchase all of the Notes then outstanding at a price equal to the sum of (a) 120% of the principal amount of such Notes to be purchased and (b) accrued and unpaid interest on the principal amount of the Notes. We have the right to redeem the Notes at any time at 120% of the principal amount plus any accrued or unpaid interest on the Notes. If the Notes are redeemed within one year of issuance, all prepaid interest totalling $4,162,500 shall be forfeited. As we incurred $1,050,000 in financing costs and paid $3,000,000 in prepaid interest with respect to the second tranche, the net amount received by us for the second tranche equalled $6,000,000. Further, we incurred $1,850,000 in financing costs and $2,662,500 in prepaid interest with respect to the third tranche; thereby, the net amount received by us for the third and final tranche equalled $13,237,500. For additional information, please refer to "Item 8- Financial Information  8. B .Significant Changes  Section (v). We initially issued 60,000 Notes with the first, second and third tranche of the Notes financing. Each Note was issued with 382 share purchase warrants. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. On April 17, 2009, we repriced these warrants to entitle the holder to purchase one common share at CAD $0.65 for the remainder of the warrant period with the provision that, if our closing trading price of our common shares on the TSX is CAD$ 1.00 or more for a period of 30 consecutive trading days, we have the option to require the earlier exercise of the warrants. The effect of re-pricing the warrants was an increase in the value of the warrants of $1,781,500 and a decrease to contributed surplus for the same amount. Page 50


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In September 2008, we sold all 20,418,565 of our common shares of Copper at CAD$2.20 per share raising $43,238,852, which we used to retire $43,238,852 of our outstanding senior secured notes. In October 2008, we closed a supplemental Notes financing issuing a total of 20,000 Notes and raising gross proceeds of $20,000,000. The Notes from this supplemental financing bear the same terms as the Notes issued in our previous Notes financing except that no warrants were issued in conjunction with the supplemental financing. As we incurred $1,125,000 in financing costs with respect to the supplemental financing and paid $3,000,000 in prepaid interest, the net amount received by us equalled $15,875,000. In March 2009, we closed the Convertible Notes financing issuing a total of 40,000 Convertible Notes and raising gross proceeds of $40,000,000. Each note in the principal amount of $1,000 is convertible into common shares at CAD$2.25 per share. The Convertible Notes bear interest at an annual rate of 15% and mature two years from date of issuance at 110% of the principal amount of such Convertible Notes. We may prepay the Convertible Notes at any time for an amount equal to 110% of the principal amount of such Convertible Notes and accrued and unpaid interest on the principal amount of the Convertible Notes. The indebtedness represented by the Convertible Notes rank pari passu with the previously issued Notes. Holders of the previously issued Notes were offered the opportunity to exchange amounts due upon maturity of their existing Notes and participated pro rata in this Convertible Note financing up to $24,187,083. Notes representing $21,000,000 in redemption value participated in exchange for the Convertible Notes. As we incurred $2,140,000 in financing costs and $6,000,000 in prepaid interest with respect to the supplemental financing, the net amount received by us less the Notes exchanged equalled $10,860,000. May 31, 2008, Compared with April 30, 2008 At May 31, 2008, our current assets totaled $13,611,277 and our working capital deficiency was $3,714,457 compared with current assets of $2,672,727 and a working capital deficiency of $27,645,485 at April 30, 2008, due to funds raised from our senior secured notes financing in May 2008. At May 31, 2008, total liabilities were $56,602,043 compared to $40,023,388 at April 30, 2008, due to a senior secured notes balance at May 31, 2008, of $26,785,359 partially offset by a decrease of $9,917,624 in accounts payable. At May 31, 2008, we had total assets of $71,208,177 compared to $58,789,331 at April 30, 2008. Share capital at May 31, 2008, was $89,002,273 (95,958,641 shares) compared to $89,640,627 (95,958,641 shares) at April 30, 2008. The most significant contribution to working capital in the one month ended May 31, 2008, came from the issue of senior secured notes for net proceeds of $23,517,628 whereas, in the year ended April 30, 2008, the most significant contribution to working capital came from advances from Copper of $17,682,808 and issuance of capital stock for net proceeds of $13,309,397. In May 2008, we closed on a gross amount of $32,250,000 comprising the first tranche of our $60 million Notes financing. The Notes issued with respect to this debt financing bear interest at an annual rate of 15% and will mature five years from date of issuance at 120% of the principal and are guaranteed, on a joint and several basis, by all of our and our subsidiaries assets. We have the right to redeem the Notes at any time at 120% of the principal amount plus any accrued or unpaid interest on the Notes. If the Notes are redeemed within one year of issuance, all prepaid interest totalling $4,837,500 shall be forfeited. After 24 months from the date of issuance of the Notes, holders of the Notes shall have the right to cause us to purchase all of our Notes then outstanding at a price equal to the sum of (a) 120% of the principal amount of such Notes to be purchased and (b) accrued and unpaid interest on the principal amount of the Notes. On an annual basis, the Note holders can cause us to redeem Notes equal to 35% of free cash flow. Each of the 32,250 Notes issued in this first tranche of the financing was issued with 382 share purchase warrants, thus, totalling 12,812,280 warrants inclusive of compensation warrants. Each warrant entitled the holder to purchase one common share at CAD$2.30 for a period of five years from the date of purchase. On April 17, 2009, the Company repriced these warrants to entitle the holder to purchase one common share at CAD $0.65 for the remainder of the warrant period with the provision that, if the closing trading price of the Companys common shares on the TSX is CAD$ 1.00 or more for a period of 30 consecutive trading days, the Company has the option to require the earlier exercise of the warrants. Page 51


---

As we incurred $3,894,872 in financing costs and $4,837,500 in prepaid interest, the net amount received by us for this first tranche equalled $23,517,628. For additional information, please refer to "Item 8  Financial Information  8.B. Significant Changes  Section (v). April 30, 2008, Compared to April 30, 2007 At April 30, 2008, current assets totaled $2,672,727 compared to $6,247,576 at April 30, 2007. The decrease is attributable to a decrease of $4,141,083 in the amount receivable from a related company. At April 30, 2008, total liabilities were significantly higher at $40,023,388 compared to $10,611,499 as at April 30, 2007, related to the substantial increase in activity in the year ended April 30, 2008. The increases included an increase in the amount payable to a related company of $9,809,747, an increase in the operating credit line facility of $8,190,385, an increase in deferred services and materials of $4,277,501, an increase in accounts payable and accrued liabilities of $4,129,408, an increase in obligation under capital leases of $2,095,941 and an increase in bank overdraft of $1,015,627. Our working capital deficiency was $27,645,485 at April 30, 2008, compared with working capital of $243,635 at April 30, 2007. At April 30, 2008, we had total assets of $58,789,332 compared with $24,981,649 at April 30, 2007. This is primarily a result of increases in capitalized project development costs and property, plant and equipment. Share capital at April 30, 2008, and April 30, 2007, was $89,640,627 (95,958,641 shares) and $74,794,361 (89,876,951 shares), respectively. Operating expenses for the year ended April 30, 2008 and the year ended April 30, 2007, were $26,267,906, inclusive of general and administrative expenses, and $35,599,669, respectively, largely due to stock-based compensation expense of $17,828,129 for the year ended April 30, 2007. The most significant contributions to working capital in the year ended April 30, 2008, came from advances from Copper of $17,682,808 and issuance of capital stock, which provided net proceeds of $13,309,397. The most significant contribution to working capital in the year ended April 30, 2007, came from the issuance of capital stock which provided proceeds of $26,064,602 net of share issuance costs. In May 2007, we completed a non-brokered private placement issuing 1,387,879 units at a price of CAD$2.00 per unit and 24,033 units priced at CAD$2.02 per unit, for gross proceeds of $2,552,698. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$3.50 per share until the warrants expired on May 8, 2009. The fair value of the warrants issued on this private placement was $263,263. In January 2008, we completed a non-brokered private placement issuing a total of 3,140,500 units at a price of CAD$3.00 per unit and raising gross proceeds of $9,736,579. Each unit consisted of one common share and one-half of one common share purchase warrant aggregating 1,691,875 warrants with the inclusion of the issued compensation warrants. Each whole warrant is exercisable into a common share at a price of CAD$3.50 per share until the warrants expire on October 31, 2009 (1,120,875), December 19, 2009 (182,000) and January 9, 2010 (389,000). We paid finders fees of $381,793 in cash and $86,439 in warrants. 5.C.
     Research and Development, Patents and Licenses, etc.
  We do not undertake any research or development activities. Please refer to prior Item 5.A. and Item 5.B for a discussion of our exploration expenditures incurred in connection with the exploration of our mineral properties. Page 52


---

5.D.
     Trend Information
  As a natural resource exploration company, our activities reflect the traditional cyclical nature of metal prices. Consequently, our business is primarily "event-driven" based on exploration results. Monthly average gold prices in calendar 2009 ranged from $858.69/oz to $1,134.72/oz with a cumulative average of $972.35.  As global economic and other market conditions are uncertain, market experts have forecasted strong gold prices through 2010. Monthly average gold prices in calendar 2010, thus far, have ranged from $1,095.41/oz to $1,232.92/oz with a cumulative average of $1,158.26. 5.E.
     Off-Balance Sheet Arrangements
  We do not have any off-balance sheet arrangements that have or are reasonably likely to have a 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 are material to investors. 5.F.
     Tabular Disclosure of Contractual Obligations
  Commitments As at May 31, 2010, we had the following contractual obligations: Less than 1 Year
     
     
     2 Years
     
     
     3 Years
     
     
     4 - 5 Years
     
     
     More than 5Years
     
     
     TotalOffice lease
     $
     63,479
     
     $
     15,867
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     79,346Equipment lease
     $
     4,376,668
     
     $
     447,080
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     4,823,748Senior secured notes
     $
     26,895,996
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     26,895,996Convertible senior secured notes
     $
     45,257,594
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     45,257,594Long-term debt
     $
     44,800
     
     $
     44,800
     
     $
     44,800
     
     
     Nil
     
     
     Nil
     
     $
     134,400Fundacion Petaquilla
     $
     1,200,000
     
     $
     1,200,000
     
     $
     1,200,000
     
     $
     1,200,000
     
     $
     3,600,000
     
     $
     8,400,000Asset retirement obligation
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     7,312,356
     
     $
     7,312,356Total
     $
     77,838,537
     
     $
     1,707,747
     
     $
     1,244,800
     
     $
     1,200,000
     
     $
     10,912,356
     
     $
     92,903,440
  Page 53


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Capital Lease Obligation We entered into four capital lease arrangements with Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA) for the purchase of equipment to advance the Molejon project into production. The equipment includes but is not restricted to: ball mills, a Metso crushing plant, cranes and an aggregate crushing plant. As a condition of the leases, the equipment will serve as collateral throughout the amortization period and will be registered with the Public Registry of the Republic of Panama. Further, IMN Resources Inc. (formerly Petaquilla Copper Ltd.) has pledged a term deposit in the amount of $2,361,098 (May 31, 2009 - $2,361,098) as additional security. Future minimum lease payments on the capital lease obligations are as follows: May 31 ,2010
     
     
     May 31, 20092010
     $
     -
     
     $
     5,741,5672011
     
     4,376,667
     
     
     4,164,9722012
     
     447,080
     
     
     461,9074,823,747
     
     
     10,368,446Less imputed interest of 9%
     
     (247,486
     )
     
     (922,291
     )Total
     
     4,576,261
     
     
     9,446,155Current obligation
     
     4,136,032
     
     
     5,054,987Long- term obligation
     $
     440,229
     
     $
     4,391,168
  Operating Credit Facility We have an operating credit line facility with Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA) up to a maximum of $13,379,554. The facility is converted to capital leases when the asset purchases are completed. The facility has a fixed rate of 9% on $11,018,456 and 6% on $2,361,098, is secured by the assets purchased and is registered with the Public Registry of the Republic of Panama. At May 31, 2010 there is a remaining credit line balance of $332,511 available upon which the Company may draw. Long-term debt During the year ended May 31, 2010, we arranged bank loan financing of $115,700 for the purchase of vehicles. The loan is secured by the purchased vehicles. The following table summarizes the loans outstanding as at May 31, 2010, and May 31, 2009: May 31, 2010
     
     
     May 31, 2009Vehicle loan, repayable at $3,733 per month, including interest at 10%, due May 2013
     $
     115,700
     
     
     -Equipment loan, repayable at $7,445 per month including interest at 9.0%, paid out October 2009
     
     -
     
     $
     29,891Equipment loan, repayable at $18,095 per month including interest at 9.25%, paid out January 2010
     
     -
     
     
     125,575Vehicle loan, repayable at $793 per month, including interest at 9.25%, paid out January 2010
     
     -
     
     
     5,527115,700
     
     
     160,993Less: current portion
     
     (35,465
     )
     
     (160,993
     )$
     80,235
     
     $
     -
  Page 54


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Asset Retirement Obligation Our asset retirement obligation relates to site restoration and cleanup costs for our Molejon gold project located in Panama. A reconciliation of the provision for asset retirement obligation is as follows:Balance at May 31, 2008
     $
     4,333,216Accretion
     
     331,504Balance at May 31, 2009
     
     4,664,720Accretion
     
     325,287Adjustment for change in estimate of timing of cash flows
     
     (291,357
     )Balance at May 31, 2010
     $
     4,698,650
  The provision for asset retirement obligation is based upon the following assumptions: a)
     The total undiscounted cash flow required to settle the obligation is approximately $7,300,000;b)
     Asset retirement obligation payments are expected to occur during fiscal years 2016 and 2017;c)
     A credit adjusted risk-free rate of 7.65% has been used to discount cash flows.
  5.G.
     Safe Harbour
  The safe harbour provided in Section 27A of the Securities Act and Section 21E of the Exchange Act (statutory safe harbours) apply to forward-looking information provided pursuant to Item 5.E. and Item 5.F. above. 5.H.
     Non-GAAP Measures
  We have included the non-GAAP performance measure unit cash cost per ounce sold. This non-GAAP performance measure does not have any standardized meaning prescribed by GAAP and, therefore, may not be comparable to similar measures presented by other companies. We believe that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate our performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared using GAAP. More specifically, our management believes that these figures are a useful indicator to investors and management of a mines performance as they provide: (i) a measure of the mines cash margin per ounce, by comparison of the cash operating costs per ounce to the price of gold, (ii) the trend in costs as the mine matures and, (iii) an internal benchmark of performance to allow for comparison against other mines. Total cash cost includes mine site operating costs such as mining, processing, administration and royalties but is exclusive of amortization, depletion, reclamation, capital costs, exploration costs and corporate administration costs. The following table provides a reconciliation of cash costs per ounce to total cost of sales per the consolidated financial statements: Q4 2010
     
     
     Q3 2010
     
     
     TotalCost of sales
     $
     9,806,015
     
     $
     6,717,145
     
     $
     16,523,160Ounces sold
     
     14,100
     
     
     13,350
     
     
     27,450Less ounces sold prior to commercialproduction date recorded in mineralproperties
     
     -
     
     
     (3,200
     )
     
     (3,200
     )Net ounces included in sales
     
     14,100
     
     
     10,150
     
     
     24,250Cash cost per ounce sold
     $
     695
     
     $
     662
     
     $
     681
  Page 55


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ITEM 6.
     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
  6.A.
     Directors and Senior Management
  The following information regarding our directors and members of senior management, including names, business experience, offices held and outside principal business activities, is at August 30, 2010: Raul Ferrer Mr. Raul Ferrer (born January 8, 1973) was appointed to our board of directors (the Board of Directors) on November 6, 2009. Mr. Ferrer is a leading financial advisor to a number of businesses operating in Panama. He is a former financial investments director with the Panamanian equity investment firm, Wall Street Securities. Richard Fifer Mr. Richard Fifer (born January 23, 1957) is a Panamanian citizen and a U.S.-trained geologist. He has served on our Board of Directors from March 1993 to November 1998, July 2002 to July 2003, and from November 12, 2003, to the present. In addition, he served as our Chief Executive Officer from December 14, 2004, to March 23, 2005, and from April 14, 2007, to September 15, 2009. Since 1994, he has been President of Geoinfo, S.A., a Panamanian company that provides geographic mapping technology and solutions. He was Chairman and President of CODEMIN, Panamas state mining company, from January 1997 to January 2000. Under the Ministry of Foreign Affairs Panama, he was the President's Plenipotentiary Ambassador-at-large from March 2002 to September 2003. He was also Governor of the Province of Cocle, Panama, from March 2002 to September 2003. Mr. Fifer holds a B.Sc. in both Geology and Geophysical Engineering and an M.A. in Finance. David Kaplan Mr. David Kaplan (born April 28, 1970) was appointed to our Board of Directors on November 6, 2009. He is a former key member of LIM Advisors LLC, a multi-strategy investment group, where he managed a portfolio of metal and energy futures and securities for a commodity hedge fund. He is a also a former Vice-President of Gerald Metals Inc., financial analyst with Glencore Ltd., and graduate of the Wharton School of the University of Pennsylvania. David Levy Mr. David Levy (born December 22, 1984) was appointed to our Board of Directors on November 6, 2009. He is a member of the private placement group at the investment advising firm of Platinum Management (NY) LLC, where he has participated in over 25 capital raising transactions for public and private corporations. He specializes in structuring and negotiating financings at all levels of the capital structure through extensive industry research financial analysis and modeling. Mr. Levy graduated with honors from Sy Syms School of Business of Yeshiva University. Joao Manuel Mr. Joao Manuel (born November 6, 1952) was appointed our President and Chief Executive Officer on November 6, 2009, after having served as our Chief Operating Officer since December 1, 2008. Before joining us, Mr. Manuel held the position of Chief Financial Officer of Copper, which was also a reporting issuer listed on the Toronto Stock Exchange. Mr. Manuel has over 20 years of management experience in large, multinational corporations worldwide, including General Electric Company, ITT Europe Ltd. and Nokia Consumer Electronics. He is a former Managing Director of Inapa France S.A. and Chief Financial Officer and Deputy Chief Executive Officer of the Inapa Group, Europes fourth largest paper merchant with operations in eight countries. Lazaro Rodriguez Mr. Lazaro Rodriguez (born March 9, 1971) was appointed our Chief Operating Officer on April 8, 2010, after having served as our Vice President of Security (2007) and Vice President of Operations (2008-2010). Prior to joining us, Mr. Rodriguez was president and general manager of a physical security company and director and general manager of a voice, data, and video wireless network implementation company, both in Panama. He has also served as an external advisor to the National Council for Public Security and National Defense (Panama) responsible for strategy in the areas of public safety and maritime security. This followed Mr. Rodriguezs position as Commander of the Special Operations Unit in Panamas National Maritime Service, where he was responsible for the planning, development and execution of rescue operations, anti-drug trafficking campaigns and research. Page 56


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Julie van Baarsen Ms. Julie van Baarsen (born October 31, 1960), a Chartered Accountant, was appointed our Chief Financial Officer on January 1, 2010. Ms. van Baarsen initially joined our Company in January 2009 as our Director of Finance. Prior to that time, she gained a wide range of experience working in various industries in both public and private companies. She is a former audit manager of Grant Thornton LLP. One of our current directors, Mr. David Levy holds a position with Platinum Management (NY) LLC (Platinum), an investment advisory firm to more than 2/3 of our Senior Secured Note holders and Convertible Note holders (collectively, the Notes Holders) and he became a director of our company due to this relationship. Platinums clients as Note Holders and, therefore, our creditors, and the interests of Platinum as the investment advisor to the Note Holders, may diverge in certain circumstances with those of the our shareholders. To the extent that Platinum, as investment advisor to more than 2/3 of our Note Holders, are related to the us, Mr. Levy may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation, which could result in competitive harm to us. In the event that such a conflict of interest arises at a meeting of our directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In appropriate cases, we will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. In accordance with the laws of the Province of British Columbia, our directors are required to act honestly, in good faith and in our best interests. 6.B.
     Compensation
  During the fiscal year ended May 31, 2010, we paid cash compensation to our directors and officers as described below. No other funds were set aside or accrued by us during the fiscal year ended May 31, 2010, to provide pension, retirement or similar benefits for our directors or officers pursuant to any existing plan provided or contributed to by us or our subsidiaries under applicable Canadian laws. We are required, under applicable securities legislation in Canada, to disclose to our shareholders details of compensation paid to our directors and executive officers. The following fairly reflects all material information regarding compensation paid to our directors and executive officers and disclosed to our shareholders under applicable Canadian law. Cash and Non-Cash Compensation - Directors and Officers The following table sets forth all annual and long-term compensation for services provided to us during the fiscal year ended May 31, 2010, by individuals who were our directors and executive officers as at May 31, 2010: Short Term Compensation
     
     Long Term CompensationAwards
     PayoutsName and PrincipalPosition
     Salary($)
     Bonus($)
     OtherAnnualCompen-sation($)
     CommonSharesUnderOptionsgranted(#)
     RestrictedShares orRestrictedShare Units($)
     Long-TermIncentivePlans($)
     All OtherCompen-sation($)Raul Ferrer (1)
Director
     $14,667
     nil
     nil
     400,000
50,000
50,000
     n/a
     n/a
     nilRichard Fifer (2)
Director, Non-Executive
Chairman of the Board of
Directors
     $379,790
     90,000
     nil
     600,000
100,000
100,000
350,000
     n/a
     n/a
     nilDavid Kaplan (1)(3)
Director, Corporate Secretary
     $23,067
     nil
     nil
     400,000
50,000
     n/a
     n/a
     nil
  Page 57


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Short Term Compensation
     
     
     Long Term CompensationAwards
     PayoutsName and PrincipalPosition
     Salary($)
     Bonus($)
     OtherAnnualCompen-sation($)
     CommonSharesUnderOptionsgranted(#)
     RestrictedShares orRestrictedShare Units($)
     Long-TermIncentivePlans($)
     All OtherCompen-sation($)50,000David Levy (1)
Director
     $21,467
     nil
     nil
     400,000
50,000
50,000
     n/a
     n/a
     nilJoao Manuel (4)
Chief Operating Officer
     $480,000
     nil
     nil
     400,000
50,000
50,000
     n/a
     n/a
     nilJulie van Baarsen (5)
Chief Financial Officer
     $149,000(7)
     nil
     nil
     100,000
100,000
     n/a
     n/a
     nilLazaro Rodriguez (6)
Chief Operating Officer
     $120,000
     nil
     nil
     25,000
25,000
     n/a
     n/a
     nil
  (1)
     Appointed to our Board of Directors on November 6, 2009.(2)
     Served as our President and Chief Executive Officer from June 1, 2009, to September 15, 2009.(3)
     Appointed as our Corporate Secretary on December 22, 2009.(4)
     Joao Manuel served as our Chief Operating Officer from June 1, 2009, until he was appointed our President and Chief Executive Officer on November 6, 2009.(5)
     Appointed as our Chief Financial Officer on January 1, 2010, after having served us our Director of Finance since July 2, 2009.(6)
     Appointed as our Chief Operating Officer on April 8, 2010, after having served us our and Vice President of Operations since the beginning of the fiscal year.(7)
     Amount shown is in Canadian dollars.
  Option Grants to Directors and Officers During Fiscal Year Ended May 31, 2010 The table below sets forth stock options granted by us during the year ended May 31, 2010, to our then directors and officers. Name
     CommonShares UnderOptionsGranted
     % of TotalOptionsGranted inFiscal Year(4)
     Exercise Priceor Base Price($/Share)(5)
     Market Value ofCommon SharesUnderlying Optionson Date of Grant
     Expiration Date(#) (1)
     
     (CAD$)
     ($/Share)Raul Ferrer
     400,000
50,000
50,000
     9.32%
     $0.23
$0.87
$0.57
     nil
     November 18, 2014
January 5, 2015
March 25, 2015Richard Fifer
     600,000(2)
100,000
100,000
350,000(3)
     21.44%
     $0.23
$0.87
$0.57
$0.53
     nil
     November 18, 2014
January 5, 2015
March 25, 2015
April 30, 2015David Kaplan
     400,000
50,000
50,000
     9.32%
     $0.23
$0.87
$0.57
     nil
     November 18, 2014
January 5, 2015
March 25, 2015David Levy
     400,000
50,000
50,000
     9.32%
     $0.23
$0.87
$0.57
     nil
     November 18, 2014
January 5, 2015
March 25, 2015Joao Manuel
     400,000
50,000
50,000
     9.32%
     $0.23
$0.87
$0.57
     nil
     November 18, 2014
January 5, 2015
March 25, 2015Julie van Baarsen
     100,000
100,000
     3.73%
     $0.62
$0.84
     nil
     July 13, 2014
January 1, 2015
  Page 58


