UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended October 31, 2009





OR





 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period
from               to





Commission
File Number:  0-13078





CAPITAL GOLD CORPORATION


(Exact
name of registrant as specified in its charter)





DELAWARE
                
                13-3180530(State or other jurisdiction of
                
                (I.R.S. Employerincorporation or organization)
                
                Identification No.)





76 Beaver Street,
14thfloor, New York, NY
10005


(Address
of principal executive offices)





Registrant’s
telephone number, including area code:     (212)
344-2785












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 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes     x                No
 ̈





Indicate
by check mark whether the registrant 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 12 months (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 or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer     ̈
            
            Accelerated
      filerxNon-accelerated
      filer       ̈
            
            Smaller
      reporting company  ̈(do
      not check if smaller reporting company)





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





Indicate
the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.





Class
                    
                    Outstanding at December 1, 2009Common
      Stock, par value $.0001 per share
                    
                    
                    193,973,949








PART I.  FINANCIAL
INFORMATION




Item
1.  Financial
Statements





The
accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring adjustments), which
we consider necessary for the fair presentation of results for the three months
ended October 31, 2009.





Moreover,
these financial statements do not purport to contain complete disclosure in
conformity with U.S. generally accepted accounting principles and should be read
in conjunction with our audited financial statements at, and for the fiscal year
ended July 31, 2009.





The
results reflected for the three months ended October 31, 2009 are not
necessarily indicative of the results for the entire fiscal year ending July 31,
2010.


-2-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEET


(in
thousands, except for share and per share amounts)





October 31,
                      2009
                      (unaudited)
                    
                    
                    July 31,
                      2009ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                    
                    $
                    6,773
                    
                    
                    $
                    6,448Accounts
      Receivable
                    
                    
                    2,043
                    
                    
                    
                    2,027Stockpiles
      and Ore on Leach Pads (Note 6)
                    
                    
                    23,412
                    
                    
                    
                    20,024Material
      and Supply Inventories (Note 5)
                    
                    
                    1,576
                    
                    
                    
                    1,381Deposits
                    
                    
                    32
                    
                    
                    
                    26Marketable
      Securities  (Note 4)
                    
                    
                    40
                    
                    
                    
                    35Prepaid
      Expenses
                    
                    
                    257
                    
                    
                    
                    277Loans
      Receivable – Affiliate (Note 12 and 15)
                    
                    
                    33
                    
                    
                    
                    33Other
      Current Assets (Note 8)
                    
                    
                    989
                    
                    
                    
                    1,042Total
      Current Assets
                    
                    
                    35,155
                    
                    
                    
                    31,293Mining
      Concessions (Note 11)
                    
                    
                    52
                    
                    
                    
                    51Property
      & Equipment – net (Note 9)
                    
                    
                    23,166
                    
                    
                    
                    22,417Intangible
      Assets – net (Note 10)
                    
                    
                    575
                    
                    
                    
                    318Other
      Assets:Deferred
      Financing Costs
                    
                    
                    378
                    
                    
                    
                    424Deferred
      Tax Asset (Note 20)
                    
                    
                    32
                    
                    
                    
                    32Security
      Deposits
                    
                    
                    66
                    
                    
                    
                    66Total
      Other Assets
                    
                    
                    476
                    
                    
                    
                    522Total
      Assets
                    
                    $
                    59,424
                    
                    
                    $
                    54,601LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                    
                    $
                    1,946
                    
                    
                    $
                    988Accrued
      Expenses (Note 19)
                    
                    
                    2,759
                    
                    
                    
                    1,633Derivative
      Contracts (Note 18)
                    
                    
                    154
                    
                    
                    
                    193Deferred
      Tax Liability (Note 20)
                    
                    
                    4,286
                    
                    
                    
                    4,233Current
      Portion of Long-term Debt (Note 17)
                    
                    
                    3,600
                    
                    
                    
                    3,600Total
      Current Liabilities
                    
                    
                    12,745
                    
                    
                    
                    10,647Reclamation
      and Remediation Liabilities (Note 13)
                    
                    
                    1,652
                    
                    
                    
                    1,594Other
      liabilities
                    
                    
                    79
                    
                    
                    
                    78Long-term
      Debt (Note 17)
                    
                    
                    3,500
                    
                    
                    
                    4,400Total
      Long-term Liabilities
                    
                    
                    5,231
                    
                    
                    
                    6,072Commitments
      and Contingencies
                    
                    
                    -
                    
                    
                    
                    -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share;Authorized
      300,000,000 shares; Issued andOutstanding
      193,850,595 and 193,855,555 shares, respectively
                    
                    
                    19
                    
                    
                    
                    19Additional
      Paid-In Capital
                    
                    
                    64,133
                    
                    
                    
                    64,057Accumulated
      Deficit
                    
                    
                    (19,150
                    )
                    
                    
                    (22,089
                    )Deferred
      Financing Costs
                    
                    
                    (1,607
                    )
                    
                    
                    (1,808
                    )Deferred
      Compensation
                    
                    
                    (201
                    )
                    
                    
                    (319
                    )Accumulated
      Other Comprehensive Income (Note 14)
                    
                    
                    (1,746
                    )
                    
                    
                    (1,978
                    )Total
      Stockholders’ Equity
                    
                    
                    41,448
                    
                    
                    
                    37,882Total
      Liabilities and Stockholders’ Equity
                    
                    $
                    59,424
                    
                    
                    $
                    54,601


The
accompanying notes are an integral part of the financial
statements.