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Lazaro Rodriguez
     25,000
25,000
     0.93%
     
     nil
     January 5, 2015
March 25, 2015
  (1)
     All stock options vest over a period of 21 months with the exception of(2)and(3)noted below.(2)
     Stock options subject to immediate vesting.(3)
     Stock options exercisable by the option holder in whole or in part upon closing of funding pursuant to the Forward Gold Purchase Agreement with Deutsche Bank.(4)
     Percentage of all stock options granted during the year ended May 31, 2010.(5)
     The exercise price of stock options is set at not less than the Volume Weighted Average Trading Price for the five trading days immediately preceding the date of the stock option grant.
  Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth details of all exercises of stock options during the year ended May 31, 2010, by our directors and executive officers and the value of unexercised options as of May 31, 2010: Name
     Common SharesAcquired onExercise(#)
     Aggregate ValueRealized(CAD$)
     Unexercised Options atFiscal Year-End(#) (1) (2)Exercisable/Unexercisable
     Value of Unexercised In-the-Money Options at FiscalYear-End($)(1) (2)Exercisable/UnexercisableRaul Ferrer
     nil
     nil
     150,000 / 250,000
12,500 / 37,500
0 / 50,000
     29,250 / 48,750
nil / nil
nil / nilRichard Fifer
     nil
     nil
     118,800 / 0
585,000 / 0
1,470,216(3)/ 0
600,000 /0
25,000 / 75,000
0 / 100,000
0 / 350,000
     19,602 / 0
nil / nil
nil / nil
117,000 / 0
nil / nil
nil / nil
nil / nilDavid Kaplan
     nil
     nil
     150,000 / 250,000
12,500 / 37,500
0 / 50,000
     29,250 / 48,750
nil / nil
nil / nilDavid Levy
     nil
nil
nil
     nil
nil
nil
     150,000 / 250,000
12,500 / 37,500
0 / 50,000
     29,250 / 48,750
nil / nil
nil / nilJoao Manuel
     nil
     nil
     225,000 / 75,000
150,000 / 250,000
12,500 / 37,500
0 / 50,000
     nil / nil
29,250 / 48,750
nil / nil
nil / nilJulie van Baarsen
     62,500
     $18,125
     12,500 / 25,000
25,000 / 75,000
     nil / nil
nil / nilLazaro Rodriguez
     nil
     nil
     50,000 / 0
6,250 / 18,750
0 / 25,000
     nil / nil
nil / nil
nil / nil
  (1)
     The figures relate solely to stock options.(2)
     Value of unexercised in-the-money options calculated using the closing price of our common shares on the Toronto Stock Exchange on May 31, 2010, which was $0.425, less the exercise price of in-the-money stock options.(3)
     Stock options cancelled effective July 31, 2009.
  Defined Benefit or Actuarial Plan Disclosure We do not provide retirement benefits for our directors and officers nor do we provide compensation pursuant to any bonus or profit-sharing plan. Termination of Employment, Change in Responsibilities and Employment Contracts We have entered into formal agreements with our directors, our executive officers and with six key employees that establish financial arrangements that would be in effect in the event of a change of control of our company. Each agreement provides for, in the event of the termination of the engagement of such persons following a change of control of our company, the payment of an amount equal to three times the annual compensation being paid to such person as at the time of the change of control. Page 59


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Directors With the exception of directors whom also serve as officers, we have arrangements in place in which directors are entitled to receive an attendance fee of $1,000 per meeting of our Board of Directors, which is attended, and an attendance fee of $800 per committee meeting attended during our most recently completed financial year and subsequently up to and including the date of this Annual Report. In addition, directors are entitled to compensation of $800 per day for technical or professional services performed on behalf of us and directors are also reimbursed for actual expenses incurred in the performance of their duties as directors. Further, with the exception of directors whom also serve as officers, directors are entitled to an annual retainer of $24,000. 6.C.
     Board Practices
  Our Board of Directors is responsible for the stewardship of our business and affairs. Its main role is to oversee corporate performance and to ensure that management has the talent, professionalism and integrity necessary to successfully carry out our strategic plan and achieve our corporate objectives. Directors are elected at each annual meeting of our shareholders and serve until our next annual meeting, at which time directors may stand for reelection, or until their successors are elected or appointed. During the year ended May 31, 2010, we did not nor did any of our subsidiaries have any arrangement to provide benefits to our directors upon termination of employment. From June 1, 2009, to November 5, 2009, our Audit Committee included Gaston Araya, Robert Baxter and John Resing, with John Resing serving as the Chairman. Since November 6, 2009, our Audit Committee has been comprised of Raul Ferrer, David Kaplan and David Levy. Each Audit Committee member is financially literate and is appointed by our Board of Directors to hold office until removed by the Board of Directors or until our next annual general meeting, at which time the appointments expire and such individuals are eligible for re-appointment. The Audit Committee reviews our interim financial statements and annual audited consolidated financial statements, liaises with our auditors, and recommends to our Board of Directors whether or not to approve such financial statements. Our Audit Committee must convene a meeting to consider any matters our auditor believes should be brought to the attention of the Board of Directors or our shareholders. Our Audit Committee operates pursuant to a charter adopted by our Board of Directors. Our Audit Committee is responsible primarily for monitoring: (i) the integrity of our financial statements; (ii) compliance with legal and regulatory requirements; and (iii) the independence and performance of our internal and external auditors. From June 1, 2009, to November 5, 2009, our Compensation Committee was composed of Robert Baxter, John Cook and John Resing. Presently, our Compensation Committee includes Raul Ferrer and Richard Fifer. The Compensation Committee is appointed by our Board of Directors and is responsible for reviewing and approving annual salaries, bonuses and other forms and items of compensation for board members, committee members and our senior officers. Except for plans that are, in accordance with their terms or as required by law, administered by our board of directors or another particularly designated group, the Compensation Committee also administers and implements all of our stock option and other stock-based and equity-based benefit plans, recommends changes or additions to those plans and reports to our board of directors on compensation matters. Our Chief Executive Officer does not vote upon or participate in the deliberations regarding his compensation. Since November 6, 2009, our Corporate Governance Committee has been composed of Raul Ferrer, Richard Fifer and David Kaplan with David Kaplan acting as coordinator for meetings of the Corporate Governance Committee. The primary function of our corporate governance committee is to assist our board of directors in developing our approach to corporate governance issues and monitoring performance against the defined approach. 6.D.
     Employees
  As at May 31, 2010, we had approximately 840 employees, including four permanent employees and one contract staff members working out of our principal office located in Vancouver, Canada, and approximately 834 at our various locations in Panama. Our office in Panama City had 28 employees in the administration, accounting, legal and investor relations departments. Our Santa Ana and La Pintada offices near Penonome, Panama, focus on logistics, engineering and accounting with approximately 90 employees. Our geological exploration team contained approximately 98 team members and our Molejon gold plant site had approximately 618 employees. Page 60


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Our subsidiary company, Petaquilla Gold, S.A. has a labour contract with union employees at our Molejon gold plant. A single union, Sindicato de los Trabajadores de las Empresas Mineras Petaquilla, negotiates the labour contract on our workers behalf. There are no relationships between our management and the union and we consider labour relations with our employees to be in good standing. We have not experienced any disruptions of our operations as a result of any labour disagreements to date. 6.E.
     Share Ownership
  As at August 30, 2010, the following table sets forth the share ownership of those persons listed in subsection 6.B. above and includes the details of all options or warrants to purchase our shares held by such persons: Name
     Number ofCommon SharesHeld atAugust 30, 2010
     Number ofCommon SharesSubject to Optionsor Warrants atAugust 6, 2010
     BeneficialPercentageOwnership(1)
     ExercisePrice(CAD$)
     Expiry DateRaul Ferrer
     nil
     400,000
50,000
50,000
     *
     $0.23
$0.87
$0.57
     November 18, 2014
January 5, 2015
March 25, 2015Richard Fifer
     4,190,783
     118,800
585,000
600,000
100,000
100,000
350,000
     3.34%
     $0.26
$0.54
$0.23
$0.87
$0.57
$0.53
     July 11, 2011
February 1, 2011
November 18, 2014
January 5, 2015
March 25, 2015
April 30, 2015David Kaplan
     nil
     400,000
50,000
50,000
     *
     $0.23
$0.87
$0.57
     November 18, 2014
January 5, 2015
March 25, 2015David Levy
     nil
     400,000
50,000
50,000
     *
     $0.23
$0.87
$0.57
     November 18, 2014
January 5, 2015
March 25, 2015Joao Manuel
     nil
     300,000
400,000
50,000
50,000
     *
     $0.52
$0.23
$0.87
$0.57
     December 1, 2013
November 18, 2014
January 5, 2015
March 25, 2015Julie van Baarsen
     39,000
     37,500
100,000
     *
     $0.62
$0.84
     July 13, 2014
January 1, 2015Lazaro Rodriguez
     nil
     50,000
25,000
25,000
     *
     $2.49
$0.87
$0.57
     July 12, 2012
January 5, 2015
March 25, 2015
  * Indicates less than 1% (1) Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares owned by a person and the percentage ownership of that person, common shares subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of August 30, 2010, are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. This table has been prepared based on 125,281,951 common shares outstanding as of August 30, 2010. On June 23, 1994, we adopted a stock option plan (the "Option Plan") which authorized our Board of Directors to grant incentive stock options to our directors, officers and employees or our associated, affiliated, controlled or subsidiary companies, in accordance with the terms of the Option Plan and the rules and policies of the Toronto Stock Exchange. Under the terms of the Option Plan, the aggregate number of our common shares reserved for issuance under the Option Plan at any time could not exceed 4,950,968. The aggregate number of common shares reserved for issuance under the Option Plan to any person may not exceed 5% of the number of our outstanding common shares. On July 24, 2002, our Board of Directors amended the Option Plan to increase the number of shares reserved for issuance thereunder from 4,950,968 to 7,436,158. Page 61


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On December 8, 2006, we adopted a new stock option plan (the New Plan) authorizing our Board of Directors to grant incentive stock options to directors, executive officers, employees or consultants of our company or of our subsidiaries in accordance with the terms of the Option Plan and as may be acceptable pursuant to the policies of the Toronto Stock Exchange. Under the terms of the New Plan, the aggregate number of our common shares reserved for issuance under the New Plan at any time may not exceed 10,000,000. The approval of our disinterested shareholders must be obtained before (a) the number of common shares under option to insiders within any 12-month period; or (b) the number of common shares issuable to insiders at any time, when combined with all of our security-based compensation arrangements, may exceed 10% of our issued and outstanding common shares. The approval of our disinterested shareholders must also be obtained for the reduction in the exercise price, or extension of the term, of options previously granted to insiders. At our annual general meeting of shareholders held on November 18, 2008, our shareholders approved an amended and restated stock option plan (the Amended Plan) increasing the maximum number of shares that may be the subject of options at any given time from 10,000,000 to 10,700,000 common shares. The Amended Plan also allows for cashless exercises by option holders in the event of a bona fide takeover offer of our company. The exercise price of options issued under our Amended Plan will not be lower than the market price as defined in the Toronto Stock Exchange Company Manual, being the volume weighted average trading price on the Toronto Stock Exchange for the shares for the five trading days immediately preceding the date on which the option is granted. Options granted must be exercised no later than 10 years after the date of grant or such lesser period as may be determined by our Board of Directors. Our Board of Directors may at its discretion in granting any option set a vesting period whereby the option may only be exercisable in pre-determined installments. ITEM 7.
     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  7.A.
     Major Shareholders
  We are a publicly-held corporation with our shares held by residents of Canada, the United States of America and other countries. To the best of our knowledge, as at August 30, 2010, no person, corporation or other entity beneficially owns, directly or indirectly, or controls more than 5% of our common shares. For these purposes, beneficial ownership means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. As at August 30, 2010, there were 125,281,951 of our common shares issued and outstanding. Based on the records of our registrar and transfer agent, Computershare Trust Company of 510 Burrard Street, Vancouver, British Columbia, Canada, as at July 31, 2010, there were a total of 203 holders of our common shares, of which 43 were resident in Canada holding an aggregate 63,670,431 common shares, 112 were resident in the United States holding an aggregate 60,042,425 common shares and 48 holders holding an aggregate of 1,569,095 common shares were not resident in either Canada nor the United States. The shareholdings of United States holders represented approximately 48.93% of our total issued and outstanding common shares as at July 31, 2010. To the extent known to our management, we are not directly or indirectly owned or controlled by another corporation(s), by any foreign government or by any other natural or legal person(s) severally or jointly. Further, we do not know of any arrangements that may, at a subsequent date, result in a change of control of our company. 7.B.
     Related Party Transactions
  During the year ended May 31, 2010: Page 62


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We paid consulting fees of $120,685 to a company controlled by a director (year ended May 31, 2009  $Nil, one month ended May 31, 2008  $Nil, year ended April 30, 2008  $Nil) We paid fees of $489,908 (year ended May 31, 2009 - $220,176, one month ended May 31, 2008 - $4,998 and year ended April 30, 2008 - $96,624) to a company controlled by the Chairman. We paid wages of $62,795 to a company controlled by a former officer (year ended May 31, 2009  $Nil, one month ended May 31, 2008  $Nil, year ended April 30, 2008  Nil) We paid wages of $Nil (year ended May 31, 2009 - $32,158, one month ended May 31, 2008 - $30,812 and year ended April 30, 2008 - $17,122) to companies controlled by a former director. We paid for goods and services of $166,134 (year ended May 31, 2009 - $155,805, one month ended May 31, 2008  $Nil and year ended April 30, 2008 - $127,326) to companies controlled by the Chairman. We paid for services of $1,203,967 to a company related to an officer of a subsidiary company. In prior years this company was not a related party. We paid debt issuance costs of $500,000 for a senior secured note bridge financing of $4,789,206. In prior years this company was not a related party. We paid legal fees of $273,178 (year ended May 31, 2009 - $269,526, one month ended May 31, 2008  $Nil and year ended April 30, 2008 - $107,329), share issue costs of $Nil (year ended May 31, 2009 - $Nil, one month ended May 31, 2008  $Nil and year ended April 30, 2008 - $162,523) and financing costs of $Nil (year ended May 31, 2009 - $104,272, one month ended May 31, 2008 - $95,257 and year ended April 30, 2008  $Nil) to a law firm controlled by a former officer and a law firm controlled by a former director. Of the total mark-to-market losses on senior secured notes and convertible senior secured notes, $8,875,394 was attributable to senior secured notes and convertible senior secured notes held by companies related to a director. At May 31, 2010, excluding related party Notes and related party Convertible Notes, $981,511 was owed to related parties. Other than the above transactions, there were no material transactions in the year ended May 31, 2010, or proposed material transactions between us or any of our subsidiaries and: enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, us; associates; individuals owning, directly or indirectly, an interest in our voting power that gives them significant influence over us, and close members of any such individual's family; a.
     key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling our activities (or their wholly owned private companies), including directors and senior management of companies and close members of such individuals' families;b.
     enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence including enterprises owned by our directors or major shareholders and enterprises that have a member of key management in common with us.
  None of our officers or directors, or any associate of such person, was indebted to us at any time during the year ended May 31, 2010, the year ended May 31, 2009, the one month ended May 31, 2008, or the year ended April 30, 2008. 7.C.
     Interests of Experts and Counsel
  Not applicable. Page 63


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ITEM 8.
     FINANCIAL INFORMATION
  8.A.
     Consolidated Statements and Other Financial Information
  This Annual Report contains our consolidated financial statements for the year ended May 31, 2010, the year ended May 31, 2009, the one month ended May 31, 2008, and the year ended April 30, 2008, which contains an Independent Auditors Report on Financial Statements dated August 30, 2010, comments by Auditors for U.S. Readers on Canada  U.S. Reporting Conflict, Consolidated Balance Sheets as at May 31, 2010, and May 31, 2009, Consolidated Statements of Operations and Comprehensive Loss for the Fiscal Periods ended May 31, 2010, May 31, 2009, May 31, 2008, and April 30, 2008, Consolidated Statements of Shareholders Deficiency for the years ended May 31, 2010 and 1009, Consolidated Statements of Cash Flows for the Fiscal Periods Ended May 31, 2010, May 31, 2009, May 31, 2008, and April 30, 2008, and Notes to the Consolidated Financial Statements. Dividend Distributions The timing, payment, form and amount of dividends paid on our common shares, if and when declared, is determined by our board of directors, based upon considerations such as our cash flow, results of operations and financial condition, the need for funds to finance ongoing operations and such other business matters as our board of directors considers relevant. 8.B.
     Significant Changes
  Subsequent to May 31, 2010, the following events took place: 1)
     On August 17, 2010, we entered into a Forward Gold Purchase Agreement with Deutsche Bank, AG (Deutsche Bank). Subject to the satisfaction of certain conditions precedent and the successful completion of the transaction, Deutsche Bank will make an upfront payment of $45,000,000 in exchange for the delivery of 68,243 ounces of gold over a five year period. Based on the price of gold at the time of delivery, Deutsche Bank may be required to make additional payments to us as gold is delivered. If the transaction is completed, the upfront payment, net of estimated restructuring, legal and finders fees of approximately $4,000,000, will be used to prepay a portion of the Notes and Convertible Notes.2)
     As a condition precedent to completing the forward gold sale with Deutsche Bank, the holders of the Notes and Convertible Notes will be required to enter into an Inter-Creditor Agreement with Deutsche Bank and the Company. While these agreements are not final, management expects that the impact of the Inter-Creditor Agreement on the Notes and Convertible Notes will be as follows:
  a)
     the security for the Notes and Convertible Notes will become subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank;b)
     no interest or principal payments will be required on the Notes or Convertible Notes for the first six months after the effective date of the Inter-Creditor Agreement. After the first six months, the Company is only required to make scheduled interest payments on the Notes and Convertible Notes as they become due until the Notes and Convertible Notes mature five years and one day after closing of the Forward Gold Purchase Agreement with Deutsche Bank;c)
     until our obligations under the Forward Gold Purchase Agreement with Deutsche Bank are satisfied, the holder of the Notes and Convertible Notes are not permitted to take any action as a result of an event of default that has occurred pursuant to the indenture;d)
     if we are able to negotiate new financing arrangements satisfying certain conditions, the proceeds of such financing will be used to prepay the outstanding balance of principal, premium and interest on the Notes and Convertible Notes.
  3)
     If the Forward Gold Purchase Agreement with Deutsche Bank is successfully completed, we have agreed to pay the Chairman $100,000 as a bonus for partial prepayment of the Notes and Convertible Notes. When we repay the remaining amount outstanding on the Notes and Convertible Notes, the Chairman will be entitled to receive an additional bonus payment of $150,000.
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4)
     As a condition precedent to the completion of the Forward Gold Purchase Agreement with Deutsche Bank, Daniel Small resigned as a director of the Company on August 16, 2010.5)
     In August 2010, the holders of the Notes and Convertible Notes requested an additional 2% in interest on the outstanding balance payable, effective March 15, 2010, as consideration for the holders not issuing a written notice that an event of default had occurred which could have required immediate repayment of the Notes and Convertible Notes. We have agreed to pay this additional interest.6)
     The term of 188,800 options, which were to expire on July 11, 2010, was extended for one year and 100,000 options were exercised.
  ITEM 9.
     THE OFFER AND LISTING
  9.A.
     Offer and Listing Details
  The high and low sale prices for our common shares on the Toronto Stock Exchange for each of the preceding six months, each fiscal quarter in each of the last two full financial years and subsequent period and each of the last five full financial years are as follows. High (CAD$)
     Low (CAD$)July 2010
     $0.52
     $0.30June 2010
     $0.42
     $0.30May 2010
     $0.55
     $0.37April 2010
     $0.61
     $0.46March 2010
     $0.70
     $0.52February 2010
     $0.74
     $0.60High (CAD$)
     Low (CAD$)June 1, 2009  May 31, 2010
     $0.98
     $0.20Fourth Quarter        (March 1, 2010  May 31, 2010)
     $0.70
     $0.37Third Quarter        (December 1, 2009  February 28, 2010)
     $0.98
     $0.60Second Quarter        (September 1, 2009  November 30, 2009)
     $0.62
     $0.20First Quarter        (June 1, 2009  August 31, 2009)
     $0.79
     $0.45June 1, 2008  May 31, 2009
     $1.98
     $0.285Fourth Quarter        (March 1, 2009  May 31, 2009)
     $0.73
     $0.35Third Quarter        (December 1, 2008  February 28, 2009)
     $0.61
     $0.285Second Quarter        (September 1, 2008  November 30, 2008)
     $1.30
     $0.36First Quarter        (June 1, 2008  August 31, 2009)
     $1.98
     $0.93May 1, 2008  May 31, 2008
     $2.32
     $1.75May 1, 2007  April 30, 2008
     $3.42
     $1.87February 1, 2007  April 30, 2007
     $2.45
     $1.90February 1, 2006  January 31, 2007
     $3.04
     $1.02
  The closing price of our common shares on the Toronto Stock Exchange on August 30, 2010, was CAD$0.44. The high and low sale prices for our common shares on the Over The Counter Bulletin Board for each of the preceding six months, each fiscal quarter in each of the last two full financial years and subsequent period and each of the last five full financial years are as follows: Page 65


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High
     LowJuly 2010
     $0.51
     $0.30June 2010
     $0.404
     $0.29May 2010
     $0.55
     $0.3527April 2010
     $0.6076
     $0.47March 2010
     $0.68
     $0.52February 2010
     $0.715
     $0.554High
     LowJune 1, 2009  May 31, 2010
     $0.9526
     $0.20Fourth Quarter (March 1, 2010  May 31, 2010)
     $0.68
     $0.3527Third Quarter (December 1, 2009  February 28, 2010)
     $0.9526
     $0.554Second Quarter (September 1, 2009  November 30, 2009)
     $0.58
     $0.20First Quarter (June 1, 2009  August 31, 2009)
     $0.729
     $0.411June 1, 2008  May 31, 2009
     $1.99
     $0.26Fourth Quarter (March 1, 2009  May 31, 2009)
     $0.64
     $0.26Third Quarter (December 1, 2008  February 28, 2009)
     $0.53
     $0.26Second Quarter (September 1, 2008  November 30, 2008)
     $1.18
     $0.28First Quarter (June 1, 2008  August 31, 2009)
     $1.99
     $0.852May 1, 2008  May 31, 2008
     $2.349
     $1.75May 1, 2007  April 30, 2008
     $3.40
     $1.80February 1, 2007  April 30, 2007
     $2.24
     $1.6398February 1, 2006  January 31, 2007
     $2.7059
     $0.901
  The closing price of our common shares on the Over the Counter Bulletin Board on August 30, 2010, was $0439. 9.B.
     Plan of Distribution
  Not applicable. 9.C.
     Markets
  Our common shares traded on the Vancouver Stock Exchange from March 29, 1988, until August 21, 1998, when they were delisted from trading at our request. Our common shares have traded on the Toronto Stock Exchange since January 28, 1994. We trade our shares on the Toronto Stock Exchange under the trading symbol "PTQ". Our common shares traded on the NASDAQ Small Cap Market from February 5, 1996, until April 12, 1999, when they were delisted for failure to meet minimum bid requirements and began to trade on the Over the Counter Bulletin Board on April 13, 1999. We trade our shares on the Over the Counter Bulletin Board under the trading symbol "PTQMF". We commenced trading on the Frankfurt Stock Exchange under the trading symbol P7Z on October 24, 2005. 9.D.
     Selling Shareholders
  Not applicable. Page 66


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9.E.
     Dilution
 Not applicable. 9.F.
     Expenses of the Issue
 Not applicable. ITEM 10.
     ADDITIONAL INFORMATION
  10.A.
     Share Capital
 Not applicable. 10.B.
     Memorandum and Articles of Association
 We were incorporated on October 10, 1985, pursuant to the Company Act (British Columbia), which has been replaced by the Business Corporations Act (British Columbia) (the "Act") and are registered with the Registrar of Companies for British Columbia under incorporation number 298967. We are not limited in our objects and purposes. With respect to our directors, our Articles provide that a director who is, in any way, directly or indirectly interested in an existing or proposed contract or transaction with us, or who holds any office or possesses any property whereby, directly or indirectly, a duty or interest might be created to conflict with his duty or interest as a director, shall declare the nature and extent of his interest in such contract or transaction or the conflict or potential conflict with his duty and interest as a director, as the case may be, in accordance with the provisions of the Act and shall abstain from voting in respect thereof. This prohibition does not apply to: (i)
     any such contract or transaction relating to a loan to us, which a director or a specified corporation or a specific firm in which he has an interest has guaranteed or joined in guaranteeing the repayment of the loan or any part of the loan;(ii)
     any contract or transaction made or to be made with, or for the benefit of a holding corporation or a subsidiary corporation of which a director is a director;(iii)
     any contract by a director to subscribe for or underwrite shares or debentures to be issued by us or our subsidiary, or any contract, arrangement or transaction in which a director is, directly or indirectly interested if all the other directors are also, directly or indirectly interested in the contract, arrangement or transaction;(iv)
     determining the remuneration of the directors;(v)
     purchasing and maintaining insurance to cover directors against liability incurred by them as directors; or(vi)
     the indemnification of any director by us. Our Articles also provide that our directors may from time to time on our behalf borrow such money in such manner and amount, on such security, from such sources and upon such terms and conditions as they think fit; issue bonds, debentures and other debt obligations, either outright or as security for any of our liabilities or obligations, or any other person; and mortgage, charge, whether by way of specific or floating charge, or give other security on the undertaking, or on the whole or any part of our property and assets (both present and future). Variation of these borrowing powers would require an amendment to our Articles which would, in turn, require the approval of our shareholders by way of a Special Resolution, as defined hereinafter. A Special Resolution means a resolution cast by a majority of not less than 3⁄4 of the votes cast by our shareholders who, being entitled to do so, vote in person or by proxy at our general meeting of which notice as our Articles provide and not being less than 21 days notice specifying the intention to propose the resolution as a special resolution, has been duly given (or, if every shareholder entitled to attend and vote at the meeting agrees, at a meeting of which less than 21 days notice has been given), or a resolution consented to in writing by each of our shareholders who would have been entitled to vote in person or by proxy at our general meeting, and a resolution so consented to is deemed to be a special resolution passed at our general meeting. Page 67


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There is no requirement in our Articles or in the Act requiring retirement or non-retirement of directors under an age limit requirement, nor is there any minimum shareholding required for a director's qualification. Holders of our common shares are entitled to vote at meetings of shareholders, and a Special Resolution, as described above, is required to effect a change in the rights of shareholders. Holders of common shares are not entitled to pre-emptive rights. Holders of common shares are entitled, ratably, to our remaining property upon our liquidation, dissolution or winding up, and such holders receive dividends if, as, and when, declared by our directors. There are no restrictions on the purchase or redemption of common shares by us while there is an arrearage in the payment of dividends or sinking fund installments. There is no liability on the part of any shareholder to further capital calls by us nor any provision discriminating against any existing or prospective holder of our securities as a result of such shareholder owning a substantial number of common shares. There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the Act or by our constating documents. We are required to give our registered shareholders not less than 21 days notice of any general meeting held by us unless all such shareholders consent to reduce or waive the period. In addition, we are obliged to give notice to registrants and intermediaries who hold common shares on behalf of the ultimate beneficial owners no fewer than 35 or more than 60 days prior to the date of the meeting. We then deliver, in bulk, proxy-related materials in amounts specified by the intermediaries. None of our common shares owned by registrants or intermediaries may be voted at our general meeting unless all proxy-related materials are delivered to the ultimate beneficial owners of such common shares. Such ultimate beneficial owner must then deliver a proxy to us within the time limited by us for the deposit of proxies in order to vote the common shares in respect of which such person is the beneficial owner. There is no provision in our Articles that would have an effect of delaying, deferring or preventing our change in control and that would operate only with respect to a merger, acquisition or corporate restructuring involving us (or any of our subsidiaries) other than a shareholder rights plan adopted by our Board of Directors effective March 7, 2006, and approved by our shareholders at the Annual and Special Meeting held on June 6, 2006 (the Shareholder Rights Plan). The Shareholder Rights Plan is designed to ensure that all shareholders receive equal treatment and to maximize shareholder values in the event of a take-over bid or other acquisition that could lead to a change in control of our company. It is not intended to deter take-over bids. Take-over bid contests for corporate control provide a singular opportunity for shareholders to obtain a one-time gain. After the acquisition of effective control, the opportunity for this one-time gain normally does not reoccur. As with most public companies, control of our company can probably be secured through the ownership of much less than 50% of the shares. Without a shareholder rights plan, it would be possible for a bidder to acquire effective control, over a relatively short period of time, through open market and private purchases, using various techniques permitted under the securities legislation in Canada, without making a bid available to all shareholders. Such acquisition of control would probably be an effective deterrent to other potential offerors. The person acquiring control would probably, over a period of time, be able to consolidate and increase its control without the price for control ever being tested through an open market auction. Shareholder rights plans are designed to prevent this occurrence by forcing all acquisitions of control into a public offer mode. A public offer will not necessarily achieve all of the objectives of ensuring the maximum value to shareholders. A take-over bid can be completed in a time period as short as 35 days. This is too short a time period to ensure that the directors can develop other competing alternatives. The Shareholder Rights Plan is intended to provide time to shareholders to properly assess any take-over bid and to provide the Board of Directors with sufficient time to explore and develop alternatives for maximizing shareholder value, including, if considered appropriate, identifying and locating other potential bidders. Our Shareholder Rights Plan was filed as Exhibit 2.A to our Annual Report on Form 20-F for the year ended May 31, 2007. Page 68


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10.C.
     Material Contracts
 We have entered into formal agreements with our directors, our executive officers and with six key employees that establish financial arrangements that would be in effect in the event of a change of control of our company. Each agreement provides for, in the event of the termination of the engagement of such persons following a change of control of our company, the payment of an amount equal to three times the annual compensation being paid to such person as at the time of the change of control. 10.D.
     Exchange Controls
 There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-resident holders of our common shares. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (5% if the shareholder is a corporation owning at least 10% of our outstanding common shares) pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See Item 10  Additional Information  E. Taxationbelow. Except as provided in the Investment Canada Act (the "Act"), which has provisions which govern the acquisition of a control block of voting shares by non-Canadians of a corporation carrying on a Canadian business, there are no limitations specific to the rights of non-Canadians to hold or vote our common shares under the laws of Canada or the Province of British Columbia or in our charter documents. Our management considers that the following general summary fairly describes those provisions of the Act pertinent to an investment in us by a person who is not a Canadian resident (a "non-Canadian"). The Act requires a non-Canadian making an investment which would result in the acquisition of control of the Canadian business to notify the Investment Review Division of Industry Canada, the federal agency created by the Act; or in the case of an acquisition of a Canadian business, the gross value of the assets of which exceeds certain threshold levels or the business activity of which is related to Canada's cultural heritage or national identity, to file an application for review with the Investment Review Division. The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with Industry Canada by the investor at any time up to 30 days following implementation of the investment. Once the completed notice has been filed, a receipt bearing the certificate date will be issued to the non-Canadian investor. The receipt must advise the investor either that the investment proposal is unconditionally non-reviewable or that the proposal will not be reviewed as long as notice of review is not issued within 21 days of the date certified under the receipt. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada's cultural heritage and national identity. If an investment is reviewable under the Act, an order for review must be issued within 21 days after the certified date on which notice of investment was received. An application for review in the form prescribed is required to be filed with Industry Canada prior to the investment taking place. Once the application has been filed, a receipt will be issued to the applicant, certifying the date on which the application was received. For incomplete applications, a deficiency notice will be sent to the applicant, and if not done within 15 days of receipt of application, the application will be deemed to be complete as of the date it was received. Within 45 days after the complete application has been received, the Minister responsible for the Investment Canada Act must notify the potential investor that the Minister is satisfied that the investment is likely to be of net benefit to Canada. If within such 45-day period the Minister is unable to complete the review, the Minister has an additional 30 days to complete the review, unless the applicant agrees to a longer period. Within such additional period, the Minister must advise either that he is satisfied or not satisfied that the investment is likely to be of net benefit to Canada. If the time limits have elapsed, the Minister will be deemed to be satisfied that the investment is likely to be of net benefit to Canada. The investment may not be implemented until the review has been completed and the Minister is satisfied that the investment is likely to be of net benefit to Canada. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non -Canadian must not implement the investment or, if the investment has been implemented, could be penalized by being required to divest himself of control of the business that is the subject of the investment. To date, the only types of business activities which have been prescribed by regulation as related to Canada's cultural heritage or national identity deal largely with publication, film and music industries. Because our total assets are less than the $5 million notification threshold, and because our business activities would likely not be deemed related to Canada's cultural heritage or national identity, acquisition of a controlling interest in us by a non-Canadian investor would not be subject to even the notification requirements under the Investment Canada Act. Page 69


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The following investments by non-Canadians are subject to notification under the Act: 1.
     an investment to establish a new Canadian business; and2.
     an investment to acquire control of a Canadian business that is not reviewable pursuant to the Act. The following investments by a non-Canadian are subject to review under the Act: 1.
     direct acquisition of control of Canadian businesses with assets of $5 million or more, unless the acquisition is being made by a World Trade Organization ("WTO") member country investor (the United States being a member of the WTO);2.
     direct acquisition of control of Canadian businesses with assets of $250,000,000 or more by a WTO investor;3.
     indirect acquisition of control of Canadian business with assets of $5 million or more if such assets represent more than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review;4.
     indirect acquisition of control of Canadian businesses with assets of $50 million or more even if such assets represent less than 50% of the total value of the assets of the entities, the control of which is being acquired, unless the acquisition is being made by a WTO investor, in which case there is no review; and5.
     an investment subject to notification that would not otherwise be reviewable if the Canadian business engages in the activity of publication, distribution or sale of books, magazines, periodicals, newspapers, film or video recordings, audio or video music recordings or music in print or machine-readable form. Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its Canadian parent or grandparent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian parent or grandparent of an entity carrying on the Canadian business. Control may be acquired through the acquisition of actual voting control by the acquisition of voting shares of a Canadian corporation or through the acquisition of substantially all of the assets of the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor. A WTO investor, as defined in the Act, includes an individual who is a national of a member country of the World Trade Organization or who has the right of permanent residence in relation to that WTO member, a government or government agency of a WTO investor-controlled corporation, limited partnership, trust or joint venture and a corporation, limited partnership, trust or joint venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds of its board of directors, general partners or trustees, as the case may be, or any combination of Canadians and WTO investors. The higher thresholds for WTO investors do not apply if the Canadian business engages in activities in certain sectors such as uranium, financial services, transportation services or communications. The Act specifically exempts certain transactions from either notification or review. Included among this category of transactions is the acquisition of voting shares or other voting interests by any person in the ordinary course of that person's business as a trader or dealer in securities. 10.E.
     Taxation
 Material Canadian Federal Income Tax Consequences Through consultation with counsel, our management believes that the following general summary accurately describes all material Canadian federal income tax consequences applicable to a holder of our common shares who is a resident of the United States, that qualifies for benefits under the Canada-United States Convention (1980), as amended (the Treaty) and who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his common shares of us in connection with carrying on a business in Canada (a "non-resident holder"). Page 70


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This summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA"), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of Canada, Customs and Revenue Agency and all specific proposals (the "Tax Proposals") to amend the ITA and Regulations announced by the Minister of Finance (Canada) prior to the date hereof. This summary assumes that the Tax Proposals will be enacted in their form as of the date of this Annual Report. This description, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, government or judicial action, nor does it take into account provincial, territorial, or foreign tax considerations which may differ significantly from those discussed herein. Dividends Dividends paid on our common shares to a non-resident holder will be subject to withholding tax. The Treaty provides that the normal 25% withholding tax rate under the ITA is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as our company) to beneficial owners of the dividends who are residents of the United States, and may also provide for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation that is a resident of the United States which owns at least 10% of the voting shares of the corporation paying the dividend. No dividends have ever been paid by us. Capital Gains Under the ITA, a taxpayer's capital gain or capital loss from a disposition of a share of our company is the amount, if any, by which his proceeds of disposition exceed (or are exceeded by) the aggregate of his adjusted cost base of the share and reasonable expenses of disposition. One half of a capital gain (the "taxable capital gain") is included in income, and one half of a capital loss in a year (the "allowable capital loss") is deductible from taxable capital gains realized in the same year. The amount by which a shareholder's allowable capital loss exceeds his taxable capital gains in a year may be deducted from a taxable capital gain realized by the shareholder in the three previous or any subsequent year, subject to certain restrictions in the case of a corporate shareholder. A non-resident holder is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a share of a public corporation unless the share represents "taxable Canadian property" to the holder thereof. We are a public corporation for purposes of the ITA and a common share of our company will be taxable Canadian property to a non-resident holder if, at any time during the 60 month period immediately preceding the disposition, the nonresident holder, persons with whom the non-resident holder did not deal at arm's length, or the non-resident holder and persons with whom he did not deal at arm's length together owned not less than 25% of the issued shares of any class of our shares. Our shares may also be taxable Canadian property to a holder if the holder acquired them pursuant to certain tax-deferred "rollover" transactions whereby the holder exchanged property that was taxable Canadian property for our shares. Where a non-resident holder who is an individual ceased to be resident in Canada, he will be subject to Canadian tax on any capital gain realized on disposition of our shares at that time. Where a non-resident holder realizes a capital gain on a disposition of our shares that constitute taxable Canadian property, the Treaty relieves the non-resident shareholder from liability for Canadian tax on such capital gains unless: (a)        the non-resident holder is an individual who was resident in Canada for not less than 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition and the shares were owned by him when he ceased to be resident in Canada or are property substituted for property that was owned at that time, or (b)        the shares formed part of the business property of a "permanent establishment" or pertained to a fixed base used for the purpose of performing independent personal services that the shareholder has or had in Canada within the year preceding the disposition. Page 71


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Material United States Federal Income Tax Consequences The following is a discussion of material U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of our common shares by a U.S. Holder (as hereinafter defined). This discussion does not address all potentially relevant federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences. Accordingly, holders and prospective holders of our common shares are urged to consult their own tax advisors about the specific federal, state, local and foreign tax consequences to them of acquiring, holding and disposing of our common shares, based upon their individual circumstances. The following discussion is based upon the sections of the Code, Treasury Regulations, published Internal Revenue Service (IRS) rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time and which are subject to differing interpretations. This discussion does not consider the potential effects, both adverse and beneficial, of any proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. U.S. Holders As used in this annual report, a U.S. Holder means a holder of our common shares who is (i) a citizen or individual resident of the United States, (ii) corporation, or other entity treated as a corporation for U.S. tax purposes, created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if such trust was in existence on August 20, 1996 and validly elected to be treated as a United States person for U.S. federal income tax purposes or if (1) a court within the U.S. is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. This summary does not address the tax consequences to, and the term U.S. Holder does not include, persons subject to specific provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals, persons or entities that have a functional currency other than the U.S. dollar, shareholders subject to the alternative minimum tax, shareholders who hold common shares as part of a straddle, hedging or conversion transaction and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This summary is limited to U.S. Holders who own common shares as capital assets, within the meaning of Section 1221 of the Code, and who own (directly and indirectly, pursuant to applicable rules of constructive ownership) no more than 10% of the value of our total outstanding stock. This summary does not address the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares. If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds our common shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner should consult its own tax advisors as to the U.S. tax consequences of being a partner in a partnership that acquires, holds, or disposes of our common shares. Distributions on Our Common Shares Subject to the discussion below under Passive Foreign Investment Company,U.S. Holders receiving dividend distributions (including constructive dividends) with respect to our common shares generally are required to include in gross income for U.S. federal income tax purposes the gross amount of such distributions (without reduction of any Canadian income or other tax withheld from such distributions), equal to the U.S. dollar value of such distributions on the date of receipt (based on the exchange rate on such date), to the extent that we have current or accumulated earnings and profits. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holders federal income tax liability or, alternatively, may be deducted in computing the U.S. Holders federal taxable income by those who itemize deductions (See more detailed discussion at Foreign Tax Credit below). Dividends paid on our common shares will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain U.S. corporations. For taxable years beginning before January 1, 2011, dividends received by U.S. Holders that are individuals, estates or trusts from qualified foreign corporations, as defined in Section 1(h)(11) of the Code, generally are taxed at the same preferential tax rates applicable to long-term capital gains. Although not free from doubt, it appears that we are a qualified foreign corporation, as defined in Section 1(h) (11) of the Code if we are not, and have not been, a PFIC, as described below under Passive Foreign Investment Company. We have not determined whether or not we meet the definition of a PFIC for the current tax year and any prior tax years. A corporation that is a PFIC, along with other foreign corporations given special status under the Code, for its taxable year during which it pays a dividend, or for its immediately preceding taxable year, will not be treated as a qualifying foreign corporation and dividends received by U.S. Holders that are individuals, estates or trusts generally will be subject to U.S. federal income tax at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains). Page 72


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In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. Disposition of Our Common Shares Subject to the discussion below under Passive Foreign Investment Company, U.S. Holders will recognize gain or loss upon the sale of our common shares equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received and (ii) the shareholders tax basis in our common shares. Preferential tax rates apply to long-term capital gains of U.S. Holders that are individuals, estates or trusts. In general, gain or loss on the sale of our common shares will be long-term capital gain or loss if our common shares are a capital asset in the hands of the U.S. Holder and are held for more than one year. Deductions for net capital losses are subject to significant limitations. Passive Foreign Investment Company We have not determined whether or not we meet the definition of PFIC, within the meaning of Sections 1291 through 1298 of the Code for the current tax year and any prior tax years. We may or may not qualify as a PFIC in subsequent years due to changes in our assets and business operations. A U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to numerous special U.S. federal income taxation rules. The following is a discussion of these special rules as they apply to U.S. Holders of our common shares. Section 1297 of the Code defines a PFIC as a corporation that is not formed in the U.S. if, for any taxable year, either (i) 75% or more of its gross income is passive income, which includes interest, dividends and certain rents and royalties or (ii) the average percentage, by fair market value (or, if the corporation is not publicly traded and either is a controlled foreign corporation or makes an election, by adjusted tax basis), of its assets that produce or are held for the production of passive income is 50% or more. U.S. Holders owning shares of a PFIC are subject to a special tax and to an interest charge based on the value of deferral of U.S. tax attributable to undistributed earnings of a PFIC for the period during which the shares of the PFIC are owned. This special tax would apply to any gain realized on the disposition of shares of a PFIC. In addition, the gain is subject to U.S. federal income tax as ordinary income, taxed at top marginal rates, rather than as capital gain income. The special tax would also be payable on receipt of excess distributions (any distributions received in the current year that are in excess of 125% of the average distributions received during the 3 preceding years or, if shorter, the shareholders holding period). However, if the U.S. Holder makes for any tax year a timely election to treat a PFIC as a qualified electing fund (QEF) with respect to such shareholders interest therein, the above-described rules generally will not apply. Instead, the electing U.S. Holder would include annually in his gross income his pro rata share of the PFICs ordinary earnings and any net capital gain regardless of whether such income or gain was actually distributed. Special rules apply to U.S. Holders who own their interests in a PFIC through intermediate entities or persons. Generally, shareholders do not make a QEF election unless they have sufficient information to determine their proportionate share of a corporations net capital gain and ordinary earnings. We have not calculated these amounts for any shareholder, and do not anticipate making these calculations in the foreseeable future. Therefore, U.S. Holders of our common shares should consult their own financial advisor, legal counsel or accountant regarding the QEF election before making this election. U.S. Holders who hold, actually or constructively, marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market (a mark-to-market election).If such an election is made, such U.S. Holder will not be subject to the special taxation rules of PFIC described above for the taxable years for which the mark-to-market election is made. A U.S. Holder who makes such an election will include in income for the taxable year an amount equal to the excess, if any, of the fair market value of our common shares as of the close of such tax year over such U.S. Holders adjusted basis in such shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holders adjusted tax basis in the shares over the fair market value of such shares as of the close of the tax year or (ii) the excess, if any of (A) the mark-to-market gains for our common shares included by such U.S. Holder for prior tax years, including any amount which would have been included for any prior year but for Section 1291 interest on tax deferral rules discussed above with respect to a U.S. Holder, who has not made a timely QEF election during the year in which he holds (or is deemed to have held) our common shares and we are a PFIC (Non-Electing U.S. Holder)over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holders adjusted tax basis in our common shares will be increased or decreased to reflect the amount included or deducted as a result of mark-to-market election. A mark-to-market election will apply to the tax year for which the election is made and to all later tax years, unless the PFIC stock ceases to be marketable or the IRS consents to the revocation of the election. Page 73


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The IRS has issued proposed regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by a Non-Electing U.S. Holder that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations and transfers at death. Generally, in such cases, the basis of our common shares in the hands of the transferee and the basis of any property received in the exchange for those shares would be increased by the amount of gain recognized. A U.S. Holder who has made a timely QEF election (as discussed above) would not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations and transfers at death. The transferees basis in this case will depend on the manner of the transfer. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the common shares are transferred. Each U.S. Holder should consult a tax advisor with respect to how the PFIC rules affect their tax situation. The PFIC and QEF election rules are complex. U.S. Holders should consult a tax advisor regarding the availability and procedure for making the QEF election as well as the applicable method for recognizing gains or earnings and profits under the foregoing rules. Foreign Tax Credit A U.S. Holder who pays (or has withheld from distributions) Canadian or other foreign income tax with respect to the ownership of our common shares may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for U.S. federal income tax purposes with respect to such foreign tax paid or withheld. Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holders U.S. federal income tax liability that such U.S. Holders foreign source taxable income bears to such U.S. Holders worldwide taxable income. In applying this limitation, a U.S. Holders various items of income and deduction must be classified, under complex rules, as either foreign source or U.S. source. In addition, this limitation is calculated separately with respect to specific categories of income including passive category income and general category income. Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of our common shares generally will be treated as U.S. source for purposes of applying the foreign tax credit rules. Dividends received by U.S. Holders on our common shares generally will be treated as foreign source and generally will be categorized as passive income for purposes of applying the foreign tax credit rules. The availability of the foreign tax credit and the application of the limitations with respect to the foreign tax credit are fact specific, and each U.S. Holder of our common shares should consult their own financial advisor, legal counsel or accountant regarding the foreign tax credit rules. Controlled Foreign Corporation If more than 50% of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., U.S. partnerships or corporations, or U.S. estates or trusts (as defined by Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of the our outstanding shares (each a 10% Shareholder), we could be treated as a Controlled Foreign Corporation (CFC) under Section 957 of the Code. Our classification as a CFC would effect many complex results, including that 10% Shareholders would generally (i) be treated as having received a current distribution of our Subpart F income and (ii) would also be subject to current U.S. federal income tax on their pro rata share of our earnings invested in U.S. property. The foreign tax credit may reduce the U.S. federal income tax on these amounts for such 10% Shareholders (See more detailed discussion at Foreign Tax Credit above). In addition, under Section 1248 of the Code, gain from the sale or other taxable disposition of our common shares by a U.S. Holder that is or was a 10% Shareholder at any time during the five-year period ending with the sale is treated as a dividend to the extent of our earnings and profits attributable to the common shares sold or exchanged. Page 74


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If we are classified as both a PFIC and a CFC, we generally will not be treated as a PFIC with respect to 10% Shareholders. This rule generally will be effective for taxable years of 10% Shareholders beginning after 1997 and for its taxable years ending with or within such taxable years of 10% Shareholders. We have not determined whether we meet the definition of a CFC, and there can be no assurance that we will not be considered a CFC for the current or any future taxable year. The CFC rules are very complicated, and U.S. Holders should consult their own financial advisor, legal counsel or accountant regarding the CFC rules and how these rules may impact their U.S. federal income tax situation. Information Reporting; Backup Withholding Certain information reporting and backup withholding rules may apply with respect to certain payments related to our common shares. In particular, a payor or middleman within the U.S., or in certain cases outside the U.S., will be required to withhold at a current rate of 28% (which rate is scheduled for periodic adjustment) of any payments to a U.S. Holder regarding dividends paid by us, or proceeds from the sale of, such common shares within the U.S., if a U.S. Holder fails to furnish its correct taxpayer identification number (generally on Form W-9) or otherwise fails to comply with, or establish an exemption from, the backup withholding tax requirements. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holders U.S. federal income tax liability, provided the required information is furnished to the IRS. We do not assume responsibility for the withholding of tax at source. U.S. Holders should consult their own financial advisor, legal counsel or accountant regarding the information reporting and backup withholding rules applicable to our common shares. 10.F.
     Dividends and Paying Agents
 Not applicable. 10.G.
     Statements by Experts
 Not applicable. 10.H.
     Documents on Display
 Any documents referred to in this Annual Report may be inspected at our head office located at Suite 410, 475 West Georgia Street, Vancouver, British Columbia, V6B 4M9 Canada, during normal business hours. 10.I.
     Subsidiary Information
 There is no additional information, which must be provided in Canada and which is not otherwise called for by the body of Canadian GAAP used in preparing our consolidated financial statements, relating to our subsidiaries. ITEM 11.
     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. We have reduced our credit risk by investing our cash and cash equivalents and restricted cash in term deposits with financial institutions that operate globally. There is also minimal risk associated with accounts receivable as the payment for gold sales is received prior to the gold being credited to the customers account at the refinery. Therefore, we are not exposed to significant credit risk and overall our credit risk has not changed significantly from the prior year. Page 75