-3-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


(in
thousands, except for share and per share amounts)





For The Three Months EndedOctober 31,2009
                  
                  
                  2008RevenuesSales
      – Gold, net
                  
                  $
                  11,727
                  
                  
                  $
                  9,175Costs
      and Expenses:Costs
      Applicable to Sales
                  
                  
                  4,110
                  
                  
                  
                  3,042Depreciation
      and Amortization
                  
                  
                  843
                  
                  
                  
                  703General
      and Administrative
                  
                  
                  1,630
                  
                  
                  
                  1,378Exploration
                  
                  
                  331
                  
                  
                  
                  490Total
      Costs and Expenses
                  
                  
                  6,914
                  
                  
                  
                  5,613Income
      (Loss) from Operations
                  
                  
                  4,813
                  
                  
                  
                  3,562Other
      Income (Expense):Interest
      Income
                  
                  
                  3
                  
                  
                  
                  13Interest
      Expense
                  
                  
                  (134
                  )
                  
                  
                  (200
                  )Other
      Expense
                  
                  
                  (24
                  )
                  
                  
                  (208
                  )Loss
      on change in fair value of derivative
                  
                  
                  -
                  
                  
                  
                  (304
                  )Total
      Other Expense
                  
                  
                  (155
                  )
                  
                  
                  (699
                  )Income
      before Income Taxes
                  
                  
                  4,658
                  
                  
                  
                  2,863Income
      Tax Expense
                  
                  
                  (1,719
                  )
                  
                  
                  (927
                  )Net
      Income
                  
                  $
                  2,939
                  
                  
                  $
                  1,936Income
      Per Common ShareBasic
                  
                  $
                  0.02
                  
                  
                  $
                  0.01Diluted
                  
                  $
                  0.01
                  
                  
                  $
                  0.01Basic
      Weighted Average Common Shares Outstanding
                  
                  
                  193,929,600
                  
                  
                  
                  192,843,875Diluted
      Weighted Average Common Shares Outstanding
                  
                  
                  199,987,460
                  
                  
                  
                  198,342,324





The
accompanying notes are an integral part of the financial
statements.


-4-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


(in
thousands, except for share and per share amounts)





AccumulatedAdditional
                  
                  
                  
                  
                  
                  Other
                  
                  
                  Deferred
                  
                  
                  
                  
                  
                  TotalCommon Stock
                  
                  
                  paid-in-
                  
                  
                  Accumulated
                  
                  
                  Comprehensive
                  
                  
                  Financing
                  
                  
                  Deferred
                  
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Income/(Loss)
                  
                  
                  Costs
                  
                  
                  Compensation
                  
                  
                  EquityBalance
      at July 31, 2009
                  
                  
                  193,855,555
                  
                  
                  $
                  19
                  
                  
                  $
                  64,057
                  
                  
                  $
                  (22,089
                  )
                  
                  $
                  (1,978
                  )
                  
                  $
                  (1,808
                  )
                  
                  $
                  (319
                  )
                  
                  $
                  37,882Amortization
      of deferred finance costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  201
                  
                  
                  
                  -
                  
                  
                  
                  201Equity
      based compensation
                  
                  
                  (166,667
                  )
                  
                  
                  -
                  
                  
                  
                  23
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  118
                  
                  
                  
                  141Common
      stock issued upon the exercising of options and warrants
                  
                  
                  161,707
                  
                  
                  
                  -
                  
                  
                  
                  53
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53Net
      income for the three months ended October 31, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,939
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  2,939Change
      in fair value on interest rate swaps
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  39
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  39Unrealized
      loss on marketable securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5Equity
      adjustment from foreign currency translation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  188
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  188Total
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,171Balance
      at October 31, 2009
                  
                  
                  193,850,595
                  
                  
                  $
                  19
                  
                  
                  $
                  64,133
                  
                  
                  $
                  (19,150
                  )
                  
                  $
                  (1,746
                  )
                  
                  $
                  (1,607
                  )
                  
                  $
                  (201
                  )
                  
                  $
                  41,448





The accompanying notes are an integral
part of the financial statements.


-5-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


(in
thousands, except for share and per share amounts)





For TheThree Months EndedOctober 31,2009
                      
                      
                      2008Cash
      Flow From Operating Activities:Net
      Income
                      
                      $
                      2,939
                      
                      
                      $
                      1,936Adjustments
      to Reconcile Net Income toNet
      Cash Provided by (Used in) Operating Activities:Depreciation
      and Amortization
                      
                      
                      843
                      
                      
                      
                      703Accretion
      of Reclamation and Remediation
                      
                      
                      38
                      
                      
                      
                      38Loss
      on change in fair value of derivative
                      
                      
                      -
                      
                      
                      
                      304Equity
      Based Compensation
                      
                      
                      141
                      
                      
                      
                      227Changes
      in Operating Assets and Liabilities:Decrease
      (increase) in Accounts Receivable
                      
                      
                      (16
                      )
                      
                      
                      432Decrease
      in Prepaid Expenses
                      
                      
                      20
                      
                      
                      
                      55Decrease
      (increase) in Inventory
                      
                      
                      (3,239
                      )
                      