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Liquidity risk Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. We have in place a planning and budgeting process to help determine the funds required to ensure we have the appropriate liquidity to meet our operating and growth objectives. We have historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the Molejon gold project and may require doing so again in the future. We have been unable to meet all of our obligations with respect to scheduled repayments of principal, premium and interest on our Notes and interest on our Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, we have paid $1,200,000. Under the terms of the Indenture an event of default has occurred and the Notes and Convertible Notes are due on demand at the option of the Note holders and Convertible Note holders or the Trustee. Subsequent to year end, we entered into a prepaid gold forward facility with Deutsche Bank AG (Deutsche Bank) for $45,000,000. Upon the satisfaction of certain conditions precedent and successful completion of this transaction, net proceeds of approximately $41,000,000 will be used to extinguish a portion of our Notes and Convertible Notes. Currency risk Financial instruments that impact our net earnings or other comprehensive income due to currency fluctuations include: Canadian dollar denominated cash and cash equivalents, restricted cash, accounts receivable and accounts payable. As we conduct the vast majority of our activities in United States dollars, changes in the exchange rate between the Canadian dollar and the United States dollar have a minimal effect on our net earnings and other comprehensive income. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cash and cash equivalents and restricted cash bear interest at fixed rates. Other current financial assets and liabilities are not exposed to interest rate risk because they are non-interest bearing. The operating credit line facility, capital leases, and long-term debt bear interest at a fixed rate and are also not exposed to interest rate risk. Qualitative Information about Market Risk Our objectives of capital management are intended to safeguard our ability to support our normal operating requirements on an ongoing basis, continue the development and exploration of its mineral properties and support any expansionary plans. The capital structure of the Company consists of long term debt, leases, Notes, Convertible Notes and equity attributable to common shareholders, comprised of issued capital, contributed surplus and deficit. We manage the capital structure and make adjustments in light of changes in economic conditions and the risk characteristics of our assets. To effectively manage our capital requirements, we have in place a planning and budgeting process to help determine the funds required to ensure we have the appropriate liquidity to meet our operating and growth objectives. We have historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the project and may require doing so again in the future. ITEM 12.
     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 Not applicable. Page 76


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PART II ITEM 13.
     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 The Company has been unable to meet all of its obligations with respect to scheduled repayments of principal, premium and interest on its Notes and interest on its Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, the Company has paid $1,200,000. Under the terms of the Indenture an event of default has occurred and the Notes and Convertible Notes are currently due on demand at the option of the Note holders and Convertible Note holders or the Trustee. There are no payments of dividends by us in arrears, nor has there been any other material delinquency relating to any class of our preference shares. ITEM 14.
     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 Effective March 7, 2006, our Board of Directors adopted a shareholder rights plan, which was subsequently approved by our shareholders at our Annual and Special Meeting held on June 6, 2006. The Shareholder Rights Plan is designed to ensure that all shareholders receive equal treatment and to maximize shareholder values in the event of a take-over bid or other acquisition that could lead to a change in control of our company. It is not intended to deter take-over bids. Take-over bid contests for corporate control provide a singular opportunity for shareholders to obtain a one-time gain. After the acquisition of effective control, the opportunity for this one-time gain normally does not reoccur. As with most public companies, control of our company can probably be secured through the ownership of much less than 50% of our shares. Without a shareholder rights plan, it would be possible for a bidder to acquire effective control, over a relatively short period of time, through open market and private purchases, using various techniques permitted under the securities legislation in Canada, without making a bid available to all shareholders. Such acquisition of control would probably be an effective deterrent to other potential offerors. The person acquiring control would probably, over a period of time, be able to consolidate and increase its control without the price for control ever being tested through an open market auction. Shareholder rights plans are designed to prevent this occurrence by forcing all acquisitions of control into a public offer mode. A public offer will not necessarily achieve all of the objectives of ensuring the maximum value to shareholders. A take-over bid can be completed in a time period as short as 35 days. This is too short a time period to ensure that the directors can develop other competing alternatives. The Shareholder Rights Plan is intended to provide time to shareholders to properly assess any take-over bid and to provide our Board of Directors with sufficient time to explore and develop alternatives for maximizing shareholder value, including, if considered appropriate, identifying and locating other potential bidders. Our Shareholder Rights Plan was filed as Exhibit 2.A. to our annual report on Form 20-F for the fiscal year ended May 31, 2009. ITEM 15.
     CONTROLS AND PROCEDURES
 Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our President (serving as our principal executive officer) and Chief Financial Officer (serving as our principal financial officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report (the Evaluation Date). Based upon that evaluation, our President and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the SECs rules and forms, and accumulated and communicated to our management, including our President and Chief Financial Officer, to allow timely decisions regarding required disclosure. Page 77


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Managements Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. An internal control material weakness is a deficiency, or aggregation of deficiencies, such that the risk of material misstatements in financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential. During the year ending May 31, 2009, the Company identified a material weakness in internal controls. The Companys policies and procedures relating to cash disbursements at one of the Companys operating subsidiaries were not followed. During the current fiscal year, the Company redesigned the internal controls for operating subsidiaries by replacing all signing authorities at these operations with senior level employees. This allowed the Company to resolve the material weakness over cash disbursements. The CEO and the CFO evaluated the design and effectiveness of internal controls over financial reporting based on the framework in Internal Control  Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission (COSO) as at May 31, 2010. Based on this evaluation, as at May 31, 2010, the Company believes that its internal controls over financial reporting were designed and operating effectively to provide reasonable, but not absolute, assurance that the objectives of the control system are met. Ernst & Young LLP, an independent registered public accounting firm, has audited the financial statements for the year ended May 31, 2010, and expressed an unqualified opinion thereon. Ernst & Young LLP has also expressed an unqualified opinion on the Companys internal control over financial reporting as of May 31, 2010. The report can be found in the Independent Auditors Report on Internal Controls under Standards of the Public Company Accounting Oversight board (United States of America). Attestation Report of our External Auditor xx Changes in Internal Control Over Financial Reporting During the period covered by this report, other than the changes discussed under Managements Annual Report on Internal Control over Financial Reporting,there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Page 78


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ITEM 16.
     [RESERVED]
  16.A.
     AUDIT COMMITTEE FINANCIAL EXPERT
 We have not identified an Audit Committee Financial Expert among the three directors currently serving on our Audit Committee. Our current Audit Committee members are Raul Ferrer, David Kaplan and David Levy, each of whom, as a result of various professional backgrounds, is financially literate with an understanding of internal controls and procedures. 16.B.
     CODE OF ETHICS
  Effective May 31, 2008, our Board of Directors adopted an updated Code of Business Ethics and Conduct that applies to, among other persons, our President and Chief Executive Officer, being our principal executive officer, and our Chief Financial Officer, being our principal financial officer, and our controller, as well as persons performing similar functions. As adopted, our Code of Business Ethics and Conduct sets forth written standards that are designed to deter wrongdoing and to promote: (1)
     honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;(2)
     full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;(3)
     compliance with applicable governmental laws, rules and regulations;(4)
     the prompt internal reporting of violations of the Code of Business Ethics and Conduct to an appropriate person or persons identified in the Code of Business Ethics and Conduct; and(5)
     accountability for adherence to the Code of Business Ethics and Conduct. Our Code of Business Ethics and Conduct requires, among other things, that all of our personnel shall be accorded full access to our President and Chief Executive Officer and Chief Financial Officer with respect to any matter which may arise relating to the Code of Business Ethics and Conduct. Further, all of our personnel are to accorded full access to our Board of Directors if any such matter involves an alleged breach of the Code of Business Ethics and Conduct by our President and Chief Executive Officer or Chief Financial Officer. In addition, our Code of Business Ethics and Conduct emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining our financial integrity, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our Chairman of the Audit Committee or Chief Financial Officer or, if anonymity is preferred, to an independent whistle-blower hotline operated and controlled by a third party. It is against our policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Ethics and Conduct by another. Our Code of Business Ethics and Conduct and our Whistle-Blower Policy were filed as Exhibits 11.A and 11.B to our Form 20-F for the period ended May 31, 2008. The full text of our Code of Business Ethics and Conduct and our Whistle-Blower Policy can be viewed on our website at www.petaquilla.comand we will provide a copy of each document to any person without charge, upon request. Requests can be sent to: Petaquilla Minerals Ltd., Suite 410 -475 West Georgia Street, Vancouver, BC, Canada V6B 4M9. 16.C.
     PRINCIPAL ACCOUNTANT FEES AND SERVICES
 The aggregate amounts billed by our auditors to us for (i) the period covered by the year ended May 31, 2010, and (ii) the period covered by the year ended May 31, 2009, for audit fees, audit-related fees, tax fees and all other fees are set forth below: Year Ended
     
     
     Year EndedMay 31, 2010
     
     
     May 31, 2009(CAD$)
     
     
     (CAD$)Audit Fees (1)
     $
     620,000
     (5)
     $
     1,075,300Audit-Related Fees (2)
     $
     40,000
     (5)
     $
     186,280Tax Fees (3)
     $
     20,000
     
     $
     26,840All Other Fees (4)
     
     -
     
     
     -Totals
     $
     680,000
     (5)
     $
     1,288,421
 Page 79


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(1)
     Audit Fees" represent the aggregate fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by our accountant in connection with statutory and regulatory filings or engagements.(2)
     Audit-Related Fees" represent the aggregate fees billed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees above.(3)
     Tax Fees" represent the aggregate fees for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning.(4)
     All Other Fees" represent the aggregate fees billed for products and services provided by our principal accountant, other than the services reported under Audit Fees, Audit-Related Fees and Tax Fees above.(5)
     Fees for the year ended May 31, 2010, are estimated. The Audit Committee has adopted procedures requiring Audit Committee review and approval in advance of all particular engagements for services provided by our independent auditor. Consistent with applicable laws, the procedures permit limited amounts of services, other than audit, review or attest services, to be approved by one or more members of the Audit Committee pursuant to authority delegated by the Audit Committee, provided the Audit Committee is informed of each particular service. All of the engagements (i.e. 100%) and fees for the year ended May 31, 2010, and the year ended May 31, 2009, were approved by the Audit Committee and all such engagements were completed by our independent auditor with no work performed by persons other than our independent auditors full-time, permanent employees. The Audit Committee reviews with our auditor whether the non-audit services to be provided are compatible with maintaining the auditor's independence. The Board determined that, starting in the fiscal year ended January 31, 2005, fees paid to our independent auditors for non-audit services in any year would not exceed the fees paid for audit services during the year. Permissible non-audit services are limited to fees for tax services, accounting assistance or audits in connection with acquisitions, and other services specifically related to accounting or audit matters such as audits of employee benefit plans. 16.D
     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 Not applicable. 16.E.
     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 No purchases were made by us or on our behalf or any affiliated purchaser, as defined in §240.10b-18(a)(3), of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act. 16.F.
     CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
 Not applicable. 16.G.
     CORPORATE GOVERNANCE
 Not applicable. PART III ITEM 17.
     FINANCIAL STATEMENTS
 Please see the Financial Statements and Exhibits listed in Item 19 hereof and filed as part of this Annual Report on Form 20-F. These consolidated financial statements were prepared in accordance with Canadian GAAP and are expressed in United States dollars. Such consolidated financial statements have been reconciled to U.S. GAAP (see Note 27 therein). Page 80


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PETAQUILLA MINERALS LTD. CONSOLIDATED FINANCIAL STATEMENTS Year Ended May 31, 2010, Year Ended May 31, 2009, One 
Month Ended May 31, 2008, and Year Ended April 30, 2008 Page 81


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Management Report on Internal Control over Financial Reporting The management of Petaquilla Minerals Ltd. (Petaquilla or the Company) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934. Petaquillas internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. An internal control material weakness is a deficiency, or aggregation of deficiencies, such that the risk of material misstatements in financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential. During the prior year, the Company identified a material weakness in internal controls related to the fact that the Companys policies and procedures over cash disbursements were not being followed at one of the Companys operating subsidiaries. As a result of this the Company redesigned the internal controls for operating subsidiaries by replacing all signing authorities at these operations with senior level employees. The Company has also performed a review of transactions to test if policies and procedures are now being followed and is satisfied that this internal control weakness has been remediated. The Companys management assessed the effectiveness of Petaquillas internal controls over financial reporting as of May 31, 2010. In making the assessment of internal control over financial reporting, the Companys management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Petaquillas management believes that, as of May 31, 2010 (the Evaluation Date), the Companys internal control over financial reporting was effective as of the Evaluation Date based on those criteria. During the period covered by this report, other than the change made with respect to cash disbursements, as previously discussed, there were no changes in the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. The effectiveness of the Companys internal control over financial reporting, as of May 31, 2010, has been audited by Ernst & Young LLP, Independent Registered Accountants, who also audited the Companys consolidated financial statements for the year ended May 31, 2010, as stated in their report which appears on the following page. PETAQUILLA MINERALS LTD. By:
     /s/ Julie van Baarsen
     
     By:
     /s/ Joao ManuelJulie van Baarsen, Chief Financial Officer
     
     
     Joao Manuel, President and Chief Executive Officer(principal financial and accounting officer)
     
     
     (principal executive officer)
  Page 82


INDEPENDENT AUDITORS REPORT ON 
FINANCIAL STATEMENTS To the Shareholders ofPetaquilla Minerals Ltd. We have audited the consolidated balance sheets of Petaquilla Minerals Ltd.(the Company) as at May 31, 2010 and 2009 and the consolidated statements of operations and comprehensive loss, shareholders deficiency and cash flows for the years ended May 31, 2010 and 2009, the one month period ended May 31, 2008, and the year ended April 30, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company, as at May 31, 2010 and 2009, and the results of its operations and its cash flows for the year ended May 31, 2010 and 2009, the one month period ended May 31, 2008, the year ended April 30, 2008, in conformity with Canadian generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as at May 31, 2010, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 30, 2010 expressed an unqualified opinion thereon. Vancouver, Canada,
August 30, 2010.
    Page 83


COMMENTS BY AUDITORS FOR U.S. READERS ON 
CANADA - U.S. REPORTING CONFLICT In the United States, reporting standards for auditors require the addition of an explanatory paragraph, following the opinion paragraph, when the financial statements are affected by conditions and events that cast substantial doubt on the companys ability to continue as a going concern, such as those described in note 1 to the 2010 consolidated financial statements. Our report to the shareholders dated August 30, 2010, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors report when these are adequately disclosed in the financial statements. Vancouver, Canada,
August 30, 2010.Chartered Accountants
 Page 84


---

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROLS 
UNDER STANDARDS OF THE PUBLIC COMPANY ACCOUNTINGOVERSIGHT BOARD (UNITED STATES) To the Shareholders ofPetaquilla Minerals Ltd. We have audited Petaquilla Minerals Ltd.s[the Company] internal control over financial reporting as of May 31, 2010 based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission [the COSO criteria]. The Companys management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2010, based on the COSO criteria. We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as at May 31, 2010 and 2009 and the consolidated statements of operations and comprehensive loss, shareholders deficiency and cash flows for the years ended May 31, 2010 and 2009, the one month period ended May 31, 2008, and the year ended April 30, 2008 and our report dated August 30, 2010 expressed an unqualified opinion thereon. Vancouver, Canada,
August 30, 2010.Chartered Accountants Page 85


---

PETAQUILLA MINERALS LTD.CONSOLIDATED BALANCE SHEETS(in United States Dollars) (See Note 1 Nature of Operations and Going Concern Uncertainty)
  May 31,
     
     
     
     May 31,2010
     
     
     
     2009ASSETS(Notes 13, 14, and 15)CurrentCash and cash equivalents (Note 23)
     $
     4,625,649
     
     
     $
     3,575,168Receivables
     
     116,326
     
     
     
     144,225Inventory (Note 3)
     
     3,634,715
     
     
     
     1,038,999Prepaid expenses
     
     690,152
     
     
     
     591,847Total current assets
     
     9,066,842
     
     
     
     5,350,239Restricted cash(Note 8)
     
     566,708
     
     
     
     707,480Long term stockpile inventory(Note 3)
     
     1,107,316
     
     
     
     -Deposit on equipment and construction materials
     
     816,461
     
     
     
     1,762,945Property, plant and equipment(Notes 4 and 13)
     
     9,916,595
     
     
     
     12,879,658Mineral properties(Note 5)
     
     58,788,273
     
     
     
     60,843,501Total assets
     $
     80,262,195
     
     
     $
     81,543,823LIABILITIES AND SHAREHOLDERS DEFICIENCYCurrentAccounts payable and accrued liabilities
     $
     17,586,683
     
     
     $
     8,746,892Current portion of deferred services and materials (Note 12)
     
     3,153,394
     
     
     
     120,000Current portion of obligations under capital leases (Note 13)
     
     4,136,032
     
     
     
     5,054,987Current portion of long-term debt (Note 10)
     
     35,465
     
     
     
     160,993Senior secured notes (Note 14)
     
     26,646,631
     
     
     
     15,653,483Convertible senior secured notes (Note 15)
     
     44,837,991
     
     
     
     -Total current liabilities
     
     96,396,196
     
     
     
     29,736,355Long term debt(Note 10)
     
     80,235
     
     
     
     -Deferred services and materials(Note 12)
     
     -
     
     
     
     3,123,394Obligations under capital leases(Note 13)
     
     440,229
     
     
     
     4,391,168Senior secured notes(Note 14)
     
     -
     
     
     
     13,754,019Convertible senior secured notes(Note 15)
     
     -
     
     
     
     34,794,455Asset retirement obligation(Note 24)
     
     4,698,650
     
     
     
     4,664,720Total liabilities
     
     101,615,310
     
     
     
     90,464,111Commitments and contingencies(Notes 21 and 25)Shareholders' deficiencyShare CapitalAuthorizedUnlimited common shares and preferred shares without par value (Note 16)Issued and outstanding125,281,951 (May 31, 2009  96,040,121) common shares
     
     102,334,997
     
     
     
     89,208,668Treasury shares, at cost44,200 (May 31, 2009  44,200) common shares
     
     (122,193
     )
     
     
     (122,193
     )Warrants (Notes 16 and 18)
     
     13,209,412
     
     
     
     14,109,097Contributed surplus (Note 16)
     
     16,219,808
     
     
     
     13,897,197Equity component of convertible senior secured notes (Note 15)
     
     495,121
     
     
     
     495,121Accumulated comprehensive loss (Note 2)
     
     (6,733,242
     )
     
     
     (6,733,242
     )Deficit
     
     (146,757,018
     )
     
     
     (119,774,936
     )Total shareholders deficiency
     
     (21,353,115
     )
     
     
     (8,920,288
     )Total liabilities and shareholders deficiency
     $
     80,262,195
     
     
     $
     81,543,823
  On behalf of the Board:Richard Fifer-Director
     David Kaplan-Director
  The accompanying notes are an integral part of these consolidated financial statements. Page 86


---

PETAQUILLA MINERALS LTD.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in United States Dollars)
  Year ended
     
     
     
     Year ended
     
     
     
     One month
     
     
     
     Year endedMay 31
     
     
     
     May 31
     
     
     
     ended May 31
     
     
     
     April 302010
     
     
     
     2009
     
     
     
     2008
     
     
     
     2008METAL SALES
     $
     27,827,935
     
     
     
     -
     
     
     
     -
     
     
     
     -COST OF SALES
     
     16,523,160
     
     
     
     -
     
     
     
     -
     
     
     
     -AMORTIZATION AND DEPLETION
     
     4,839,420
     
     
     
     -
     
     
     
     -
     
     
     
     -6,465,355
     
     
     
     -
     
     
     
     -EXPENSESAccounting and legal (Note 19)
     $
     1,775,357
     
     
     $
     1,944,302
     
     
     $
     15,536
     
     
     $
     1,306,921Accretion of asset retirement obligation (Note 24)
     
     325,287
     
     
     
     331,504
     
     
     
     52,098
     
     
     
     305,692Consulting fees (Note 19)
     
     663,796
     
     
     
     370,248
     
     
     
     21,170
     
     
     
     943,250Filing fees
     
     64,303
     
     
     
     115,295
     
     
     
     280
     
     
     
     87,005Investor relations and shareholder information
     
     502,690
     
     
     
     475,092
     
     
     
     54,595
     
     
     
     1,012,822Office administration
     
     1,609,746
     
     
     
     2,187,020
     
     
     
     213,168
     
     
     
     2,711,908Rent
     
     119,920
     
     
     
     240,693
     
     
     
     1,630
     
     
     
     122,495Donations and community relations
     
     1,240,479
     
     
     
     949,271
     
     
     
     -
     
     
     
     -Exploration and development costs (Note 6)
     
     4,304,303
     
     
     
     7,761,862
     
     
     
     562,237
     
     
     
     11,690,204Stock-based compensation (Note 17)
     
     1,351,106
     
     
     
     898,454
     
     
     
     77,890
     
     
     
     5,561,247Travel
     
     906,989
     
     
     
     1,014,530
     
     
     
     121,849
     
     
     
     857,907Debt issuance costs (Notes 11, 14 and 15)
     
     613,244
     
     
     
     6,398,825
     
     
     
     3,894,873
     
     
     
     -Wages and benefits (Note 19)
     
     3,428,470
     
     
     
     2,916,615
     
     
     
     177,329
     
     
     
     1,668,455Total expenses
     
     (16,905,690
     )
     
     
     (25,603,711
     )
     
     
     (5,192,655
     )
     
     
     (26,267,906
     )OTHER INCOME (EXPENSE)Foreign exchange (loss) gain
     
     (93,159
     )
     
     
     (8,157,720
     )
     
     
     295,059
     
     
     
     1,342,442Interest income
     
     52,394
     
     
     
     169,366
     
     
     
     78,658
     
     
     
     51,926Interest on long-term debt (Notes 10 and 13)
     
     (501,574
     )
     
     
     (37,382
     )
     
     
     (15,613
     )
     
     
     (68,465
     )Asset usage fees
     
     -
     
     
     
     (4,155
     )
     
     
     (695
     )
     
     
     126,775Gain on sale of equity investment (Note 7)
     
     -
     
     
     
     40,604,938
     
     
     
     -
     
     
     
     4,347,077Power and drilling services
     
     90,000
     
     
     
     156,597
     
     
     
     70,094
     
     
     
     76,430Loss from equity investment (Note 7)
     
     -
     
     
     
     (2,396,011
     )
     
     
     (779,846
     )
     
     
     (8,301,371
     )Gain on dilution of equity investment (Note 7)
     
     -
     
     
     
     2,238,492
     
     
     
     -
     
     
     
     12,582,085Redemption loss on senior secured notes
     
     (240,000
     )
     
     
     (13,130,982
     )
     
     
     -
     
     
     
     -Mark-to-market loss on senior secured notes and convertible senior secured notes
     
     (15,849,408
     )
     
     
     (14,939,298
     )
     
     
     -
     
     
     
     -Total other income (expenses)
     
     (16,541,747
     )
     
     
     4,503,845
     
     
     
     (352,343
     )
     
     
     10,156,899Net loss for the period
     
     (26,982,082
     )
     
     
     (21,099,866
     )
     
     
     (5,544,998
     )
     
     
     (16,111,007
     )Other comprehensive (loss) gain:Unrealized (loss) gain on translatingfinancial statements to U.S. dollarreporting currency (Note 2)
     
     -
     
     
     
     (4,648,716
     )
     
     
     487,574
     
     
     
     716,555Comprehensive loss for the year
     $
     (26,982,082
     )
     
     $
     (25,748,582
     )
     
     $
     (5,057,424
     )
     
     $
     (15,394,452
     )Basic and diluted loss per share
     $
     (0.25
     )
     
     $
     (0.22
     )
     
     $
     (0.06
     )
     
     $
     (0.17
     )Weighted average number of commonshares outstanding (basic and diluted)
     
     107,740,441
     
     
     
     96,019,488
     
     
     