                      
                      330Decrease
      (increase) in Other Current Assets
                      
                      
                      53
                      
                      
                      
                      (299
                      )Decrease
      (increase) in Other Deposits
                      
                      
                      (6
                      )
                      
                      
                      1Decrease
      in Security Deposits
                      
                      
                      -
                      
                      
                      
                      9Decrease
      in Deferred Tax Asset
                      
                      
                      -
                      
                      
                      
                      127Increase
      (decrease) in Accounts Payable
                      
                      
                      958
                      
                      
                      
                      (48
                      )Decrease
      in Derivative Liability
                      
                      
                      -
                      
                      
                      
                      (293
                      )Increase
      (decrease) in Other Liability
                      
                      
                      1
                      
                      
                      
                      (14
                      )Increase
      (decrease) in Reclamation and Remediation
                      
                      
                      20
                      
                      
                      
                      (373
                      )Increase
      (decrease) in Deferred Tax Liability
                      
                      
                      53
                      
                      
                      
                      (455
                      )Increase
      in Accrued Expenses
                      
                      
                      1,126
                      
                      
                      
                      881Net
      Cash Provided By Operating Activities
                      
                      
                      2,931
                      
                      
                      
                      3,561Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property andEquipment
                      
                      
                      (1,679
                      )
                      
                      
                      (2,027
                      )Purchase
      of Intangibles
                      
                      
                      (269
                      )
                      
                      
                      -Net
      Cash Used in Investing Activities
                      
                      
                      (1,948
                      )
                      
                      
                      (2,027
                      )





The
accompanying notes are an integral part of the financial
statements.


-6-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)


(in
thousands, except for share and per share amounts)





For TheThree Months EndedOctober 31,2009
                
                
                2008Cash
      Flow From Financing Activities:Repayments
      from Affiliate, net
                
                
                1
                
                
                
                (1
                )Repayments
      on Notes Payable
                
                
                (900
                )
                
                
                (1,125
                )Proceeds
      From Issuance of Common Stock
                
                
                53
                
                
                
                -Net
      Cash Used in Financing Activities
                
                
                (846
                )
                
                
                (1,126
                )Effect
      of Exchange Rate Changes
                
                
                188
                
                
                
                (2,192
                )(Decrease)
      Increase In Cash and Cash Equivalents
                
                
                325
                
                
                
                (1,784
                )Cash
      and Cash Equivalents - Beginning
                
                
                6,448
                
                
                
                10,992Cash
      and Cash Equivalents – Ending
                
                $
                6,773
                
                
                $
                9,208Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                
                $
                138
                
                
                $
                213Cash
      Paid For Income Taxes
                
                $
                1,094
                
                
                $
                672Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
                
                $
                39
                
                
                $
                (8
                )





The
accompanying notes are an integral part of the financial
statements.


-7-





CAPITAL
GOLD CORPORATION


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


(in
thousands, except for per share and ounce amounts)





NOTE 1 -
Basis of Presentation





Capital
Gold Corporation (“Capital Gold” or, the “Company”) owns rights to property
located in the State of Sonora, Mexico. The Company is engaged in the production
of gold and silver from its properties in Mexico as well as exploration for
additional mineral properties. All of the Company's mining activities are in
Mexico.





The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) for
interim financial information and with article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of the Company’s management, the accompanying
condensed consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
condensed consolidated financial position and results of operations and cash
flows for the periods presented. They include the accounts of Capital Gold
Corporation and its wholly owned and majority owned subsidiaries, Leadville
Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de
C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as well as the accounts
within Caborca Industrial S.A. de C.V. (“Caborca Industrial”), a Mexican
corporation that is 100% owned by two of the Company’s officers and directors
for mining support services. These services include, but are not limited to, the
payment of mining salaries and related costs. Caborca Industrial bills the
Company for these services at slightly above cost.  This entity is
considered a variable interest entity under accounting rules provided under ASC
guidance for consolidation accounting.





All significant intercompany accounts
and transactions are eliminated in consolidation.  Certain items in
these financial statements have been reclassified to conform to the current
period presentation. These reclassifications had no impact on the Company’s
balance sheet, results of operations, stockholders’ equity or cash
flows.





The notes to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended July
31, 2009 should be read in conjunction with these condensed consolidated
financial statements.  Results of operations for interim periods are
not necessarily indicative of the results of operations for a full
year.





NOTE 2 –
Summary of Significant Accounting Policies





Recently
Issued Accounting Pronouncements





The
Accounting Standards Codification





In
June 2009, the Financial Accounting Standards Board (“FASB”) established
the FASB Accounting Standards Codification(“ASC”) as the single source of authoritative GAAP to be applied by
nongovernmental entities. The ASC is a new structure which took existing
accounting pronouncements and organized them by accounting topic. Relevant
authoritative literature issued by the Securities and Exchange Commission
(“SEC”) and select SEC staff interpretations and administrative literature was
also included in the ASC. All other accounting guidance not included in the ASC
is non-authoritative. The ASC was effective for the Company’s interim quarterly
period beginning August 1, 2009. The adoption of the ASC did not have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.