     93,131,030
     
     
     
     93,131,030
  The accompanying notes are an integral part of these consolidated financial statements. Page 87


---

PETAQUILLA MINERALS LTD.CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY(in United States dollars)
  Number
of Common
Shares
     
     
     Amount of
Common Shares
     
     
     Contributed
Surplus
     
     
     Warrants
     
     
     Accumulated Other
Comprehensive
Loss
     
     
     Accumulated DeficitBalance as at May 31, 2008
     
     95,958,641
     
     $
     89,002,273
     
     $
     14,714,276
     
     $
     11,771,374
     
     $
     (2,084,526
     )
     $
     (98,675,070
     )Exercise of stock options
     
     81,480
     
     
     206,395
     
     
     (168,732
     )
     
     -
     
     
     -
     
     
     -Stock-based compensation
     
     -
     
     
     -
     
     
     869,890
     
     
     -
     
     
     -
     
     
     -Senior secured notes finders warrants
     
     -
     
     
     -
     
     
     -
     
     
     215,230
     
     
     -
     
     
     -Senior secured notes warrants
     
     -
     
     
     -
     
     
     -
     
     
     706,802
     
     
     -
     
     
     -Expiration of warrants
     
     -
     
     
     -
     
     
     263,263
     
     
     (263,263
     )
     
     -
     
     
     -Warrant issue costs
     
     
     
     
     
     
     
     
     
     
     (102,546
     )
     
     -
     
     
     -Repricing of senior secured notes warrants
     
     -
     
     
     -
     
     
     (1,781,500
     )
     
     1,781,500
     
     
     -
     
     
     -Net loss
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (21,099,866
     )Exchange difference from translation of financial statements to US reporting currency
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (4,648,716
     )
     
     -Balance as at May 31, 2009
     
     96,040,121
     
     $
     89,208,668
     
     $
     13,897,197
     
     $
     14,109,097
     
     $
     (6,733,242
     )
     $
     (119,774,936
     )Non-brokered private placements, net of finders fees
     
     28,000,080
     
     
     12,226,321
     
     
     -
     
     
     319,736
     
     
     -
     
     
     -Exercise of stock options
     
     768,750
     
     
     542,201
     
     
     (187,487
     )
     
     -
     
     
     -
     
     
     -Stock-based compensation
     
     -
     
     
     -
     
     
     1,351,106
     
     
     -
     
     
     -
     
     
     -Expiration of warrants
     
     -
     
     
     -
     
     
     1,158,992
     
     
     (1,158,992
     )
     
     -
     
     
     -Exercise of warrants
     
     473,000
     
     
     357,807
     
     
     -
     
     
     (60,429
     )
     
     -
     
     
     -Net loss
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     -
     
     
     (26,982,082
     )Balance as at May 31, 2010
     
     125,281,951
     
     $
     102,334,997
     
     $
     16,219,808
     
     $
     13,209,412
     
     $
     (6,733,242
     )
     $
     (146,757,018
     )
  The accompanying notes are an integral part of these consolidated financial statements. Page 88


---

PETAQUILLA MINERALS LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS(in United States Dollars)
  Year ended
May 31, 2010
     
     
     Year ended
May 31, 2009
     
     
     One
month ended
May 31, 2008
     
     
     Year ended
April 30, 2008CASH FLOWS FROM OPERATINGACTIVITIESNet loss for the period
     $
     (26,982,082
     )
     $
     (21,099,866
     )
     $
     (5,544,998
     )
     $
     (16,111,007
     )Items not affecting cash:Accretion of asset retirement obligation
     
     325,287
     
     
     331,504
     
     
     52,098
     
     
     305,692Amortization and depletion
     
     4,839,420
     
     
     -
     
     
     -
     
     
     -Amortization included in office administration
     
     361,198
     
     
     336,602
     
     
     35,511
     
     
     344,968Gain on dilution of equity investment
     
     -
     
     
     (2,238,492
     )
     
     -
     
     
     (12,582,085
     )Gain on sale of equity investment
     
     -
     
     
     (40,604,938
     )
     
     -
     
     
     (4,347,077
     )Loss from equity investment
     
     -
     
     
     2,396,011
     
     
     779,846
     
     
     8,301,371Stock-based compensation
     
     1,351,106
     
     
     898,454
     
     
     77,890
     
     
     5,561,247Stock-based compensation included in exploration and development expenses
     
     -
     
     
     (28,564
     )
     
     12,113
     
     
     581,068Amortization included in exploration and development expenses
     
     -
     
     
     4,033,720
     
     
     368,809
     
     
     2,901,942Debt issuance costs
     
     613,244
     
     
     6,398,825
     
     
     3,894,872
     
     
     -Redemption loss on senior secured notes
     
     240,000
     
     
     13,130,982
     
     
     -
     
     
     -Mark-to-market loss on senior secured notes and convertible senior secured notes
     
     15,849,408
     
     
     14,939,298
     
     
     -
     
     
     -Interest paid on senior secured notes and convertible senior secured notes
     
     (2,526,291
     )
     
     -
     
     
     -
     
     
     -Unrealized foreign exchange losses (gains)
     
     -
     
     
     8,651,025
     
     
     (397,753
     )
     
     (234,748
     )Changes in non-cash working capital items:Decrease (increase) in receivables
     
     27,899
     
     
     306,660
     
     
     (187,614
     )
     
     (153,297
     )(Increase) decrease in prepaid expenses
     
     (98,305
     )
     
     (281,592
     )
     
     343,861
     
     
     (202,481
     )(Increase) in inventory
     
     (3,274,719
     )
     
     (1,038,999
     )
     
     -
     
     
     -Deferred services and materials
     
     (90,000
     )
     
     (156,597
     )
     
     (70,094
     )
     
     (76,430
     )(Decrease) increase in accounts payable and accrued liabilities
     
     9,864,683
     
     
     (1,984,118
     )
     
     (9,498,857
     )
     
     9,042,977Net cash provided by (used in)operating activities
     
     500,846
     
     
     (16,010,085
     )
     
     (10,134,316
     )
     
     (6,667,860
     )CASH FLOWS FROM FINANCINGACTIVITIESNet proceeds from exercise of warrants and options
     
     652,092
     
     
     37,662
     
     
     -
     
     
     1,625,520Proceeds from issue of shares
     
     13,216,313
     
     
     -
     
     
     -
     
     
     12,142,274Share issuance costs
     
     (670,256
     )
     
     -
     
     
     -
     
     
     (458,397
     )Advances from (to) Petaquilla Copper Ltd.
     
     -
     
     
     -
     
     
     -
     
     
     17,682,808(Repayment of) proceeds from bank overdraft
     
     -
     
     
     (2,100,000
     )
     
     (32,125
     )
     
     896,935Proceeds from senior secured notes
     
     -
     
     
     40,587,500
     
     
     27,412,500
     
     
     -Repayment of senior secured notes
     
     (1,200,000
     )
     
     (64,238,852
     )
     
     -
     
     
     -Proceeds from convertible senior secured notes
     
     -
     
     
     34,000,000
     
     
     -
     
     
     -Payment of capital lease obligations
     
     (4,869,894
     )
     
     (2,824,140
     )
     
     (60,390
     )
     
     (700,022
     )Debt issuance costs
     
     (613,244
     )
     
     (6,286,138
     )
     
     (3,894,872
     )
     
     -Repayment of long-term debt
     
     (160,993
     )
     
     (436,230
     )
     
     (45,005
     )
     
     (534,993
     )Proceeds from bridge financing
     
     4,788,826
     
     
     -
     
     
     -
     
     
     -Repayment of bridge financing
     
     (4,788,826
     )
     
     -
     
     
     -
     
     
     -Net cash provided by (used in)financing activities
     
     6,354,018
     
     
     (1,260,198
     )
     
     23,380,108
     
     
     30,654,125CASH FLOWS FROM INVESTINGACTIVITIESAcquisition of property, plant and equipment
     
     (1,138,477
     )
     
     (1,631,883
     )
     
     -
     
     
     (6,579,011
     )
  Page 89


---

Pre-production revenue credited to mineral properties
     
     22,779,059
     
     
     653,941
     
     
     -
     
     
     -Pre-production cost of sales included in mineral properties
     
     (24,275,977
     )
     
     (1,260,127
     )
     
     -
     
     
     -Deposit on equipment
     
     -
     
     
     (1,762,945
     )
     
     -
     
     
     -Investment in mineral properties
     
     (3,310,056
     )
     
     (31,073,461
     )
     
     (1,289,902
     )
     
     (13,909,888
     )Redemption (purchase) of performance bond and restricted cash
     
     140,772
     
     
     -
     
     
     -
     
     
     511,315Proceeds (purchase) from sale of equity investment
     
     -
     
     
     43,238,852
     
     
     -
     
     
     -Net cash (used in) provided by investing activities
     
     (5,804,679
     )
     
     8,164,377
     
     
     (1,289,902
     )
     
     (19,977,584
     )Impact of exchange rate changes on cash andcash equivalents
     
     296
     
     
     (169,063
     )
     
     (872,009
     )
     
     (3,849,118
     )Change in cash and cash equivalents
     
     1,050,481
     
     
     (9,274,969
     )
     
     11,083,881
     
     
     159,563Cash and cash equivalents, beginning of period
     
     3,575,168
     
     
     12,850,137
     
     
     1,766,256
     
     
     1,606,693Cash and cash equivalents, end of period
     $
     4,625,649
     
     $
     3,575,168
     
     $
     12,850,137
     
     $
     1,766,256Supplemental disclosure with respect to cashflows(Note 23)
  The accompanying notes are an integral part of these consolidated financial statements. Page 90


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  1.
     NATURE OF OPERATIONS AND GOING CONCERN UNCERTAINTY
  Petaquilla Minerals Ltd. (the Company or Petaquilla) was incorporated in the Province of British Columbia. The Company is engaged in the mining and mineral exploration of gold-bearing mineral properties in Panama and operates under the rules and regulations of Ley Petaquilla No. 9 of February 26, 1997 which is a contractual arrangement between the Company and the Government of Panama. In accordance with Ley Petaquilla, the Ministry of Commerce and Industry of the Government of Panama issued a letter to the Company dated November 18, 2009, authorizing Petaquillas subsidiary, Petaquilla Gold, S.A., to initiate commercial production at its Molejon gold mine. Commercial production was subsequently achieved on January 8, 2010. The Company is also pursuing exploration activities centered on its 842 square kilometres of concessions in the Province of Colon, Panama. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has experienced recurring operating losses and has accumulated an operating deficiency of $146,757,018 at May 31, 2010 (May 31, 2009 - $119,774,936) and a shareholders deficiency of $21,353,115 at May 31, 2010 (May 31, 2009  $8,920,288). Also the Company had a working capital deficiency of $87,329,354 at May 31, 2010 (May 31, 2009 - $24,386,116). Working capital is defined as current assets less current liabilities and provides a measure of the Companys ability to settle liabilities that are due within one year with assets that are also expected to be converted to cash within one year. (See Note 26). The Company is currently in discussions with lenders to refinance its senior secured notes and convertible senior secured notes however, there is no guarantee that management will be successful in its efforts. Therefore, the use of generally accepted accounting principles that are applicable to a going concern may not be appropriate as there is substantial doubt about the Companys ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The operating cash flow and profitability of the Company are affected by various factors including the amount of gold produced and sold, the market price of gold, operating costs, interest rates, environmental costs, the level of exploration activity, labour risk, risk of business disruption due to environmentalist activities, and political risk. The Company seeks to manage the risks associated with its business; however, many of the factors affecting these risks are beyond the Companys control. 2.
     SIGNIFICANT ACCOUNTING POLICIES
  These consolidated financial statements and accompanying notes have been prepared in conformity with Canadian Generally Accepted Accounting Principles (GAAP). For a description of the differences between Canadian GAAP and United States GAAP for the Company, see note 27. These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries Adrian Resources (BVI) Ltd. (a British Virgin Island corporation), Petaquilla Minerals, S.A. (a Panama corporation), Instituto Petaquilla, S.A. (a Panama corporation), Petaquilla Gold, S.A. (a Panama corporation), Brigadas Verdes, S.A. (a Panama corporation), Aqua Azure, S.A. (a Panama corporation), Panamanian Development and Infrastructure Ltd. (formerly Petaquilla Infrastructure Ltd.) (a British Columbia corporation), Petaquilla Infraestructura Ltd. (a British Virgin Island corporation), Panama Desarrollo De Infraestructuras, S.A. (formerly Petaquilla Hidro, S.A.) (a Panama corporation), Panama Central Electrica, S.A. (a Panama corporation) and a 50.2% interest in Petaquilla Infraestructura, S.A. (a Panama corporation). The Company proportionately consolidates its 69% interest in a joint venture investment, Compania Minera Belencillo, S.A. (Belencillo) (a Panama corporation). Page 91


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  2.
     SIGNIFICANT ACCOUNTING POLICIES(continued)
  Variable interest entities (VIEs), which include, but are not limited to, special purpose entities, trusts, partnerships, and other legal structures, as defined by the Accounting Standards Board in Accounting Guideline (AcG) 15, Consolidation of Variable Interest Entities (AcG 15) are entities in which equity investors do not have the characteristics of a controlling financial interest or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are subject to consolidation by the primary beneficiary who will absorb the majority of the entities expected losses and/or expected residual returns. The Company has determined that it is the primary beneficiary of Azuero Mining Development, S.A. (a Panama corporation) and this VIE is consolidated with the accounts of the Company in these consolidated financial statements. The Company does not have access to the assets of Azuero Mining Development, S.A. and the creditors of Azuero Mining Development, S.A. do not have recourse against the Company. All inter-company transactions and balances have been eliminated upon consolidation. Use of estimates The preparation of consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the amount of revenues and expenses reported during the period. Actual results could differ from these estimates. Significant estimates used in the preparation of the consolidated financial statements include, but are not limited to, the estimated recoverable tonnes of ore from the mine and the estimated tonnes of waste material to be mined, the expected economic life of the mine, the estimated future operating results and net cash flows from the mine, the anticipated costs of reclamation and mine closure obligations, the recoverability of accounts receivable, the useful life of property, plant and equipment, the amount and likelihood of contingencies, the discount rate and expected redemption date used for valuation of senior secured and convertible senior secured notes, the valuation allowance for future income tax assets and the accounting for stock-based compensation and warrants. Cash and cash equivalents Cash and cash equivalents are classified as held for trading and include short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. The Company places its deposits with financial institutions with high credit standings. The Company regularly maintains cash balances in financial institutions in excess of insured limits. Inventory Finished goods, work-in-process, and stockpiled ore are valued at the lower of average production cost and net realizable value. Production costs include the cost of raw materials, direct labor, mine-site overhead expenses, royalties and amortization and depletion of mining assets. Supplies are valued at the lower of average cost or replacement cost. Page 92


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  2.
     SIGNIFICANT ACCOUNTING POLICIES(continued)
  Property, plant and equipment Equipment is recorded at cost less accumulated amortization, which is provided on the declining balance basis at rates as follows: Furniture and fixtures
     20%Computer equipment
     30%Equipment under capital lease
     30%Equipment
     30%Vehicles
     30%Computer software
     50%Buildings
     4%
  Plant is depleted on a unit-of-production basis over the estimated economic life of the mine to which it relates. Tailings ponds are depleted on a straight line basis over their estimated useful life, which ranges from one to two years. Mineral properties Exploration and development costs are expensed until such time as reserves are proven and financing to complete development has been obtained. Acquisition costs of mineral properties and tangible development costs incurred thereon, are deferred until the property to which they relate is placed into production, sold or abandoned. The carrying values of mineral properties are, where necessary, written down to fair value if carrying value is not recoverable. Costs relating to properties abandoned are written off when the decision to abandon is made. Prior to the attainment of commercial production, all revenues from metal sales and all production and selling costs related to those sales are capitalized as part of mineral properties. After the start of commercial production, all revenue and applicable costs are recorded in the consolidated statement of operations. The start of commercial production is defined as the point in time when 70% of the designed production capability is achieved and this is maintained for thirty consecutive days. The Company follows the cost reduction method of accounting for the receipt of property option and similar payments. Cash and other property payments received from the Companys exploration partners are credited to the respective property until all capitalized costs are recovered; thereafter, such payments are included in income. Option payments are exercisable at the discretion of the optionee and are only recognized when received. Restricted cash The Company has elected to classify restricted cash as held for trading. Receivables Receivables are classified as loans and receivables and are measured at amortized costs. Receivables consist of refundable government value added taxes and travel advances. Page 93


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  2.
     SIGNIFICANT ACCOUNTING POLICIES(continued)
  Asset retirement obligation An asset retirement obligation is a legal obligation associated with the retirement of tangible long-lived assets that the Company is required to settle. The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred when a reasonable estimate of fair value can be made. The carrying amount of the related long-lived asset is increased by the same amount as the liability. Subsequently, these capitalized asset retirement costs will be amortized to expense over the life of the related assets using the unit-of-production method. At the end of each period, the liability is increased to reflect the passage of time (accretion expense) and adjusted for changes in the estimated future cash flows underlying any initial fair value measurements (an increase or decrease in asset retirement costs). Impairment of long-lived assets A long-lived asset which includes property and related costs and equipment is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities to form an asset group, at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Estimates of future cash flows used to test recoverability of a long-lived asset include only the future cash flows that are directly associated with, and that are expected to arise as a direct result of, its use and eventual disposition. Foreign currency translation Prior to March 1, 2009, the Canadian dollar was determined to be the measurement currency of the Companys operations and these operations have been translated into United States dollars up until this date using the current rate method as follows: all assets and liabilities are translated into United States dollars at the exchange rate prevailing at the balance sheet date; all revenue and expense items are translated at the average rate of exchange for the period; and the resulting translation adjustment is recorded as accumulated other comprehensive income (AOCI), a separate component of shareholders equity. Subsequent to the change in measurement currency described below, the AOCI balance will remain the same until the entities which gave rise to the AOCI balance are disposed of. In addition, unrealized gains and losses due to movements in exchange rates on balances held in foreign currencies are shown separately on the Consolidated Statement of Cash Flows. Due to several financings in U.S. dollars, the most recent in March 2009, as well as the commencement of startup operations in Panama and expected revenue generation in U.S. dollars, it has been determined that as of March 1, 2009, the United States dollar is the reporting and measurement currency of the Companys operations and therefore these operations have been translated using the temporal method from that date onward. Under this method, foreign currency monetary assets and liabilities are translated into United States dollars at the exchange rates prevailing at the balance sheet date; non-monetary assets denominated in foreign currencies are translated using the rate of exchange at the transaction date; and foreign exchange gains and losses are included in the determination of earnings. Revenue Recognition Revenue from the sale of metals is recognized in the accounts when persuasive evidence of an arrangement exists, title and risk passes to the buyer, collection is reasonably assured and the price is reasonably determinable. During the pre-operating period, revenues and related expenses are recognized as a reduction / increase to mineral properties. Page 94


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  2.
     SIGNIFICANT ACCOUNTING POLICIES(continued)
  Debt issuance costs Debt issuance costs, which include legal fees, trustee fees, due diligence fees, finders fees, and finders warrants, are expensed in the year that they are incurred. Interest expense Interest expense on financing related to project development, construction and mill equipment is capitalized to mineral properties to be amortized over the recoverable reserves on a unit-of-production basis. Interest on operating long-term debt is expensed to operations as it is incurred since it relates to the acquisition of equipment used for general corporate purposes rather than for production. Loss per share The Company uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on loss per share is recognized as a result of the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. For all periods presented, all outstanding options and warrants were anti-dilutive since the proceeds to be received would be below the market value of the Companys shares, and the Company incurred a net loss for all periods presented. Stock-based compensation The Company accounts for all stock-based payments and awards using the fair value-based method. Under the fair value-based method, stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair value of stock-based payments to non-employees is periodically remeasured until counterparty performance is complete, and any change therein is recognized over the vesting period of the award and in the same manner as if the Company had paid cash instead of paying with or using equity instruments. The cost of stock-based payments to non-employees that are fully vested and non-forfeitable at the grant date is measured and recognized at that date. Compensation cost attributable to awards to employees is measured at fair value at the grant date and recognized over the vesting period. Income taxes Future income taxes are recorded using the liability method under which future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income or loss in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess. Adoption of new accounting policies In February 2008, the CICA issued a new Handbook Section 3064 - Goodwill and Intangible Assets (Section 3064), which replaces CICA Handbook Sections 3062 - Goodwill and Other Intangible Assets (Section 3062) and 3450 - Research and Development Costs and EIC-27- Revenues and Expenditures during the Pre-Operating Period. Various changes have been made to other sections of the CICA Handbook for consistency purposes. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets. Standards concerning goodwill are unchanged from the standards included in Section 3062. The new Section was applicable to the Companys financial statements for its fiscal year beginning June 1, 2009. The adoption of this section did not have a material impact on the Companys consolidated financial statements. Page 95


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  2.
     SIGNIFICANT ACCOUNTING POLICIES(continued)
  In June 2009 the Company adopted the amendments to CICA Section 3862, Financial Instruments Disclosures, to include enhanced disclosures on the liquidity risk of financial instruments and new disclosures on fair value measurements of financial instruments. The adoption of these amendments did not result in a material impact on the Companys consolidated financial statements. Accounting Policies to be Implemented Effective June 1, 2011 In January 2009, the CICA issued Handbook Sections 1582  Business Combinations (Section 1582), 1601  Consolidated Financial Statements (Section 1601) and 1602  Non-controlling Interests (Section 1602) which replaces CICA Handbook Sections 1581  Business Combinations and 1600  Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under International Financial Reporting Standards (IFRS). Section 1582 is applicable for the Companys business combinations with acquisition dates on or after January 1, 2011. Early adoption of this Section is permitted. Section 1601, together with Section 1602, establishes standards for the preparation of consolidated financial statements. Section 1601 is applicable for the Companys interim and annual consolidated financial statements for its fiscal year beginning June 1, 2011. Early adoption of this Section is permitted. If the Company chooses to early adopt any one of these Sections, the other two sections must also be adopted at the same time. 3.
     INVENTORY
  May 31, 2010
     
     
     May 31, 2009Supplies
     $
     1,505,310
     
     $
     1,038,999Ore stockpiles
     
     1,398,074
     
     
     -Work in process
     
     404,870
     
     
     -Finished goods
     
     1,433,777
     
     
     -4,742,031
     
     
     1,038,999Less: Ore stockpiles which will not be consumed for more than one year
     
     1,107,316
     
     
     -$
     3,634,715
     
     $
     1,038,999
  The amount of inventories recognized as an expense during the year is included in cost of sales in the Consolidated Statement of Earnings. 4.
     PROPERTY, PLANT AND EQUIPMENT
  May 31,
     
     
     
     
     
     
     
     
     May 31,2010
     
     
     
     
     
     
     
     
     2009Accumulated
     
     
     Net
     
     
     
     
     
     Accumulated
     
     
     NetCost
     
     
     Amortization
     
     
     Book Value
     
     
     Cost
     
     
     Amortization
     
     
     Book ValueEquipment under capital leases
     
     10,808,073
     
     
     6,011,701
     
     
     4,796,372
     
     
     10,808,072
     
     
     3,956,113
     
     
     6,851,959Equipment
     
     9,294,346
     
     
     5,322,109
     
     
     3,972,237
     
     
     8,744,787
     
     
     3,737,484
     
     
     5,007,303Buildings
     
     472,530
     
     
     39,160
     
     
     433,370
     
     
     472,783
     
     
     21,098
     
     
     451,685Vehicles
     
     433,348
     
     
     109,208
     
     
     324,140
     
     
     167,499
     
     
     27,257
     
     
     140,242Computer equipment
     
     262,105
     
     
     121,475
     
     
     140,630
     
     
     221,489
     
     
     69,909
     
     
     151,580Computer software
     
     214,132
     
     
     168,788
     
     
     45,344
     
     
     201,187
     
     
     129,915
     
     
     71,272Land
     
     188,533
     
     
     -
     
     
     188,533
     
     
     189,353
     
     
     -
     
     
     189,353Furniture and fixtures
     
     28,302
     
     
     12,333
     
     
     15,969
     
     
     25,016
     
     
     8,752
     
     
     16,264$
     21,701,369
     
     $
     11,784,774
     
     $
     9,916,595
     
     $
     20,830,186
     
     $
     7,950,528
     
     $
     12,879,658
  Page 96


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  5.
     MINERAL PROPERTIES
  As at May 31, 2010, the Company has capitalized $58,788,273 in mineral property costs, net of revenue of $27,908,659. A total of $60,843,501, net of revenue of $653,941 was capitalized in mineral property costs as at May 31, 2009. May 31, 2010
     
     
     May 31, 2009Plant
     $
     46,876,372
     
     $
     47,610,795Plant equipment
     
     2,973,133
     
     
     2,973,133Camp
     
     5,553,824
     
     
     5,252,168Tailings ponds
     
     1,599,202
     
     
     -Site improvements under construction
     
     238,734
     
     
     -Asset retirement obligation (Note 24)
     
     3,166,947
     
     
     3,458,304Capitalized interest expense
     
     1,999,794
     
     
     1,549,101Depletion
     
     (3,619,733
     )
     
     -$
     58,788,273
     
     $
     60,843,501
  Molejon Property  Panama The Molejon Property is located in the District of Donoso, Province of Colon, Panama. The project forms part of the Petaquilla Concession. The Company, through Petaquilla Gold, S.A., owns a 100% interest in the Molejon gold deposit, as well as all other gold and precious metal mineral deposits that might be developed within the Petaquilla Concession, subject to a graduated 5% - 7% net smelter return, based on the gold price at the time of production. A phased Mine Development Plan was approved by Ministerial Resolution of the Government of Panama in September 2005. The Company proceeded with the development of the property and construction of the processing mill and commercial production was achieved on January 8, 2010. 6.
     EXPLORATION AND DEVELOPMENT COSTS
  Exploration and development costs incurred to develop the Companys Molejon property and for exploration of other properties are detailed below: Year ended May 31,
     
     
     Year ended May 31,
     
     
     One month ended2010
     
     
     2009
     
     
     May 31, 2008Temporary camp costs
     $
     1,182,676
     
     $
     -
     
     $
     -Engineering and geologists
     
     769,598
     
     
     1,180,721
     
     
     39,107Trenching
     
     637,277
     
     
     78,024
     
     
     22,862Drilling costs
     
     486,291
     
     
     1,603,544
     
     
     40,581Logistics
     
     264,593
     
     
     153,229
     
     
     7,921Topography
     
     202,893
     
     
     7,599
     
     
     1,956Assaying
     
     186,941
     
     
     -
     
     
     -Transportation
     
     161,666
     
     
     -
     
     
     -Engineering and design
     
     123,053
     
     
     145,285
     
     
     25,224Communications
     
     96,372
     
     
     49,396
     
     
     -Data management
     
     74,004
     
     
     -
     
     
     -Environment
     
     60,009
     
     
     162,859
     
     
     8,153Bridges and roads
     
     38,819
     
     
     376,049
     
     
     1,693Property permits
     
     20,111
     
     
     -
     
     
     33,818Amortization on operating equipment
     
     -
     
     
     4,033,720
     
     
     368,809Stock-based compensation
     
     -
     
     
     (28,564
     )
     
     12,113$
     4,304,303
     
     $
     7,761,862
     
     $
     562,237
  Page 97


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  6.
     EXPLORATION AND DEVELOPMENT COSTS(continued)
  Year ended April 30,2008Drilling costs
     $
     5,845,024Trenching
     
     370,845Engineering and geologists
     
     1,058,073Environment
     
     117,545Logistics
     
     85,810Engineering and design
     
     335,193Transportation
     
     102,686Communications
     
     62,370Topography
     
     37,797Technical support
     
     9,824Bridges and roads
     
     (4,083
     )Amortization on operating equipment
     
     2,901,942Stock-based compensation (Note 16)
     
     581,068Interest expense
     
     186,110$
     11,690,204
  7.
     INVESTMENT IN PETAQUILLA COPPER LTD.
  The Company initially owned 22,233,634 of the issued shares of Petaquilla Copper Ltd. (Copper) at a cost of $439,367 (CAD$ 500,000). Subsequent to the spin out of Copper, the Company accounted for Copper on an equity basis. Under the equity method, the Company recorded the percentage of net income (loss) that would be attributed to the investment by adjusting the carrying value of the investment. If the percentage of loss from the investee was greater than the carrying cost, the amount was not reduced below zero. Dilution gains arose whenever Copper issued equity at a price greater than the carrying value of the equity investment. On September 19, 2008, the Company disposed of its 20,418,565 common shares of Copper to a wholly-owned subsidiary of Inmet Mining Corporation at a price of CAD$ 2.20 per common share, for proceeds of $43,238,852 (CAD$ 44,920,843). The Company did not incur any transaction costs in disposing of the shares. 8.
     RESTRICTED CASH
  The Company has $566,708 in term deposits (May 31, 2009 - $707,480) which are being held to guarantee credit cards and a performance bond for compliance with environmental laws in Panama. Interest rates on these deposits range from 0.5% to 4.875%. 9.
     OPERATING CREDIT LINE FACILITY
  The Company has an operating credit line facility with Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA) up to a maximum of $13,379,554. The facility is converted to capital leases when the asset purchases are completed. The facility has a fixed rate of 9% on $11,018,456 and 6% on $2,361,098, is secured by the assets purchased and is registered with the Public Registry of the Republic of Panama. At May 31, 2010 there is a remaining credit line balance of $332,511 available upon which the Company may draw. Page 98


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  10.
     LONG-TERM DEBT
  During the current year, the Company arranged bank loan financing of $115,700 for the purchase of vehicles. The loan is secured by the purchased vehicles. The following table summarizes the loans outstanding as at May 31, 2010 and May 31, 2009: May 31, 2010
     
     
     May 31, 2009Vehicle loan, repayable at $3,733 per month, including interest at 10%, due May 2013
     $
     115,700
     
     
     -Equipment loan, repayable at $7,445 per month including interest at 9.0%, paid out October 2009
     
     -
     
     $
     29,891Equipment loan, repayable at $18,095 per month including interest at 9.25%, paid out January 2010
     
     -
     
     
     125,575Vehicle loan, repayable at $793 per month, including interest at 9.25%, paid out January 2010
     
     -
     
     
     5,527115,700
     
     
     160,993Less: current portion
     
     (35,465
     )
     
     (160,993
     )$
     80,235
     
     $
     -
  11.
     SENIOR SECURED NOTE BRIDGE FINANCING FROM RELATED PARTIES
  On November 6, 2009 the Company offered for issue a new series of notes pursuant to the Companys senior secured note and convertible senior secured note indenture up to $5,000,000 of financing (Bridge Financing) to companies related to directors. The Bridge Financing was repaid in whole in January 2010 along with a restructuring fee of $500,000. 12.
     DEFERRED SERVICES AND MATERIALS TO BE PROVIDED TO IMN RESOURCES INC.
  On September 30, 2007, Petaquilla Gold S.A. (Gold), a subsidiary of the Company entered into a Service Agreement with Minera Panama S.A. (MPSA) (formerly Petaquilla Copper S.A.) to provide electric generation, aggregate for construction and the rental of a drill machine (collectively, the services) for a 3-year period. In return for receiving certain benefits and assurances, payment for services was assumed and prepaid by IMN Resources Inc. (IMN) (formerly Petaquilla Copper Ltd.), a wholly owned subsidiary of Inmet Mining Corporation, in the amount of $4,404,000. Services provided to date include the rental of a drill and the generation of electricity. May 31, 2010
     
     
     May 31, 2009$
     3,153,394
     
     $
     3,243,394Current portion
     
     3,153,394
     
     
     120,000Non-current portion
     $
     -
     
     $
     3,123,394
  Page 99


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  13.
     CAPITAL LEASE OBLIGATIONS
  The Company entered into four capital lease arrangements with Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA) for the purchase of equipment to advance the Molejon project into production. The equipment includes but is not restricted to: ball mills, a Metso crushing plant, cranes and an aggregate crushing plant. As a condition of the leases, the equipment will serve as collateral throughout the amortization period and will be registered with the Public Registry of the Republic of Panama. Further, IMN has pledged a term deposit in the amount of $2,361,098 (May 31, 2009 - $2,361,098) as additional security. Future minimum lease payments on the capital lease obligations are as follows: May 31, 2010
     
     
     May 31, 20092010
     $
     -
     
     $
     5,741,5672011
     
     4,376,667
     
     
     4,164,9722012
     
     447,080
     
     
     461,9074,823,747
     
     
     10,368,446Less imputed interest of 9%
     
     (247,486
     )
     
     (922,291
     )Total
     
     4,576,261
     
     
     9,446,155Current obligation
     
     4,136,032
     
     
     5,054,987Long- term obligation
     $
     440,229
     
     $
     4,391,168
  14.
     SENIOR SECURED NOTES
  May 31, 2010
     
     
     May 31, 2009Senior secured notes due to related parties
     $
     20,672,235
     
     $
     -Senior secured notes due to third parties
     
     5,974,396
     
     
     29,407,50226,646,631
     
     
     29,407,502Less estimated current portion
     
     26,646,631
     
     
     15,653,483$
     -
     
     $
     13,754,019
  At May 31, 2010, there are 21,301 senior secured notes (Notes) outstanding (May 31, 2009 - 26,468). The Notes bear interest at an annual rate of 15%. Semi-annual principal repayments on the Notes range from $nil to $8,000,000 depending upon the weighted average market price of gold during the six months prior to the payment date as follows: Weighted Average Market Gold Price
     Aggregate Pro Rata Principal PaymentOver $1,000
     $8,000,000$900 to $1,000
     $6,000,000$800 to $900
     $4,000,000Less than $800
     -
  The Notes mature five years from date of issuance at 120% of principal. The Company has the right to redeem the Notes at any time at 120% of the principal amount plus any accrued or unpaid interest on the Notes. After 18 or 24 months from the date of issuance of the Notes, depending upon the agreement reached with the Note holders, the holders of the Notes can give six months notice to cause the Company to purchase all of the Notes then outstanding at a price equal to the sum of (a) 120% of the principal amount of such Notes to be purchased and (b) accrued and unpaid interest on the principal amount of the Notes. On an annual basis, the Note holders can cause the Company to redeem Notes equal to 35% of Distributable Cash. Page 100


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  14.
     SENIOR SECURED NOTES(continued)
  Distributable Cash is defined as cash available after: a)
     satisfaction of the Companys debt obligations (principal and interest);b)
  satisfaction of the Companys general and administrative expenses, capital expenditures and other expense obligations;c)
  deduction for income tax obligations; andd)
     retaining reasonable working capital or other reserves.
  Reasonable working capital and other reserves are to be defined mutually between the Company and the Note holders. As of May 31, 2010 neither of these has been defined. The Company initially issued 60,000 Notes. Each Note was issued with 382 share purchase warrants. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. On April 17, 2009 the Company repriced these warrants to entitle the holder to purchase one common share at CAD $0.65 for the remainder of the warrant period with the provision that, if the closing trading price of the Companys common shares on the TSX is CAD$ 1.00 or more for a period of 30 consecutive trading days, the Company has the option to require the earlier exercise of the warrants. The effect of repricing the warrants was an increase in the value of the warrants of $1,781,500 and a decrease in contributed surplus for the same amount. On September 30, 2008 the Company redeemed 36,032.376 Notes at 120% of their principal value for a total payment of $43,238,852, resulting in a loss of $10,983,735. On October 1, 2008, the Company issued an additional 20,000 Notes under the $60 million senior secured notes indenture for net proceeds of $15,874,958. These Notes contain the same terms and conditions as the previous issue under the indenture with the exception of the 382 share purchase warrants. These Notes did not include any warrants. On March 25, 2009, the Company redeemed 17,500 Notes at 120% of their principal value for a total payment of $21,000,000, resulting in a loss of $2,147,247. On September 15, 2009 the Company redeemed 5,000 Notes at 120% of their principal value plus interest for a total payment of $6,208,844. This payment was financed in part by a $5,129,600 prepayment on forward gold sales of 5,600 ounces at a net price of $916 per ounce. There were two additional scheduled repayments of principal, premium and interest totalling $9,443,405 that were due in March 2010 and May 2010. Of the amounts due, the Company has paid out $857,594. Under the terms of the Indenture an event of default has occurred and the Notes are currently due on demand at the option of the Note holders or the Trustee. (See Note 26). The Notes have been accounted for in accordance with HB 3855 Financial Instruments  Recognition and Measurement, HB 3862 Financial Instruments  Disclosure and HB 3863 Financial Instruments Presentation. Under this guidance, the Company valued the liability component of the Notes and assigned the difference to the warrants. On the valuation dates, the value of the Notes was calculated to be $58,474,937 and the amount allocated to the warrants was $1,525,063. Prepaid interest of $9,000,000 was applied as a reduction of the Notes. The liability component was initially estimated as approximating the value of a two-year bond with no put or call features using a discount rate of 26.65%. The senior secured notes contain an embedded derivative as a result of the call and put options. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability that is held for trading. At May 31, 2010, the Notes have been adjusted to their fair market value of $26,646,631. Fair market value was estimated as approximating the value of a one-month bond with no put or call features and a 12% discount rate. During the fiscal year ended May 31, 2010 the Company incurred Nil (year ended May 31, 2009 $3,931,861) in financing costs related to the Notes. These costs were expensed in the period in which they were incurred in accordance with the Companys accounting policy. Page 101


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  14.
     SENIOR SECURED NOTES(continued)
  The Notes are guaranteed, on a joint and several basis, by all of the assets of the Company and of the Companys subsidiaries. At May 31, 2010, of the 21,301 senior secured notes outstanding, 16,486 senior secured notes are due to companies related to directors of the Company. 15.
     CONVERTIBLE SENIOR SECURED NOTES
  May 31, 2010
     
     
     
     May 31, 2009Convertible notes due to related parties
     $
     44,397,509
     
     
     
     -Less estimated current portion
     
     44,397,509
     
     
     
     -$
     -
     
     
     
     -Convertible notes due to third parties
     $
     440,482
     
     
     $
     34,794,455Less estimated current portion
     
     440,482
     
     
     
     -$
     -
     
     
     $
     34,794,455
  On March 25, 2009 the Company closed $40,000,000 of a convertible senior secured note (Convertible Notes) financing. The Convertible Notes bear interest at an annual rate of 15%, of which the first year is prepaid. The Convertible Notes mature two years from the date of issuance at 110% of the principal. The Company has the right to redeem the Convertible Notes at any time at 110% of the principal amount plus any accrued or unpaid interest. Each Convertible Note in the principal amount of $1,000 is convertible into common shares at CAD$ 2.25 per share. On an annual basis, the Convertible Note holders can cause the Company to redeem Convertible Notes equal to 35% of Distributable Cash. Distributable Cash is defined as cash available after: a)
     satisfaction of the Companys debt obligations (principal and interest);b)
  satisfaction of the Companys general and administrative expenses, capital expenditures and other expense obligations;c)
  deduction for income tax obligations; andd)
     retaining reasonable working capital or other reserves.
  Reasonable working capital and other reserves are to be defined mutually between the Company and the Note holders. As of May 31, 2010 neither of these has been defined. Commencing in September 2010, on a semi-annual basis, the Company is required to make principal payments under each holders Convertible Notes ranging from $nil to $8,000,000 depending upon the weighted average market price of gold for the six months prior to the payment date as follows: Weighted Average Market Gold Price
     Aggregate Pro Rata Principal PaymentOver $1,000
     $        8,000,000$900 to $1,000
     $        6,000,000$800 to $900
     $        4,000,000Less than $800
     -
  Interest of $829,545 on the Convertible Notes was due on May 15, 2010. Of this amount the Company has paid $342,406. Under the terms of the Indenture an event of default has occurred and the Convertible Notes are currently due on demand at the option of the Convertible Note holders or the Trustee. (See Note 26) Page 102


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  15.
     CONVERTIBLE SENIOR SECURED NOTES(continued)
  The Convertible Notes have been accounted for in accordance with HB 3855 Financial Instruments Recognition and Measurement, HB 3862 Financial Instruments  Disclosure, HB 3863 Financial Instruments  Presentation and EIC 164 Convertible and Other Debt Instruments with Embedded Derivatives. Under this guidance, the Company valued the liability component of the Convertible Notes and assigned the difference to the conversion feature. On the valuation date, the value of the liability component of the Convertible Notes was calculated to be $39,504,879. The conversion feature was valued at $495,121. Prepaid interest of $6,000,000 was applied as a reduction of the Convertible Notes. The liability component was initially estimated as approximating the value of a two-year bond with no put or call features using a discount rate of 20.58%. The convertible senior secured notes contained an embedded derivate as a result of the call option. The Company is unable to fair value the embedded derivative component separately and thus has classified the combined contract as a financial liability that is held for trading. At May 31, 2010, the convertible notes were adjusted to their fair market value of $44,837,991. Fair market value was estimated as approximating the value of a one-month bond with no put or call features using a 12% discount rate. The Company incurred $2,466,964 in financing costs in fiscal 2009 related to the Convertible Notes. These costs have been expensed in the period in which they were incurred in accordance with the Companys accounting policy. The Convertible Notes are guaranteed, on a joint and several basis, by all of the assets of the Company and of the Companys subsidiaries. The indebtedness represented by the Convertible Notes is senior to all other indebtedness of the Company and ranks pari passu with the previously issued senior secured notes. 16.
     SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS
  At May 31, 2010, the Company had unlimited authorized common shares without par value and unlimited authorized preferred shares without par value. The Board of Directors will assign the rights and privileges to each series of preference shares upon issue. In October 2007, the Company closed the first tranche of a non-brokered private placement of 2,093,500 units at CAD$ 3.00 per unit for gross proceeds of $6,611,749. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $234,104 and agreed to issue 74,125 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the finders warrants was $55,357. In December 2007, the Company closed the second tranche of the non-brokered private placement announced in October 2007 of 339,000 units at CAD$ 3.00 per unit for gross proceeds of $1,018,732. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $43,574 and agreed to issue 12,500 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the finders warrants was $8,318. In January 2008, the Company closed the third tranche of the non-brokered private placement announced in October 2007 of 708,000 units at CAD$ 3.00 per unit for gross proceeds of $2,106,098. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $104,115 and agreed to issue 35,000 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the finders warrants was $22,764. Page 103


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  16.
     SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS(continued)
  In May 2008, the Company closed the first tranche of its senior secured notes issuing 32,250 units for gross proceeds of $32,250,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Company agreed to issue 492,780 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $638,354. In June 2008, the Company closed the second tranche of its senior secured notes issuing 10,000 units for gross proceeds of $10,000,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Company agreed to issue 152,800 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $104,496. In July 2008, the Company closed the third tranche of its senior secured notes issuing 17,750 units for gross proceeds of $17,750,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Company agreed to issue 271,220 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $110,736. On April 17, 2009 the Company repriced the warrants issued with the Notes to allow the holder to purchase one common share at CAD $0.65 for the remainder of the warrant period with the provision that, if the closing trading price of the Companys common shares on the TSX is CAD$ 1.00 or more for a period of 30 consecutive trading days, the Company has the option to require the earlier exercise of the warrants. The effect of repricing the warrants was an increase in the value of the warrants by $1,781,500 and a decrease in contributed surplus by the same amount. In December 2009, the Company closed a non-brokered private placement of 24,000,000 common shares at a price of CAD $0.50 per share, raising gross proceeds of $11,328,236. In connection with the closing of the private placement, the Company has paid finders fees in the amount of $566,412. In May 2010, the Company issued 4,000,080 units at a price of CAD$ 0.50 per unit, raising gross proceeds of $1,888,077. Each unit consisted of one common share and one-half of one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of two years at an exercise price of CAD$ 0.85 per share. The Company paid finders fees of $103,844 plus 100,002 warrants exercisable for a period of two years at an exercise price of CAD$ 0.85 per share. The fair value of the finders warrants was $15,225. 17.
     STOCK OPTIONS
  On November 18, 2008, the Company received approval for its stock option plan which authorizes the board of directors to grant incentive stock options to directors, officers and employees. The maximum number of shares reserved for issuance under the Companys Plan is 10,700,000. The aggregate number of common shares reserved for issuance to any person may not exceed 5% of the number of outstanding common shares. The exercise price of the options will be determined by the five day volume weighted average price of the Companys shares prior to the date of the grant. Options granted must be exercised no later than 10 years after the date of grant or such lesser period as may be determined by the Board. The Board may at its discretion in any granting of an option set a vesting period whereby the option may only be exercisable in pre-determined instalments. Page 104


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  17.
     STOCK OPTIONS(continued)
 Stock option transactions are summarized as follows: Number
     Weighted Averageof Shares
     Exercise Price (CAD$)Balance at May 31, 2008
     8,115,134
     1.83Granted
     1,370,000
     0.85Exercised
     (81,480)
     0.50Expired
     (909,676)
     2.17Forfeited
     (58,125)
     2.32Balance at May 31, 2009
     8,435,853
     1.64Granted
     5,365,000
     0.37Exercised
     (768,750)
     0.48Cancelled
     (3,245,080)
     2.08Forfeited
     (1,532,653)
     1.65Expired
     (30,000)
     0.26Balance at May 31, 2010
     8,224,370
     0.75Number of stock options exercisable
     5,103,120
     0.95
 At May 31, 2010, the following stock options were outstanding as follows: Number of Shares
     Exercise PriceOutstanding
     (CAD$)
     Expiry Date786,000
     0.54
     February 1, 2011118,800
     0.26
     July 11, 20111,617,070
     2.01
     January 15, 2012100,000
     2.25
     June 20, 201250,000
     2.49
     July 12, 2012300,000
     0.52
     December 1, 2013100,000
     0.39
     March 1, 201475,000
     0.62
     July 13, 20143,500,000
     0.23
     November 18, 2014100,000
     0.84
     January 1, 2015525,000
     0.87
     January 5, 2015537,500
     0.57
     March 25, 2015350,000
     0.53
     April 30, 201565,000
     0.48
     May 13, 20158,224,370
 The weighted average fair value of stock options granted is estimated to be approximately CAD$ 0.35, CAD$ 0.22, CAD$ 1.18 and CAD$ 1.65 for the year ended May 31, 2010, the year ended May 31, 2009, the one month ended May 31, 2008 and the year ended April 30, 2008 respectively, by using the Black-Scholes options pricing model with the following weighted average assumptions: Year Ended
     Year Ended
     One Month Ended
     Year EndedMay 31, 2010
     May 31, 2009
     May 31,2008
     April 30, 2008Risk-free interest rate
     1.88%
     2.45%
     3.05 %
     4.44 %Expected dividend yield
     -
     -
     -
     -Expected stock price volatility
     82%
     64%
     74 %
     87 %Expected option life in years
     3.0
     4.90
     5.00
     5.00
 Page 105


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  18.
     SHARE PURCHASE WARRANTS
 Share purchase warrant transactions are summarized as follows: WeightedAverageNumber
     Exerciseof Shares
     Price (CAD$)Balance at April 30, 2008
     24,634,715
     1.94Issued
     12,812,280
     2.30Balance at May 31, 2008
     24,634,715
     2.13Issued
     11,024,520
     0.65Expired
     (705,955)
     3.50Balance at May 31, 2009
     34,953,280
     1.03Issued
     2,100,042
     0.85Exercised
     (473,000)
     0.65Expired
     (1,691,875)
     3.50Balance at May 31, 2010
     34,888,447
     0.90
 In October 2007, the Company closed a non-brokered private placement of 2,093,500 units at CAD$ 3.00 per unit for gross proceeds of $6,611,749. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $234,104 and agreed to issue 74,125 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the warrants issued on this tranche of the private placement was $758,116. The fair value of the finders warrants was $55,357. In December 2007, the Company closed the second tranche of the non-brokered private placement announced in October 2007 of 339,000 units at CAD$ 3.00 per unit for gross proceeds of $1,018,732. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $43,574 and agreed to issue 12,500 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the warrants issued on this tranche of the private placement was $103,725. The fair value of the finders warrants was $8,318. In January 2008, the Company closed the third tranche of the non-brokered private placement announced in October 2007 of 708,000 units at CAD$ 3.00 per unit for gross proceeds of $2,106,098. Each unit consisted of one common share and one-half of one common share purchase warrant, with each whole warrant exercisable into a common share at a price of CAD$ 3.50 per share for a period of two years following the close of the private placement. The Company paid $104,115 and agreed to issue 35,000 share purchase warrants as finders fees in connection with part of the private placement. The fair value of the warrants issued on this tranche of the private placement was $210,713. The fair value of the finders warrants was $22,764. In May 2008, the Company closed the first tranche of its senior secured notes financing issuing 32,250 units for gross proceeds of $32,250,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 Common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Notes mature at 120% of the principal amount and carry 15% interest of which the first years interest was prepaid at the date the funds were received. The Company paid $1,635,230 and agreed to issue 492,780 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $638,354. Page 106