-8-




Fair
Value Measurements





In
September 2009, the ASC guidance was further updated for fair value
measurements of investments in certain entities that calculate net asset value
per share (or its equivalent). The guidance creates a practical expedient to
measure the fair value of an investment that is within the scope of the guidance
on the basis of the net asset value per share of the investment (or its
equivalent) determined as of the reporting entity’s measurement date. Therefore,
the guidance allows certain attributes of the investment, which in the past may
have indicated that it was necessary to make adjustments to the net asset value
per share (or its equivalent) to estimate the fair value of the investment, to
not be considered if the practical expedient is used. Additional disclosures are
also required under the guidance. The guidance is effective for interim and
annual periods ending after December 15, 2009, with early application
permitted. The Company is currently determining the impact of the guidance on
the Company’s consolidated financial statements.





In
August 2009, the ASC guidance for fair value measurements and disclosure
was updated to further define fair value of liabilities. This update provides
clarification for circumstances in which: (i) a quoted price in an active
market for the identical liability is not available, (ii) the liability has a
restriction that prevents its transfer, and (iii) the identical liability
is traded as an asset in an active market in which no adjustments to the quoted
price of an asset are required. The updated guidance is effective for the
Company’s interim reporting period beginning November 1, 2009. The Company is
evaluating the potential impact of adopting this guidance on the Company’s
consolidated financial position, results of operations and cash
flows.





In
April 2009, the ASC guidance was further updated to provide additional
guidance on determining fair value when the volume and level of activity for the
asset or liability have significantly decreased and identifying circumstances
that indicate when a transaction is not orderly. In April 2009, the guidance for
investments in debt and equity securities was updated to: (i) clarify the
interaction of the factors that should be considered when determining whether a
debt security is other than temporarily impaired, (ii) provide guidance on
the amount of an other-than-temporary impairment recognized for a debt security
in earnings and other comprehensive income and (iii) expand the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the guidance for financial instruments was updated to
require disclosures about the fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The Company adopted the updated guidance for the interim period
ended April 30, 2009. See Note 21 for the Company’s fair value measurements
disclosure.





In
September 2006, the ASC guidance for fair value measurements and disclosure
was updated to define fair value, establish a framework for measuring fair
value, and expand disclosures about fair value measurements. The Company adopted
the updated guidance for assets and liabilities measured at fair value on a
recurring basis on January 1, 2008. In February 2008, the FASB staff
issued an update to the guidance which delayed the effective date for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
Company adopted the updated guidance for the Company’s nonfinancial assets and
liabilities measured at fair value on a nonrecurring basis on January 1,
2009.


-9-





Variable
Interest Entities





In
June 2009, the ASC guidance for consolidation accounting was updated to
require an entity to perform a qualitative analysis to determine whether the
enterprise’s variable interest gives it a controlling financial interest in a
variable interest entity (“VIE”). This analysis identifies a primary beneficiary
of a VIE as the entity that has both of the following characteristics: i) the
power to direct the activities of a VIE that most significantly impact the
entity’s economic performance and ii) the obligation to absorb losses or receive
benefits from the entity that could potentially be significant to the VIE. The
updated guidance also requires ongoing reassessments of the primary beneficiary
of a VIE. The updated guidance is effective for the Company’s fiscal year
beginning August 1, 2010. The Company currently accounts for Caborca
Industrial (“CI”) as a VIE and is evaluating the potential impact of adopting
this statement on the Company’s consolidated financial position, results of
operations and cash flows.





Subsequent
Events





In
May 2009, the ASC guidance for subsequent events was updated to establish
accounting and reporting standards for events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The update sets forth: (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet in its financial
statements, and (iii) the disclosures that an entity should make about
events or transactions occurring after the balance sheet date in its financial
statements. The Company adopted the updated guidance for the fiscal year ended
July 31, 2009. The adoption had no impact on the Company’s consolidated
financial position, results of operations or cash flows.




Business
Combinations





In
April 2009, the ASC guidance for business combinations was updated to
address application issues on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. This guidance is effective for
assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after January 1, 2009. The Company will
apply the updated guidance to all future business combinations.





Equity
Method Investment




In
November 2008, the ASC guidance for equity method and joint venture
investments was updated to clarify the accounting for certain transactions and
impairment considerations involving equity method investments. The intent is to
provide guidance on: (i) determining the initial measurement of an equity
method investment, (ii) recognizing other-than- temporary impairments of an
equity method investment and (iii) accounting for an equity method
investee’s issuance of shares. The updated guidance was effective for the
Company’s fiscal year beginning August 1, 2009 and was applied
prospectively. The adoption had no impact on the Company’s consolidated
financial position or results of operations.


-10-




Equity-linked
Financial Instruments




In
June 2008, the ASC guidance for derivatives and hedging when accounting for
contracts in an entity’s own equity was updated to clarify the determination of
whether an instrument (or embedded feature) is indexed to an entity’s own stock
which would qualify as a scope exception from hedge accounting. The updated
guidance was effective for the Company’s fiscal year beginning August 1,
2009. The adoption had no impact on the Company’s consolidated financial
position or results of operations.





Accounting
for the Useful Life of Intangibles





In
April 2008, the ASC guidance for goodwill and other intangibles was updated
to amend the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this update is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset under guidance
for business combinations. The updated guidance was effective for the Company’s
fiscal year beginning August 1, 2009 and was applied prospectively to
intangible assets acquired after the effective date. The adoption had no impact
on the Company’s consolidated financial position, results of operations or cash
flows.