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  18.
     SHARE PURCHASE WARRANTS(continued)
 In June 2008, the Company closed the second tranche of its senior secured notes financing issuing 10,000 units for gross proceeds of $10,000,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Notes mature at 120% of the principal amount and carry 15% interest of which the first years interest was prepaid at the date the funds were received. The Company agreed to issue 152,800 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $104,196. In July 2008, the Company closed the third tranche of its senior secured notes financing issuing 17,750 units for gross proceeds of $17,750,000. Each unit of $1,000 consisted of one Note and a warrant to purchase 382 common shares. Each warrant entitled the holder to purchase one common share at CAD$ 2.30 for a period of five years from the date of purchase. The Notes mature at 120% of the principal amount and carry 15% interest of which the first years interest was prepaid at the date the funds were received. The Company agreed to issue 271,220 share purchase warrants as finders fees in connection with this tranche of the private placement. The fair value of the finders warrants was $110,734. On April 17, 2009 the Company re-priced the warrants issued with the Notes to entitle the holder to purchase one common share at CAD$ 0.65 for the remainder of the warrant period. Under the revised terms of the warrants, if the common shares of the Company trade at a weighted average trading price of CAD$ 1.00 or more per share for 30 consecutive trading days, the holders of the warrants must exercise the warrants within 30 days. The re-pricing of the warrants resulted in an increase in the value of the warrants by $1,781,500 and a decrease in contributed surplus by the same amount. In December 2009, the Company closed a non-brokered private placement of 24,000,000 common shares at a price of CAD $0.50 per share, raising gross proceeds of $11,328,236. In connection with the closing of the private placement, the Company has paid finders fees in the amount of $566,412. On May 21, 2010, the Company issued 4,000,080 units at a price of CAD$ 0.50 per unit, raising gross proceeds of $1,888,077. Each unit consisted of one common share and one-half of one common share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company for a period of two years at an exercise price of CAD$ 0.85 per share. The Company paid finders fees of $94,404 plus 100,002 warrants exercisable for a period of two years at an exercise price of CAD$ 0.85 per share. The fair value of the finders warrants was $15,225. The weighted average fair value of the warrants issued is estimated to be approximately CAD$ 0.16, CAD$ 0.54, CAD$ 1.28, CAD$ 0.69 for the year ended May 31, 2010, the year ended May 31, 2009, the one month ended May 31, 2008 and the year ended April 30, 2008 respectively, by using the Black-Scholes options pricing model with the following assumptions: One MonthYear Ended May
     Year Ended May
     Ended May 31,
     Year Ended31, 2010
     31, 2009
     2008
     April 30, 2008Risk-free interest
     1.69%
     3.29%
     3.18%
     4.00%Expected dividend yield
     -
     -
     -
     -Expected stock price volatility
     99%
     43%
     74%
     47%Expected warrant life in years
     2.00
     5.00
     5.00
     2.00
  Page 107


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  18.
     SHARE PURCHASE WARRANTS(continued)
 At May 31, 2010, the following warrants were outstanding as follows: Number of Warrants
     ExerciseOutstanding
     Price (CAD$)
     Expiry Date9,424,605
     $1.54
     October 17, 20112,100,042
     $0.85
     May 21, 201212,716,780
     $0.65
     May 21, 20133,595,300
     $0.65
     June 4, 20137,051,720
     $0.65
     July 9, 201334,888,447
  19.
     RELATED PARTY TRANSACTIONS
 Related party transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the transacting parties. During the year ended May 31, 2010: a)
     The Company paid consulting fees of $120,685 to a company controlled by a director (year ended May 31, 2009  Nil, one month ended May 31, 2008  Nil, year ended April 30, 2008  Nil)b)
     The Company paid fees of $489,908 (year ended May 31, 2009 - $220,176, one month ended May 31, 2008 - $4,998 and year ended April 30, 2008 - $96,624) to a company controlled by the Chairman.c)
     The Company paid wages of $62,795 to a company controlled by a former officer (year ended May 31, 2009  Nil, one month ended May 31, 2008  Nil, year ended April 30, 2008  Nil)d)
     The Company paid wages of Nil (year ended May 31, 2009 - $32,158, one month ended May 31, 2008 - $30,812 and year ended April 30, 2008 - $17,122) to companies controlled by a former director.e)
     The Company paid for goods and services of $166,134 (year ended May 31, 2009 - $155,805, one month ended May 31, 2008  Nil and year ended April 30, 2008 - $127,326) to companies controlled by the Chairman.f)
     The Company paid for services of $1,203,967 to a company related to an officer of a subsidiary company. In prior years this company was not a related party.g)
     The Company paid debt issuance costs of $500,000 for a senior secured note bridge financing of $4,789,206. (Note 11) In prior years this company was not a related party.h)
     The Company paid legal fees of $273,178 (year ended May 31, 2009 - $269,526, one month ended May 31, 2008  Nil and year ended April 30, 2008 - $107,329), share issue costs of Nil (year ended May 31, 2009 - Nil, one month ended May 31, 2008  Nil and year ended April 30, 2008 - $162,523) and financing costs of Nil (year ended May 31, 2009 - $104,272, one month ended May 31, 2008 - $95,257 and year ended April 30, 2008  Nil) to a law firm controlled by a former officer and a law firm controlled by a former director.i)
     Of the total mark-to-market losses on Notes and Convertible Notes, $8,875,394 was attributable to Notes and Convertible Notes held by companies related to two directors. Page 108


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  19.
     RELATED PARTY TRANSACTIONS(continued)
 At May 31, 2010, excluding related party Notes and related party Convertible Notes (Notes 14 and 15), $981,511 was owed to related parties. 20.
     INCOME TAXES
 A reconciliation of income taxes at statutory rates with the reported taxes is as follows: Year ended
     
     
     Year ended
     
     
     One month ended
     
     
     Year endedMay 31, 2010
     
     
     May 31, 2009
     
     
     May 31, 2008
     
     
     April 30, 2008Statutory tax rate
     
     29.38
     %
     
     30.38
     %
     
     30.67
     %
     
     33.08
     %(Loss) for the period
     $
     (26,982,082
     )
     $
     (21,099,866
     )
     $
     (5,544,998
     )
     $
     (16,111,008
     )Income tax recovery
     
     (7,925,987
     )
     
     (6,409,084
     )
     
     (1,700,651
     )
     
     (5,329,521
     )Permanent differences
     
     (199,709
     )
     
     (4,746,965
     )
     
     (145,691
     )
     
     508,419Income tax rate change and differential
     
     2,608,282
     
     
     5,551,802
     
     
     630,937
     
     
     4,933,488Foreign exchange
     
     522,046
     
     
     (1,131,760
     )
     
     -
     
     
     -Cost of previously unrecognized tax pools
     
     -
     
     
     1,480,781
     
     
     -
     
     
     -Change in functional currency foreign exchange impact
     
     -
     
     
     4,010,847
     
     
     -
     
     
     -Other
     
     (2,142,158
     )Change in valuation allowance
     
     7,137,526
     
     
     1,244,379
     
     
     1,215,405
     
     
     (112,386
     )Income tax recovery
     
     -
     
     
     -
     
     
     -
     
     
     -
 The significant components of the Companys future income tax assets (liabilities) are as follows: May 31, 2010
     
     
     May 31, 2009Future income tax assets (liabilities)Non-capital and other loss carry-forwards
     $
     9,684,260
     
     $
     4,573,299Equipment and exploration properties
     
     51,814
     
     
     48,335Deferred financing costs
     
     1,951,713
     
     
     2,261,949Foreign exchange gain on notes
     
     -
     
     
     (556,181
     )Senior secured notes
     
     1,333,938
     
     
     (442,636
     )Other
     
     12,852
     
     
     12,285Total future income tax assets
     $
     13,034,577
     
     $
     5,897,051Valuation allowance
     
     (13,034,577
     )
     
     (5,897,051
     )Net future income tax assets
     
     -
     
     
     -
 Page 109


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  20.
     INCOME TAXES(continued)
 The Company has non-capital losses of $38,737,039 for deduction against future years taxable income in Canada. If unutilized, these losses will expire, beginning in 2014, as follows: 2014
     
     402,7472015
     
     845,2932026
     
     1,851,8582027
     
     4,957,6042028
     
     3,883,3992029
     
     5,835,8862030
     
     20,960,252$
     38,737,039
 The Company will not be subject to any income taxes in Panama until all of the debt incurred by all of the affiliated / subsidiary companies has been repaid in full, the timing of which cannot be estimated due to the uncertainty inherent in the future price of gold. At that time the Company will be able to claim accelerated write-offs for all Panamanian subsidiaries. 21.
     COMMITMENTS
  Less than 1
     
     
     
     
     
     
     
     
     
     
     
     More thanYear
     
     
     2 Years
     
     
     3 Years
     
     
     4-5 Years
     
     
     5 YearsOffice lease
     $
     63,479
     
     $
     15,867
     
     
     Nil
     
     
     Nil
     
     
     NilEquipment lease
     $
     4,376,668
     
     $
     447,080
     
     
     Nil
     
     
     Nil
     
     
     NilSenior secured notes
     $
     26,895,996
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     NilConvertible senior secured notes
     $
     45,257,594
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     NilLong term debt
     $
     44,800
     
     $
     44,800
     
     $
     44,800
     
     
     Nil
     
     
     NilFundacion Petaquilla
     $
     1,200,000
     
     $
     1,200,000
     
     $
     1,200,000
     
     $
     1,200,000
     
     $
     3,600,000Asset retirement obligation
     
     Nil
     
     
     Nil
     
     
     Nil
     
     
     Nil
     
     $
     7,312,356
 The Company has committed funding of $100,000 per month to Fundacion Petaquilla for the life of the Molejon mine. Fundacion Petaquilla promotes a sustainable development culture, administering social programs in the area around the Molejon property. Page 110


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  22.
     FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT
 The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, currency risk, and interest rate risk. Where material, these risks are reviewed and monitored by the Board of Directors. (a) Fair Values The fair value of the Companys current assets and liabilities including cash and cash equivalents, receivables, restricted cash and accounts payable and accrued liabilities approximates their carrying values due to the immediate or short-term maturity of these financial instruments. The carrying amounts of the Companys long term debt and obligations under capital leases approximate fair value due to their interest rates being in line with market rates. The Companys senior secured notes and convertible senior secured notes are measured on initial recognition using the residual method (see Notes 14 and 15). Subsequent fair value measurement is based on a discounted cash flow model using a discount rate of 12.0% at May 31, 2010 (May 31, 2009  20.58%) and a maturity date of June 30, 2010 based on the assumption that the Company would obtain refinancing of the notes by that date. For 2009, the maturity date was set at two years from date of issue based on the ability of the note holders to demand repayment after two years and the expectation that note holders would make this demand. The amendments to Section 3862 (Note 2) introduce a fair value hierarchy that reflects the significance of inputs used in making fair value measurements as follows: Level 1  quoted prices in active markets for identical assets or liabilities; Level 2  inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices of) or indirectly (i.e. derived from prices); and Level 3  inputs for the asset or liability that are not based on observable market data. At May 31, 2010, the levels in the fair value hierarchy into which the Companys financial assets and liabilities measured and recognized in the balance sheet at fair value are categorized are as follows: Level 1
     
     
     Level 2
     
     
     Level 3Senior secured notes
     
     -
     
     
     -
     
     $
     26,646,631Convertible senior secured notes
     
     -
     
     
     -
     
     
     44,837,991
 Page 111


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  22.
     FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT(continued)
 An analysis of these notes including related gains and losses during the year is as follows: Year ended May
     
     
     Year ended31, 2010
     
     
     May 31, 2009Balance at beginning of yearSenior secured notes
     $
     29,407,502
     
     $
     26,785,359Convertible senior secured notes
     
     34,794,455
     
     
     -64,201,957
     
     
     26,785,359Payments
     
     (8,822,558
     )
     
     (64,238,852
     )Issues net of prepaid interest
     
     -
     
     
     74,587,500Redemption losses included in net income
     
     240,000
     
     
     13,130,982Mark-to-market losses included in net income
     
     15,849,408
     
     
     14,939,298Unrealized foreign exchange loss (gain) included in net income
     
     -
     
     
     (1,002,330
     )Other
     
     15,815
     
     
     -Balance at end of year
     $
     71,484,622
     
     $
     64,201,957
 (b) Financial Instrument Risk Exposure Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. The Company has reduced its credit risk by investing its cash and cash equivalents and restricted cash in term deposits with financial institutions that operate globally. There is also minimal risk associated with accounts receivable as the payment for gold sales is received prior to the gold being credited to the customers account at the refinery. Therefore, the Company is not exposed to significant credit risk and overall the Companys credit risk has not changed significantly from the prior year. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company has historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the Molejon gold project and may require doing so again in the future. On an annual basis the Company may be required to pay 35% of its distributable cash as defined in its senior secured notes and convertible senior secured notes indenture (Notes 14 and 15). The Company has been unable to meet all of its obligations with respect to scheduled repayments of principal, premium and interest on its Notes and interest on its Convertible Notes. Total payments of $10,272,950 were due in March and May 2010. Of this total, the Company has paid $1,200,000. Under the terms of the Indenture an event of default has occurred and the Notes and Convertible Notes are due on demand at the option of the Note holders and Convertible Note holders or the Trustee. Page 112


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  22.
     FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT(continued)
 Subsequent to year end, the Company entered into a prepaid gold forward facility with Deutsche Bank AG (Deutsche Bank) for $45,000,000. Upon the satisfaction of certain conditions precedent and successful completion of this transaction, net proceeds of approximately $41,000,000 will be used to extinguish a portion of the Companys Notes and Convertible Notes. (See Note 26) Market risk (i) Currency risk Financial instruments that impact the Companys net earnings or other comprehensive income due to currency fluctuations include: Canadian dollar denominated cash and cash equivalents, restricted cash, accounts receivable and accounts payable. As the Company conducts the vast majority of its activities in United States dollars, changes in the exchange rate between the Canadian dollar and the United States dollar have a minimal effect on the Companys net earnings and other comprehensive income. (ii) Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cash and cash equivalents and restricted cash bear interest at fixed rates. Other current financial assets and liabilities are not exposed to interest rate risk because they are non-interest bearing. The operating credit line facility, capital leases, and long-term debt bear interest at a fixed rate and are also not exposed to interest rate risk. (c) Capital Management The Companys objectives of capital management are intended to safeguard the entity's ability to support the Companys normal operating requirements on an ongoing basis, continue the development and exploration of its mineral properties and support any expansionary plans. The capital structure of the Company consists of long term debt (Note 10), leases (Note 13), Notes (Note 14), Convertible Notes (Note 15) and equity attributable to common shareholders, comprised of issued capital, contributed surplus and deficit. The Company manages the capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the Companys assets. To effectively manage the entitys capital requirements, the Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company has historically relied on issuance of shares, senior secured debt, convertible senior secured debt and leasing arrangements to develop the project and may require doing so again in the future. The Company is monitoring market conditions to secure funding at the lowest cost of capital. The Company is exposed to various funding and market risks which could curtail its access to funds. Page 113


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  23.
     SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
  Year ended
     
     
     Year ended
     
     
     One month ended
     
     
     Year endedMay 31, 2010
     
     
     May 31, 2009
     
     
     May 31, 2008
     
     
     April 30, 2008Non-cash investing and financing activitiesFinders fees
     $
     15,226
     
     $
     -
     
     $
     638,354
     
     $
     86,439Share issue costs
     
     (15,226
     )
     
     -
     
     
     (638,354
     )
     
     (86,439
     )Debt issuance costs
     
     -
     
     
     112,686
     
     
     -
     
     
     -Share capital warrants exercised
     
     60,429
     
     
     -
     
     
     -
     
     
     -Warrants exercised
     
     (60,429
     )
     
     (112,686
     )
     
     -
     
     
     -Share capital warrants issued in private placement
     
     (304,511
     )
     
     -
     
     
     -
     
     
     -Warrants granted in private placement
     
     304,511
     
     
     -
     
     
     -
     
     
     -Settlement of advances for deferred services
     
     -
     
     
     -
     
     
     -
     
     
     (4,404,000
     )Mineral properties
     
     (291,357
     )
     
     -
     
     
     -
     
     
     -Asset retirement obligation
     
     291,357
     
     
     -
     
     
     -
     
     
     -Share capital options exercised
     
     187,488
     
     
     -
     
     
     -
     
     
     -Contributed surplus options exercised
     
     (187,488
     )
     
     -
     
     
     -
     
     
     -Senior secured note repayment through forward sales agreement
     
     (5,129,600
     )
     
     -
     
     
     -
     
     
     -Deposits on equipment transferred to capital assets
     
     946,484
     
     
     -
     
     
     -
     
     
     -Settlement of advances for property, equipment and mineral properties
     
     -
     
     
     -
     
     
     
     
     
     (3,394,847
     )Shares issued for legal settlement
     
     -
     
     
     -
     
     
     -
     
     
     264,438Mineral properties financed through payables
     
     5,242,659
     
     
     5,147,462
     
     
     1,441,668
     
     
     2,539,496Property and equipment financed through payables
     
     -
     
     
     1,071,255
     
     
     -
     
     
     -Property and equipment acquired through credit line facility and capital leases
     
     115,700
     
     
     2,058,197
     
     
     -
     
     
     10,541,877Amortization capitalized to mineral properties
     
     1,825,067
     
     
     -
     
     
     -
     
     
     -Amortization allocated to ending inventory
     
     146,696
     
     
     -
     
     
     -
     
     
     -Depletion allocated to ending inventory
     
     281,617
     
     
     -
     
     
     -
     
     
     -Deferred services and materials financed by a reduction in amounts payable to IMN
     
     90,000
     
     
     156,597
     
     
     11,271
     
     
     135,252Interest paid in cash
     $
     4,165,274
     
     $
     14,224,440
     
     $
     5,751,180
     
     $
     68,618Income taxes paid in cash
     
     -
     
     
     -
     
     
     -
     
     
     -
  May 31, 2010
     
     
     May 31, 2009Cash and cash equivalents consist of:Cash
     $
     4,625,649
     
     $
     3,440,168Term deposits
     
     -
     
     
     135,000$
     4,625,649
     
     $
     3,575,168
 Page 114


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  24.
     ASSET RETIREMENT OBLIGATION
 The Companys asset retirement obligation relates to site restoration and cleanup costs for its Molejon gold project located in Panama. A reconciliation of the provision for asset retirement obligation is as follows: Balance at May 31, 2008
     $
     4,333,216Accretion
     
     331,504Balance at May 31, 2009
     
     4,664,720Accretion
     
     325,287Adjustment for change in estimate of timing of cash flows
     
     (291,357
     )Balance at May 31, 2010
     $
     4,698,650
 The provision for asset retirement obligation is based upon the following assumptions: d)
     The total undiscounted cash flow required to settle the obligation is approximately $7,300,000;e)
     Asset retirement obligation payments are expected to occur during fiscal years 2016 and 2017;f)
     A credit adjusted risk-free rate of 7.65% has been used to discount cash flows. 25.
     CONTINGENCIES
  1)
     On November 13, 2008 the Autoridad Nacional del Ambiente (ANAM), the environmental agency of the Government of the Republic of Panama, issued a Resolution purporting to fine the Company and its present and former affiliates US$ 1,000,000 for alleged violations of environmental laws that took place on the main Petaquilla Copper Concession in 2005 and an additional US$ 934,695 for damages. On November 26, 2008, ANAM, by Resolution, approved the Companys Environmental Impact Study (EIS) Category III submitted in July 2007 for the Molejon Gold Project. The Resolution sets out a number of conditions to be satisfied before the Company can attain full commercial production. Based on the approval of the EIS, the Company filed for reconsideration by ANAM to have the fines reduced to nil. In January 2009, the Company was advised that ANAM had not accepted the Companys request for reconsideration that the amount of the financial sanctions purportedly levied against the Company and its present and former affiliates be reduced to nil. On March 10, 2009, the Supreme Court of the Republic of Panama suspended the imposition of ANAMs fine until the matter of the Companys appeal is resolved. It is the Companys contention that the Company is required to comply with the Ministry of Industry and Commerce and ANAMs authority is limited to making recommendations. Therefore, the Company does not believe that ANAM has the ability to issue a fine under the terms of Ley Petaquilla 9 and, as such, no amount has been recorded.2)
     The Ministry of Industry and Commerce has indicated that the Government of Panama would like to increase royalties on metal sales from 2% to 4%. This would require a legislative change and the timing and degree of certainty of this are not known at this time. The effect of increasing royalties by 2% on the Companys operations and financial position for the current year would be an increase in cost of sales of $502,386 and an increase in accounts payable of $502,386.3)
     During the year ending May 31, 2008, the Company was served with a claim by a former officer in the amount of $250,000. This matter will be going to mediation in fiscal 2011. The Company believes that the claim is without merit and has not recorded a liability as the outcome is uncertain and the amount that could be paid, if any, is not determinable. 4)
     The Company is engaged in certain other legal actions in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position. Page 115


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  26.
     SUBSEQUENT EVENTS
  Subsequent to May 31, 2010 the following events took place: 1)
     On August 17, 2010, the Company entered into a Forward Gold Purchase Agreement with Deutsche Bank, AG (Deutsche Bank). Subject to the satisfaction of certain conditions precedent and the successful completion of the transaction, Deutsche Bank will make an upfront payment of $45,000,000 in exchange for the Company delivering 68,243 ounces of gold over a five year period. Based on the price of gold at the time of delivery, Deutsche Bank may be required to make additional payments to the Company as gold is delivered. If the transaction is completed, the upfront payment, net of estimated restructuring, legal and finders fees of approximately $4,000,000, will be used to prepay a portion of the Notes and Convertible Notes (See Notes 14 and 15).2)
     As a condition precedent to completing the forward gold sale with Deutsche Bank, the holders of the Notes and Convertible Notes will be required to enter into an Inter-Creditor Agreement with Deutsche Bank and the Company. While these agreements are not final, management expects that the impact of the Inter-Creditor Agreement on the Notes and Convertible Notes will be as follows:a)
     the security for the Notes and Convertible Notes will become subordinated to the security granted under the Forward Gold Purchase Agreement with Deutsche Bank;b)
     no interest or principal payments will be required on the Notes or Convertible Notes for the first six months after the effective date of the Inter-Creditor Agreement. After the first six months, the Company is only required to make scheduled interest payments on the Notes and Convertible Notes as they become due until the Notes and Convertible Notes mature five years and one day after closing of the Forward Gold Purchase Agreement with Deutsche Bank;c)
     until the Companys obligations under the Forward Gold Purchase Agreement with Deutsche Bank are satisfied, the holder of the Notes and Convertible Notes are not permitted to take any action as a result of an event of default that has occurred pursuant to the indenture (See Notes 14 and 15);d)
     if the Company is able to negotiate new financing arrangements satisfying certain conditions, the proceeds of such financing will be used to prepay the outstanding balance of principal, premium and interest on the Notes and Convertible Notes.3)
     If the Forward Gold Purchase Agreement with Deutsche Bank is successfully completed, the Company has agreed to pay the Chairman $100,000 as a bonus for partial prepayment of the Notes and Convertible Notes. When the Company repays the remaining amount outstanding on the Notes and Convertible Notes, the Chairman will be entitled to receive an additional bonus payment of $150,000.4)
     As a condition precedent to the completion of the Forward Gold Purchase Agreement with Deutsche Bank, Daniel Small resigned as a director of the Company on August 16, 2010.5)
     In August 2010, the holders of the Notes and Convertible Notes requested an additional 2% in interest on the outstanding balance payable, effective March 15, 2010, as consideration for the holders not issuing a written notice that an event of default had occurred which could have required immediate repayment of the Notes and Convertible Notes. The Company has agreed to pay this additional interest.6)
     The term of 188,800 options, which were to expire on July 11, 2010, was extended for one year and 100,000 options were exercised.
  Page 116


---

PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
  These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). Material variations in the accounting principles, practices and methods used in preparing these financial statements from United States Generally Accepted Accounting Principles (U.S. GAAP) are described and quantified below. Loss for the periodsYear ended
     
     
     Year endedMay 31, 2010
     
     
     May 31, 2009(Loss) for the period  Canadian GAAP
     $
     (26,982,082
     )
     $
     (21,099,866
     )Gain on dilution of equity investment (a)
     
     -
     
     
     (2,238,492
     )Mineral properties expensed under U.S. GAAP (b)
     
     (3,411,935
     )
     
     (17,562,548
     )Revenue recognized (i)
     