Derivative
Instruments





In March 2008, the ASC guidance
for derivatives and hedging was updated for enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and the
related hedged items are accounted for, and how derivative instruments and the
related hedged items affect an entity’s financial position, financial
performance and cash flows. The Company adopted the updated guidance for the
fiscal year ended July 31, 2008. The adoption had no impact on the Company’s
consolidated financial position, results of operations or cash flows. See Note
18 for the Company’s derivative instruments disclosure.





NOTE 3 -
Equity Based Compensation





In connection with offers of employment
to the Company’s executives as well as in consideration for agreements with
certain consultants, the Company issues options and warrants to acquire its
common stock. Employee and non-employee awards are made at the discretion of the
Board of Directors.





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.35 to $0.85 per
share of common stock. Certain of these grants are exercisable immediately upon
grant while others vest. Certain grants have vested or are vesting over a period
of between three to five years. Also, certain grants contain a provision whereby
they become immediately exercisable upon a change of control.





The
Company accounts for stock compensation under ASC guidance for compensation –
stock compensation, which requires the Company to expense the cost of employees
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This expense must be recognized ratably over
the requisite service period following the date of grant.





The cumulative effect of applying the
forfeiture rates is not material. ASC guidance requires that excess tax benefits
related to stock option exercises be reflected as financing cash inflows instead
of operating cash inflows.


-11-





The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The estimated per share weighted average grant-date fair values of stock options
and warrants granted during the three months ended October 31, 2009, and 2008
were $0. The fair values of the options and warrants granted were estimated
based on the following weighted average assumptions:





Three months ended October 31,2009
                  
                  
                  2008Expected
      volatility
                  
                  
                  -
                  
                  
                  
                  -Risk-free
      interest rate
                  
                  
                  -
                  
                  
                  
                  -Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life
                  
                  
                  -
                  
                  
                  
                  -





Stock
option and activity for employees during the fiscal years ended July 31, 2009
and 2008, and three months ended October 31, 2009 are as follows (all tables in
thousands, except for option, price and term data):




Number of
                    Options
                  
                  
                  Weighted
                    average
                    exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                    term (years)
                  
                  
                  Aggregate
                      intrinsic valueOutstanding
      at July 31, 2007
                  
                  
                  2,500,000
                  
                  
                  $
                  .34
                  
                  
                  
                  1.20
                  
                  
                  $
                  255Options
      granted*
                  
                  
                  2,500,000
                  
                  
                  
                  .63
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (1,450,000
                  )
                  
                  
                  .32
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2008
                  
                  
                  3,550,000
                  
                  
                  $
                  .55
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted*
                  
                  
                  1,000,000
                  
                  
                  
                  .49
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (705,729
                  )
                  
                  
                  .37
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (344,271
                  )
                  
                  
                  .35
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2009
                  
                  
                  3,500,000
                  
                  
                  $
                  .59
                  
                  
                  
                  5.18
                  
                  
                  $
                  70Options
      granted*
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (633,333
                  )
                  
                  
                  .56
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at October 31, 2009
                  
                  
                  2,866,667
                  
                  
                  $
                  .60
                  
                  
                  
                  4.37
                  
                  
                  $
                  495Options
      exercisable at October 31, 2009
                  
                  
                  1,758,332
                  
                  
                  $
                  .59
                  
                  
                  
                  1.71
                  
                  
                  $
                  310




*
Issuances under 2006 Equity Incentive Plan.


-12-




Unvested
stock option balances for employees at October 31, 2009 are as
follows:





Number of Options
                
                
                Weighted
                  average
                  exercise
                  price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic valueOutstanding
      at July 31, 2007
                
                
                150,000
                
                
                $
                .32
                
                
                
                1.67
                
                
                $
                17Options
      granted
                
                
                2,500,000
                
                
                
                .63
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (900,000
                )
                
                
                .58
                
                
                
                -
                
                
                
                -Unvested
      Options Outstanding at July 31, 2008
                
                
                1,750,000
                
                
                $
                .63
                
                
                
                4.49
                
                
                $
                8Options
      granted
                
                
                1,000,000
                
                
                
                .49
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (1,000,000
                )
                
                
                .56
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at July 31, 2009
                
                
                1,750,000
                
                
                $
                .59
                
                
                
                5.18
                
                
                $
                35Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (141,665
                )
                
                
                .59
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (500,000
                )
                
                
                .56
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at October 31, 2009
                
                
                1,108,335
                
                
                $
                .60
                
                
                
                5.00
                
                
                $
                184





Stock
option and warrant activity for non-employees during the years ended July 31,
2009 and 2008, and three months ended October 31, 2009 are as
follows:




Number of
                  options
              
              
              Weighted
                average
                exercise
                  price
              
              
              Weighted
                average
                remaining
                contracted
                term (years)
              
              
              Aggregate
                Intrinsic valueWarrants
      and options outstanding at July 31, 2007
              
              
              22,535,542
              
              
              $
              .33
              
              
              
              1.48
              
              
              $
              2,578Options
      granted*
              
              
              1,715,000
              
              
              
              .66Options
      exercised
              
              
              (21,555,542
              )
              
              
              .33
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (680,000
              )
              
              
              .30
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2008
              
              
              2,015,000
              
              
              $
              .62
              
              
              
              3.54
              
              
              $
              54Options
      granted
              
              
              1,400,000
              
              
              
              .50
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (150,000
              )
              
              
              .39
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (150,000
              )
              
              
              .39
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2009
              
              
              3,115,000
              
              
              $
              .59
              
              
              
              3.36
              
              
              $
              73Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (161,707
              )
              
              
              .44
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (868,293
              )
              
              
              .54
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at October 31, 2009
              
              
              2,085,000
              
              
              $
              .62
              
              
              
              3.16
              
              
              $
              318Warrants
      and options exercisable at October 31, 2009
              
              
              1,551,380
              
              
              $
              .65
              
              
              
              1.25
              
              
              $
              180




*
1,115,000 issued under 2006 Equity Incentive Plan.