     27,948,475
     
     
     653,941Cost of goods sold (i)
     
     (24,275,977
     )
     
     (1,260,127
     )Amortization (i)
     
     (1,825,067
     )
     
     (640,425
     )Amortization of ball mills included in mineral properties under U.S. GAAP (i)
     
     (419,345
     )
     
     -Depletion of mineral properties under Canadian GAAP (i)
     
     3,338,116
     
     
     -Loss of variable interest entity under US GAAP (k)
     
     69,765Expensing of opening inventory reclassified in prior year
     
     (2,868,999
     )
     
     -Write down of inventory in finished goods and work in progress
     
     -
     
     
     (2,404,695
     )Change in fair value of warrants denominated in Canadian dollars under U.S. GAAP (j)
     
     1,692,320
     
     
     22,871,582Change in fair value of share capital issued with warrants denominated in Canadian dollars under U.S. GAAP (j)
     
     58,824
     
     
     --Foreign exchange on difference in mineral properties expensed under U.S. GAAP
     
     -
     
     
     (9,639,262
     )Foreign exchange on difference in senior secured notes under U.S. GAAP
     
     -
     
     
     3,180,313Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP (f)
     
     -
     
     
     (18,712,488
     )Net loss  U.S. GAAP
     $
     (26,675,905
     )
     $
     (46,852,067
     )Other comprehensive (loss) gainUnrealized (loss) gain on translating financial statements to U.S. reporting currency
     
     -
     
     
     (4,648,716
     )Foreign exchange on difference in mineral properties expensed under U.S. GAAP
     
     -
     
     
     9,639,262Foreign exchange on difference in senior secured notes under U.S. GAAP
     
     -
     
     
     (3,180,313
     )Comprehensive loss for the year
     $
     (26,675,905
     )
     $
     (45,041,834
     )Basic and diluted loss per share  U.S. GAAP
     $
     (0.25
     )
     $
     (0.49
     )
  Page 117


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  Loss for the periodsOne monthended May 31,2008
     
     
     Year endedApril 30,2008(Loss) for the period  Canadian GAAP
     $
     (5,544,998
     )
     $
     (16,111,007
     )Gain on dilution of equity investment (a)
     
     -
     
     
     (12,582,085
     )Mineral properties expensed under U.S. GAAP (b)
     
     (1,884,160
     )
     
     (22,680,970
     )Foreign exchange on difference in mineral propertiesexpensed under U.S. GAAP
     
     -
     
     
     1,622,000Additional loss relating to redemption andmodification of senior secured note agreement under
     
     3,831,931
     
     
     -Net loss  U.S. GAAP
     $
     (3,597,227
     )
     $
     (49,752,062
     )Other comprehensive (loss) gainUnrealized (loss) gain on translating financialstatements to U.S. reporting currency
     
     487,574
     
     
     716,555Foreign exchange on difference in mineralproperties expensed under U.S. GAAP
     
     -
     
     
     (1,622,000
     )Foreign exchange on difference in senior securednotes under U.S. GAAP
     
     -
     
     
     -Comprehensive loss for the year
     $
     (3,106,653
     )
     $
     (50,657,507
     )Basic and diluted loss per share  U.S. GAAP
     $
     (0.04
     )
     $
     (0.53
     )Mineral Properties
     
     May 31, 2010
     
     
     May 31, 2009Mineral properties  Canadian GAAP
     $
     58,788,272
     
     $
     60,843,501Amortization (i)
     
     (2,465,492
     )
     
     (640,425
     )Revenue recognized under U.S. GAAP (i)
     
     28,602,416
     
     
     653,941Cost of goods sold (i)
     
     (25,536,104
     )
     
     (1,260,127
     )Depletion of mineral properties under Canadian GAAP (i)
     
     3,619,733
     
     
     -Amortization of ball mills included in mineral properties under U.S. GAAP (i)
     
     (419,345
     )
     
     -Inventory write-down (i)
     
     -
     
     
     (2,404,695
     )Reclassification of work-in-progress and finished goods to current assets
     
     -
     
     
     (2,868,999
     )Mineral properties expensed under U.S. GAAP (b)
     
     (60,036,692
     )
     
     (51,350,063
     )Mineral properties  U.S. GAAP
     $
     2,552,788
     
     $
     2,973,133
  Page 118


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  Balance Sheets
     
     May 31 2010
     
     
     May 31 2009Total assets  Canadian GAAP
     $
     80,262,195
     
     $
     81,543,823Depletion of mineral properties added to ending inventory (i)
     
     (281,617
     )
     
     -Mineral properties expensed or charged to cost of sales and revenue under U.S. GAAP (b)(i)
     
     (56,235,484
     )
     
     (55,001,369
     )Total assets  U.S. GAAP
     $
     23,745,094
     
     $
     26,542,454Liabilities  Canadian GAAP
     $
     101,615,310
     
     $
     90,464,111Derivative liability  warrants (j)
     
     4,965,589
     
     
     6,292,830Equity component of convertible debt treated as a liability under U.S. GAAP (g)
     
     177,778
     
     
     495,121Liabilities  U.S. GAAP
     $
     106,758,677
     
     $
     97,252,062Shareholders equity (deficit) - Canadian GAAP
     $
     (21,353,115
     )
     $
     (8,920,288
     )Mineral properties expensed or charged to cost of sales and revenue under U.S. GAAP (b)(i)
     
     (56,235,484
     )
     
     (55,001,369
     )Exercise of warrants denominated in Canadian dollars under U.S. GAAP (j)
     
     272,000Depletion added to ending inventory
     
     (281,617
     )
     
     -(Decrease) increase in retained earnings due to translation of prior year mineral property expenses and senior secured notes
     
     (4,564,949
     )
     
     (4,564,949
     )Difference in accumulated other comprehensive income
     
     4,564,949
     
     
     4,564,949Increase in net income due to the change in fair value of warrants denominated in Canadian dollars under U.S. GAAP (j)
     
     22,883,272
     
     
     22,871,582Decrease in warrants due to fair value of warrants denominated in Canadian dollars under U.S. GAAP (j)
     
     (28,120,861
     )
     
     (29,164,412
     )Additional loss relating to redemption and modification of senior secured note agreement under U.S. GAAP (f)
     
     (14,591,713
     )
     
     (14,903,816
     )Allocation of fair value of senior secured notes under U.S. GAAP (f)
     
     14,591,713
     
     
     14,903,816Equity component of convertible debenture treated as a liability under U.S. GAAP (g)
     
     (177,778
     
     
     (495,121
     )Shareholders equity (deficit)  U.S. GAAP
     $
     (83,013,583
     )
     $
     (70,709,608
     )Statement of Cash Flows
     
     Year endedMay 31, 2010
     
     
     Year endedMay 31, 2009Cash provided by (used in) operating activities  Canadian GAAP
     $
     500,846
     
     $
     (16,010,085
     )Revenues and expenses charged to mineral properties under Canadian GAAP
     
     3,672,498
     
     
     -Expenditures on mineral properties
     
     (3,411,935
     )
     
     (27,201,810
     )Cash provided by (used in) operating activities  U.S.
     $
     761,409
     
     $
     (43,211,895
     )Cash provided by (used in) financing activities  Canadian GAAP
     $
     6,354,018
     
     $
     (1,260,198
     )Cash provided by (used in) financing activities  U.S. GAAP
     $
     6,354,018
     
     $
     (1,260,198
     )Cash from (used in) investing activities  Canadian GAAP
     $
     (5,804,679
     )
     $
     8,164,377Revenues and expenses charged to mineral properties under Canadian GAAP
     
     (3,672,498
     
     
     -Expenditures on mineral properties
     
     3,411,935
     
     
     27,201,810Cash from (used in) investing activities  U.S. GAAP
     $
     (6,065,242
     
     $
     35,366,187Cash and cash equivalents, end of period  Canadian GAAP
     $
     4,625,649
     
     $
     3,575,168Cash and cash equivalents, end of period  U.S. GAAP
     $
     4,625,649
     
     $
     3,575,168
  Page 119


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  Statement of Cash Flows
     
     One month endedMay 31, 2008
     
     
     Year endedApril 30, 2008Cash (used in) provided by operating activities  Canadian GAAP
     $
     (10,134,316
     )
     $
     (6,667,860
     )Expenditures on mineral properties
     
     (1,884,160
     )
     
     (21,058,970
     )Cash used in operating activities  U.S. GAAP
     $
     (12,018,476
     )
     $
     (27,726,830
     )Cash from (used in) financing activities  Canadian
     $
     23,380,108
     
     $
     30,654,125Cash from (used in) financing activities  U.S. GAAP
     $
     23,380,108
     
     $
     30,654,125Cash from (used in) investing activities  Canadian GAAP
     $
     (1,289,902
     )
     $
     (19,977,584
     )Expenditures on mineral properties
     
     1,884,160
     
     
     21,058,970Cash from investing activities  U.S. GAAP
     $
     594,258
     
     $
     1,081,386Cash and cash equivalents, end of period  Canadian GAAP
     $
     12,850,137
     
     $
     1,766,256Cash and cash equivalents, end of period  U.S. GAAP
     $
     12,850,137
     
     $
     1,766,256
  a)
     Equity investment in Petaquilla Copper Ltd.Under U.S. GAAP, changes in the parent companys proportionate share of equity resulting from the additional equity raised by an entity subject to significant influence in the development stage are accounted for as an equity transaction on consolidation. Under Canadian GAAP, these gains have been credited to income.b)
     Mineral properties and deferred costsMineral property costs and related exploration expenditures are accounted for in accordance with Canadian GAAP as disclosed in Note 2. For U.S. GAAP purposes, the Company expenses, as incurred, the exploration costs related to unproven mineral properties. When proven and probable reserves are determined for a property and a feasibility study is prepared, then subsequent exploration and development costs of the property would be capitalized. The capitalized costs of such properties are measured periodically for recoverability of carrying values.c)
     Development stage companyPursuant to U.S. GAAP, the Company would be subject to the disclosure requirements applicable to a development stage enterprise as the Company is devoting its efforts to establishing commercially viable mineral properties. However, the identification of the Company as such for accounting purposes does not impact the measurement principles applied to these consolidated financial statements.d)
     Income taxesUnder Canadian GAAP, future tax assets and liabilities are recorded at substantively enacted tax rates. Under U.S. GAAP, deferred tax assets and liabilities are recorded at enacted rates. There were no significant differences between enacted and substantively enacted rates for the periods presented.e)
     Accounting for uncertainty in income taxesU.S. GAAP provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return.
  Page 120


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  Effective May 1, 2007 the Company adopted the U.S. GAAP guidance in accounting for uncertainty in income taxes. The adoption did not result in any adjustment to opening retained earnings under U.S. GAAP. As a result of the implementation of this guidance, the Company did not recognize any liabilities for unrecognized tax benefits. In the event that the Company recognizes accrued interest related to unrecognized tax benefits, it will be recorded in interest expense. Any penalties will be recorded in general and administrative expenses.
      The Company is subject to taxation in Canada and various other foreign jurisdictions. The Company is currently open to audit under the statute of limitations by the Canada Revenue Agency for years ended January 31, 2006 through May 31, 2010.f)
     Senior secured notesUnder Canadian GAAP, compound financial instruments can be accounted for using the residual method when allocating between the liability and the equity component of the instrument. Under U.S. GAAP, compound financial instruments are accounted for using the fair value method when allocating between the liability and the equity component. On the modification of the senior secured note agreement on March 25, 2009, the senior secured notes were required to be marked- to-market and the Company recognized additional losses relating to redemption and inception losses in the amount of $14,903,816. This resulted in harmonizing both Canadian GAAP and U.S. GAAP with no differences going forward. In the current year, a portion of the warrants were exercised and this amount decreased to $14,591,173.g)
     Convertible senior secured notesUnder U.S. GAAP, convertible debt instruments are classified as debt until converted to equity, whereas under Canadian GAAP, the proceeds of the convertible debt instrument are allocated to both debt and equity components, with the debt component being accreted over time to its face value and accretion charged to earnings. Under U.S. GAAP, a value is assigned to the conversion feature only if the effective conversion rate is less than the market price of the common stock at the commitment date. No value would be assigned under U.S. GAAP to the conversion feature and thus, the entire value of the convertible notes is classified as debt. This difference resulted in liabilities being increased by $177,778 and shareholders equity being decreased by $177,778.h)
     Deferred financing costsU.S. GAAP requires that debt issuance costs be reported in the balance sheet as deferred charges and amortized over the term of the debt. Upon issuance, the Company reduced the carrying value of the senior secured notes by debt issuance costs. On modification of the senior secured note agreement as stated above in (g), an inception loss wrote off all deferred financing costs. No differences exist for the period ended May 31, 2010.i)
     Commencement of productionUnder Canadian GAAP, the Company uses specific criteria to assess the point at which an operation commences commercial production (Note 2). Under U.S. GAAP, commercial production is considered to have commenced when saleable minerals are extracted (produced) from an ore body, regardless of the level of production. However, commercial production does not commence with the removal of de minimus saleable mineral material that occurs in conjunction with the removal of overburden or waste material for the purpose of obtaining access to an ore body. For the year ended May 31, 2010, there was one Canadian/U.S. GAAP difference with respect to the determination of commercial production.
  Page 121


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  Under Canadian GAAP, up until January 7, 2010, the Molejon gold mine was at a pre-commercial production phase whereas for U.S. GAAP purposes, commercial production commenced on the date on which revenue was earned from the sale of gold. For U.S. GAAP purposes, the impact of this difference was to increase revenues, cost of sales and amortization and decrease depletion for the year ended May 31, 2010 by $27,948,475, $24,275,977, $1,825,067 and $3,338,116 respectively, and increase mineral properties and net earnings for the year ended May 31, 2010 by $8,054,546, and $5,185,547, respectfully.j)
     WarrantsUnder Canadian GAAP share purchase warrants are accounted for as equity. Under US GAAP, as required by the Financial Accounting Standards Board (FASB) issued ASC Topic 815 (formerly, SFAS 133 Accounting for Derivative Instruments and Hedging Activities), as amended, and EITF 07-5 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock, share purchase warrants denominated in a currency that is not the functional currency of the Company are accounted for as a liability, with the change in fair value recorded in the statement of operations.For the year ended May 31, 2010, under U.S. GAAP, other income was increased by $1,751,114 arising from a decrease in fair value of the warrants granted in which the exercise price denominated currency is different from the Companys functional currency. As of May 31, 2010, the liability relating to warrants granted for which the exercise price denominated currency is different from the Companys functional currency was $4,965,589 and the warrant account was reduced by $28,120,861 as a result of the reclassification of the warrants to liabilities pursuant to U.S. GAAP.k)
     Under Canadian GAAP, the financial position and results of operations of a variable interest entity are consolidated with those of the Company designated as the primary beneficiary of the entity even though the Company may not hold the controlling interest in the entity. Under ASC 810, non-controlling interests are classified as a separate component of shareholders equity. Under ASC 810, accumulated losses attributable to non-controlling interests are not limited to the original carrying amount, and therefore non-controlling interests could have a negative carrying amount.l)
     Adoption of new accounting policiesDuring the first quarter of fiscal 2010, the Company adopted the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles in accordance with FASB ASC Topic 105,Generally Accepted Accounting Principles(the Codification). The Codification has become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Effective with the Companys adoption on July 1, 2009, the Codification has superseded all prior non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. As the adoption of the Codification only affected how specific references to GAAP literature have been disclosed in the notes to our condensed consolidated financial statements, it did not result in any impact on the Companys results of operations, financial condition, or cash flows.In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC filer to disclose a date in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company adopted ASU 2010-09 in February 2010 and did not disclose the date the financial statements are available to be issued.
  Page 122


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  In December 2007, the FASB issued authoritative guidance related to non-controlling interests in consolidated financial statements, which was an amendment of ARB No. 51. This guidance is set forth in ASC 810, Consolidation. ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This accounting standard is effective for fiscal years beginning on or after December 15, 2008, which for the Company was the fiscal year beginning June 1, 2009. The Company adopted ASC 810 at June 1, 2009 and the adoption did not have any impact on the consolidated financial statements.In April 2009, the FASB issued ASC 820-10-65 formerly FASB Staff Position FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4). This provides significant guidance for determining when a market has become inactive as well as guidance for determining whether transactions are not orderly. It also provides guidance on the use of valuation techniques and the use of broker quotes and pricing services. It reiterates that fair value is based on an exit price and also that fair value is market-driven and not entity-specific. The accounting standard of codification applies to all assets and liabilities within the scope of ASC 820 and is effective for all interim and annual periods ending after June 15, 2009. The adoption of ASC 820-10-65 did not have a material effect on the Companys results of operations, financial position, and cash flows.In June 2008, the FASB Task Force reached a consensus on EITF Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Equitys Own Stock (EITF 07-5). The standard provides that an equity linked financial instrument (or embedded derivative) would not be considered indexed to the entitys own stock if the strike price is denominated in a currency other than the issuers functional currency. EITF 07-5 is effective for periods beginning on or after December 15, 2008. The adoption of this standard did not have any impact on the Companys consolidated financial statements.In December 2007, the FASB issued a revised standard on accounting for business combinations (SFAS-141R). The statement is effective for periods beginning on or after December 15, 2008. SFAS-141R requires fair value measurement for all business acquisitions including pre-acquisition contingencies. The standard also expands the existing definition of a business and removes certain acquisition related costs from the purchase price consideration. The adoption of this standard had no impact on the Companys consolidated financial statements.m)
  Recent Account PronouncementsOn January 21, 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amends guidance on employers' disclosures about postretirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The ASU is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2009-06 to have a material impact on the financial statements.
  Page 123


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PETAQUILLA MINERALS LTD.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in United States Dollars)Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008 and Year Ended April 30, 2008
  27.
     DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(continued)
  In June 2009, the FASB issued ASU 2009-17. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The standard will be effective for the years beginning after November 19, 2009 and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2009-17 to have a material impact on the financial statements. In September 2009, the FASB issued authoritative guidance regarding multiple-deliverable revenue arrangements. This guidance addresses how to separate deliverables and how to measure and allocate consideration to one or more units of accounting. Specifically, the guidance requires that consideration be allocated among multiple deliverables based on relative selling prices. The guidance establishes a selling price hierarchy of (1) vendor-specific objective evidence, (2) third-party evidence and (3) estimated selling price. This guidance is effective for annual periods beginning after June 15, 2010 but may be early adopted as of the beginning of an annual period. The Company is currently evaluating the effect that this guidance will have on consolidated financial position and results of operations. Page 124


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ITEM 18.
     FINANCIAL STATEMENTS
  Please refer to Item 17  Financial Statements. ITEM 19.
     EXHIBITS
  (a) Financial Statements Description of Document Cover Sheet Management Report on Internal Controls over Financial Reporting Report of Independent Auditors dated August 30, 2010 Report of Independent Auditors on Internal Controls over Financial Reporting Balance Sheets as at May 31, 2010 and May 31 2009 Consolidated Statements of Operations and Deficit for Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008, and Year Ended April 30, 2008 Consolidated Statements of Shareholders Equity Consolidated Statements of Cash Flows for Year Ended May 31, 2010, Year Ended May 31, 2009, One Month Ended May 31, 2008, and Year Ended April 30, 2008 Notes to the Consolidated Financial Statements (b) Exhibits ExhibitNumber
     Description of Document*1.A.
     Memorandum of Incorporation and Articles of Petaquilla Minerals Ltd.*2.A.
     Shareholder Rights Plan*2.B.
     Amended and Restated Senior Secured Notes Indenture between Petaquilla Minerals Ltd. and Computershare Trust Company of Canada made as of March 25, 2009*3.B.
     Special Resolution dated June 8, 1995, increasing the authorized share capital of Petaquilla Minerals Ltd.*4.F.
     Option Agreement dated August 10, 1993, between Petaquilla Minerals, S.A., Madison Enterprises Corp. and Madison Enterprises (Latin America), S.A. with respect to the Belencillo Property.*4.G.
     Association Agreement dated September 23, 1994, as amended, between Petaquilla Minerals, S.A. and Madison Enterprises (Latin America), S.A., with respect to the Belencillo Property*4.I.
     Option Agreement dated February 17, 1994, between Petaquilla Minerals, S.A. and Arlo Resources Ltd. with respect to the Oro del Norte Property*4.J.
     Option Agreement dated February 17, 1994, between Petaquilla Minerals, S.A. and Arlo Resources Ltd. with respect to the Santa Lucia Property*4.K.
     Option Agreement dated January 27, 1994, between Petaquilla Minerals, S.A. and Silverstone Resources Ltd. with respect to the La Esperanza Property*4.L.
     Option Agreement dated November 7, 1994, between Petaquilla Minerals, S.A., Arlo Resources Ltd. and Arlo Resources (Panama), S.A. with respect to the Iglesias Property
  Page 125


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*4.O.
     Petaquilla Shareholders Agreement dated February 21, 1997, between Petaquilla Minerals Ltd., Teck Corporation, Inmet Mining Corporation, Georecursos Internacional, S.A. and Minera Petaquilla, S.A.*4.S.
     Assignment dated May 23, 2000, between Adrian Resources (Colorado) Ltd. and Hyperion Resources (Colorado) Ltd. respecting the Baca Ranch Property*4.T.
     Molejon Gold Project Agreement dated June 2, 2005, among Petaquilla Minerals Ltd., Teck Cominco Limited, Inmet Mining Corporation and Minera Petaquilla, S.A.*4.V.
     Law No. 9, dated February 26, 1997, of the Legislative Assembly of Panama (original Spanish version)*4.W.
     Law No. 9, dated February 26, 1997, of the Legislative Assembly of Panama (English translation of original Spanish version)*8
     Subsidiaries of Petaquilla Minerals Ltd.*11.A.
     Code of Business Ethics and Conduct dated May 31, 2008*11.B.
     Whistle-Blower Policy dated May 31, 200812.A.
     Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 200212.B.
     Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 200213.A.
     Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.B.
     Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *
     These exhibits were previously filed with Petaquilla Minerals Ltd.'s Registration Statement or a previousAnnual Report on Form 20-F (file no. 000-26296).
  Page 126


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SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, hereunto duly authorized. Dated at Vancouver, British Columbia, this 30th day of August, 2010. PETAQUILLA MINERALS LTD. By:
     /s/ Joao Manuel
     By: /s/ Julie van BaarsenJoao Manuel, President and Chief Executive Officer
     Julie van Baarsen, Chief Financial Officer(principal executive officer)
     (principal financial and accounting officer)
  Page 127


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EXHIBIT 12.A CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT 2002 I, Joao Manuel, President and Chief Executive Officer of Petaquilla Minerals Ltd., certify that: 1.
     I have reviewed this annual report on Form 20-F of Petaquilla Minerals Ltd.;2.
     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.
     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.
     The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:(a)
     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;(b)
     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;(c)
     Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)
     Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and5.
     The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):(a)
     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and(b)
     Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
  Date:
     August 30, 2010By:
     /s/ Joao ManuelJoao ManuelPresident and Chief Executive Officer(principal executive officer)
  Page 128


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EXHIBIT 12.B CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 
SECTION 302 OF THE SARBANES-OXLEY ACT 2002 I, Julie van Baarsen, Chief Financial Officer of Petaquilla Minerals Ltd., certify that: 1.
     I have reviewed this annual report on Form 20-F of Petaquilla Minerals Ltd.;2.
     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.
     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.
     The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:(a)
     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;(b)
     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;(c)
     Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)
     Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and5.
     The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):(a)
     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and(b)
     Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting.
  Date:
     August 30, 2010By:
     /s/ Julie van Baarsen Julie van BaarsenChief Financial Officer(principal financial officer)
  Page 129


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EXHIBIT 13.A CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Annual Report of Petaquilla Minerals Ltd. (the Company) on Form 20-F for the fiscal period ended May 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Joao Manuel, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: 1.
     The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and2.
     The information contained in the Report fairly presents, in all materials respects, the financial condition and results of operations of the Company.
  /s/Joao Manuel 
Joao Manuel
(principal executive officer) 
Dated: August 30, 2010 The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Page 130


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EXHIBIT 13.B CERTIFICATION PURSUANT TO 
18 U.S.C. SECTION 1350, 
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with Annual Report of Petaquilla Minerals Ltd. (the Company) on Form 20-F for the fiscal period ended May 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Julie van Baarsen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: 3.
      The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and4.
     The information contained in the Report fairly presents, in all materials respects, the financial condition and results of operations of the Company.
 /s/ Julie van Baarsen 
  Julie van Baarsen
  (principal financial and accounting officer) 
  Dated: August 30, 2010 The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. Page 131


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