-13-


Unvested
stock option balances for non-employees at October 31, 2009 are as
follows:




Number of
                    Options
                
                
                Weighted
                  Average
                  Exercise
                    price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic
                    valueOutstanding
      at July 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      granted
                
                
                650,000
                
                
                
                .63
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (195,000
                )
                
                
                .63
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2008
                
                
                455,000
                
                
                $
                .63
                
                
                
                4.49
                
                
                $
                3Options
      granted
                
                
                1,275,000
                
                
                
                .49
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (767,500
                )
                
                
                .51
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2009
                
                
                962,500
                
                
                $
                .54
                
                
                
                4.88
                
                
                $
                70Options
      granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (83,330
                )
                
                
                .49
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (275,834
                )
                
                
                .59
                
                
                
                -
                
                
                
                -Unvested
      options outstanding at October 31, 2009
                
                
                603,336
                
                
                $
                .52
                
                
                
                4.53
                
                
                $
                152




The impact on the Company’s results of
operations of recording equity based compensation for the three months ended
October 31, 2009 and 2008, for employees and non-employees was approximately
$141 and $227 and reduced earnings per share by $0.00, and $0.00 per basic and
diluted share, respectively.  The Company has not recognized any tax
benefit or expense for the three months ended October 31, 2009 and 2008, related
to these items due to the Company’s net operating losses and corresponding
valuation allowance within the U.S. (See Note 20).




As of October 31, 2009, there was
approximately $343 of unrecognized equity based compensation cost related to
options granted which have not yet vested.





NOTE 4 -
Marketable Securities





Marketable
securities are classified as current assets and are summarized as
follows:





(in thousands)October 31,
                                2009
                              
                              
                              July 31,
                                2009Marketable
      equity securities, at cost
                              
                              $
                              50
                              
                              
                              $
                              50Marketable
      equity securities, at fair value (See Notes 12 & 14)
                              
                              $
                              40
                              
                              
                              $
                              35


-14-


NOTE 5 –
Material and Supplies Inventories





(in thousands)October 31,
                              2009
                            
                            
                            July 31,
                              2009Materials,
      supplies and other
                            
                            $
                            1,576
                            
                            
                            $
                            1,381Total
                            
                            $
                            1,576
                            
                            
                            $
                            1,381




NOTE 6 -
Ore on Leach Pads and Inventories (“In-Process Inventory”)




(in thousands)October 31,
                            2009
                          
                          
                          July 31,
                            2009Ore
      on leach pads
                          
                          $
                          23,412
                          
                          
                          $
                          20,024Total
                          
                          $
                          23,412
                          
                          
                          $
                          20,024




Costs
that are incurred in or benefit the productive process are accumulated as ore on
leach pads and inventories. Ore on leach pads and inventories are carried at the
lower of average cost or market. The current portion of ore on leach pads and
inventories is determined based on the amounts to be processed within the next
12 months.




In-process
inventories represent materials that are currently in the process of being
converted to a saleable product. Conversion processes vary depending on the
nature of the ore and the specific processing facility, but include leach
in-circuit, flotation and column cells and carbon in-pulp inventories.
In-process material are measured based on assays of the material fed into the
process and the projected recoveries of the respective plants. In-process
inventories are valued at the average cost of the material fed into the process
attributable to the source material coming from the mines and/or leach pads plus
the in-process conversion costs, including applicable depreciation relating to
the process facilities incurred to that point in the process.




NOTE 7 –
Deposits





Deposits are classified as current
assets and represent payments made on mining equipment for the Company’s El
Chanate Project in Sonora, Mexico. Deposits are summarized as
follows:





(in thousands)October 31,
                                      2009
                                    
                                    
                                    July 31,
                                      2009Equipment
      deposits
                                    
                                    $
                                    32
                                    
                                    
                                    $
                                    26Total
      Deposits
                                    
                                    $
                                    32
                                    
                                    
                                    $
                                    26





NOTE 8 –
Other Current Assets





Other
current assets consist of the following:





(in thousands)October 31,
                                      2009
                                    
                                    
                                    July 31,
                                      2009Value
      added tax to be refunded
                                    
                                    $
                                    988
                                    
                                    
                                    $
                                    1,032Other
                                    
                                    
                                    1
                                    
                                    
                                    
                                    10Total
      Other Current Assets
                                    
                                    $
                                    989
                                    
                                    
                                    $
                                    1,042




-15-




NOTE 9 –
Property and Equipment





Property
and Equipment consist of the following:





(in
      thousands)October
      31,
                                      2009
                                    
                                    
                                    July
      31,
                                      2009Process
      equipment and facilities
                                    
                                    $
                                    26,510
                                    
                                    
                                    $
                                    26,477Mining
      equipment
                                    
                                    
                                    2,262
                                    
                                    
                                    
                                    2,248Mineral properties
                                    
                                    
                                    175
                                    
                                    
                                    
                                    175Construction
      in progress
                                    
                                    
                                    1,690
                                    
                                    
                                    
                                    70Computer
      and office equipment
                                    
                                    
                                    396
                                    
                                    
                                    
                                    389Improvements
                                    
                                    
                                    16
                                    
                                    
                                    
                                    16Furniture
                                    
                                    
                                    47
                                    
                                    
                                    
                                    47Total
                                    
                                    
                                    31,096
                                    
                                    
                                    
                                    29,422Less:
      accumulated depreciation
                                    
                                    
                                    (7,930
                                    )
                                    
                                    
                                    (7,005
                                    )Property
      and equipment, net
                                    
                                    $
                                    23,166
                                    
                                    
                                    $
                                    22,417





Depreciation
expense for the three months ended October 31, 2009 and 2008 was approximately
$925 and $847, respectively.





NOTE 10 -
Intangible Assets





Intangible
assets consist of the following:





(in thousands)October 31,
                                2009
                              
                              
                              July 31,
                                2009Repurchase of Net Profits
      Interest
                              
                              $
                              500
                              
                              
                              $
                              500Water Rights
                              
                              
                              510
                              
                              
                              
                              241Reforestation fee
                              
                              
                              73
                              
                              
                              
                              73Mobilization Payment to Mineral
      Contractor
                              
                              
                              70
                              
                              
                              
                              70Investment in Right of Way
                              
                              
                              18
                              
                              
                              
                              18Total
                              
                              
                              1,171
                              
                              
                              
                              902Accumulated Amortization
                              
                              
                              (596
                              )
                              
                              
                              (584
                              )Intangible assets, net
                              
                              $
                              575
                              
                              
                              $
                              318





Purchased
intangible assets consisting of rights of way, water rights, easements, net
profit interests, etc. are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the economic lives
of the respective assets, generally five years or using the Units of Production
(“UOP”) method. It is the Company’s policy to assess periodically the carrying
amount of its purchased intangible assets to determine if there has been an
impairment to their carrying value. Impairments of other intangible assets are
determined in accordance with ASC guidance for goodwill and other intangibles.
There was no impairment at October 31, 2009.




-16-





Amortization expense for the three
months ended October 31, 2009 and 2008 was approximately $12 and $8,
respectively.  The net profits interest from Grupo Minera FG (“FG”)was
fully amortized as of July 31, 2008.





NOTE 11 -
Mining Concessions





Mining
concessions consists of the following:





(in thousands)October 31,
                            2009
                          
                          
                          July 31,
                            2009El
      Chanate
                          
                          $
                          49
                          
                          
                          $
                          45El
      Charro
                          
                          
                          25
                          
                          
                          
                          25Total
                          
                          
                          74
                          
                          
                          
                          70Less:
      accumulated amortization
                          
                          
                          (22
                          )
                          
                          
                          (19
                          )Total
                          
                          $
                          52
                          
                          
                          $
                          51





The El Chanate concessions are carried
at historical cost and are being amortized using the UOP method. They were
acquired in connection with the purchase of the stock of Minera
Chanate.  Amortization expense for the three months ended October 31,
2009 and 2008 was approximately $3 and $3, respectively.





MSR acquired an additional mining
concession – El Charro. El Charro lies within the current El Chanate property
boundaries. MSR is required to pay a 1 1/2% net smelter royalty in connection
with the El Charro concession.





NOTE 12 -
Loans Receivable - Affiliate





Loans receivable - affiliate consist of
expense reimbursements due from a publicly-owned corporation in which the
Company has an investment. The Company's chairman of the board of directors and
chief executive officer was an officer and director of that corporation. On
March 10, 2008, the Company’s chairman of the board of directors resigned as
both an officer and director of this corporation.  These loans are
non-interest bearing and due on demand (see Note 4 & 15).




NOTE 13 -
Reclamations and Remediation Liabilities (“Asset Retirement
Obligations”)




The Company includes environmental and
reclamation costs on an ongoing basis, in our internal revenue and cost
projections.  No assurance can be given that environmental regulations
will not be changed in a manner that would adversely affect the Company’s
planned operations.  As of October 31, 2009, we estimated the
reclamation costs for the El Chanate site to be approximately
$3,200.  Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and abandonment
costs.  The Asset Retirement Obligation is based on when the spending
for an existing environmental disturbance and activity to date will occur. The
Company reviews, on an annual basis, unless otherwise deemed necessary, the
Asset Retirement Obligation at each mine site.  The Company reviewed
the estimated present value of the El Chanate mine reclamation and closure costs
as of October 31, 2009.  As of October 31, 2009, approximately $1,652
was accrued for reclamation obligations relating to mineral properties in
accordance with ASC guidance for asset retirement and environmental
obligations.




-17-




The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the three months ended October 31, 2009:




(in
      thousands)Balance
      as of July 31, 2009
                  
                  $
                  1,594Additions,
      changes in estimates and other
                  
                  
                  20Accretion
      expense
                  
                  
                  38Balance
      as of October 31, 2009
                  
                  $
                  1,652





NOTE 14 –
Accumulated Other Comprehensive Income





Accumulated other comprehensive income
(loss) consists of foreign currency translation gains and losses, unrealized
gains and losses on marketable securities and fair value changes on derivative
instruments and is summarized as follows:





Foreign
                      currency items
                    
                    
                    Unrealized gain
                      (loss) on securities
                    
                    
                    Change in fair
                      value on interest
                      rate swaps
                    
                    
                    Accumulated other
                      comprehensive
                      incomeBalance
      as of July 31, 2009
                    
                    $
                    (2,050
                    )
                    
                    $
                    (15
                    )
                    
                    $
                    87
                    
                    
                    $
                    (1,978
                    )Income
      (loss)
                    
                    
                    188
                    
                    
                    
                    5
                    
                    
                    
                    39
                    
                    
                    
                    232Balance
      as of October 31, 2009
                    
                    $
                    (1,862
                    )
                    
                    $
                    (10
                    )
                    
                    $
                    126
                    
                    
                    $
                    (1,746
                    )





The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the year ended July 31, 2009 and the three months ended October 31,
2009.





NOTE 15 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $2 and $2 in expense reimbursements including office rent from
this entity for the three months ended October 31, 2009, and 2008, respectively
(see Notes 4 and 12).





The Company utilizes Caborca
Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the
Company’s Chief Executive Officer, and an officer and director of the company.
These services include but are not limited to the payment of mining salaries and
related costs. Caborca Industrial bills the Company for these services at
slightly above cost. Mining expenses charged by Caborca Industrial and
eliminated upon consolidation amounted to approximately $1,233, and $1,234 for
the three months ended October 31, 2009, and 2008, respectively.




-18-





NOTE 16 -
Stockholders' Equity





Common
Stock





At various stages in the Company’s
development, shares of the Company’s common stock have been issued at fair
market value in exchange for services or property received with a corresponding
charge to operations, property and equipment or additional paid-in capital
depending on the nature of services provided or property received.





The Company received proceeds of
approximately $53 during the three months ended October 31, 2009 from the
exercising of an aggregate of 125,000 options issued to officers and directors.
The Company also issued 36,707 shares upon the cashless exercising of options
during the three months ended October 31, 2009.





As part of the settlement agreement
with the Company’s former Executive Vice-President, upon his termination without
cause, the unvested portion of a previous restricted share grant of 166,667
shares were forfeited.





During the three months ended October
31, 2009 and 2008, the Company recorded approximately $141 and $125 in equity
compensation expense related to the vesting of restricted stock grants and stock
options, respectively.





Stock
Split





In September 2008, our Board of
Directors (the "Board") recommended to our stockholders a proposal to effect a
reverse stock split of all outstanding shares of our Common Stock in an amount
which our Board of Directors deems appropriate to result in a sustained per
share market price above $2.00 per share, to be at a ratio of not less than
one-for-four and not more than one-for-six (the "Reverse Stock
Split").  In conjunction with the Reverse Stock Split, our Board has
approved and is recommending to our stockholders a proposal to effect a
reduction in the number of shares of Common Stock authorized for issuance and an
increase in the par value thereof in proportion to the Reverse Stock
Split.  Our stockholders subsequently approved the reverse stock split
in October 2008.  We will not issue fractional shares in connection
with the Reverse Stock Split. Any fractional shares that result from the Reverse
Stock Split will be rounded up to the next whole share.  However, if
the Board determines that effecting these capitalization changes would not be in
the best interests of our stockholders, the Board can determine not to effect
any or all of the changes.  As of October 31, 2009, the board of
directors has not effected a capitalization change.





2006
Equity Incentive Plan





The 2006 Equity Incentive Plan (the
“Plan”), approved by stockholders on February 21, 2007, is intended to attract
and retain individuals of experience and ability, to provide incentive to the
Company’s employees, consultants, and non-employee directors, to encourage
employee and director proprietary interests in the Company, and to encourage
employees to remain in the Company’s employ.





The Plan authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights and
restricted stock awards (each, an “Award”). A maximum of 10,000,000 shares of
common stock are reserved for potential issuance pursuant to Awards under the
Plan.  Unless sooner terminated, the Plan will continue in effect for
a period of 10 years from its effective date.




-19-





The Plan is administered by the
Company’s Board of Directors which has delegated the administration to the
Company’s Compensation Committee.  The Plan provides for Awards to be
made to such of the Company’s employees, directors and consultants and its
affiliates as the Board may select.





Stock options awarded under the Plan
may vest and be exercisable at such times (not later than 10 years after the
date of grant) and at such exercise prices (not less than Fair Market Value at
the date of grant) as the Board may determine.  Unless otherwise
determined by the Board, stock options shall not be transferable except by will
or by the laws of descent and distribution. The Board may provide for options to
become immediately exercisable upon a "change in control," as defined in the
Plan.





On July 23, 2009, at the recommendation
of the Compensation Committee and upon approval by the Board of Directors, the
Company amended the 2006 Equity Incentive Plan to provide for cashless exercises
of options by participants under the Plan.  Payment of the option exercise
price may now be made (i) in cash or by check payable to the Company, (ii) in
shares of Common Stock duly owned by the option holder (and for which the option
holder has good title free and clear of any liens and encumbrances), valued at
the fair market value on the date of exercise, or (iii) by delivery back to the
Company from the shares acquired on exercise of the number of shares of common
stock equal to the exercise price, valued at the fair market value on the date
of exercise. Previously, the exercise price of an option must have been paid in
cash.  No options may be granted under the Plan after the tenth
anniversary of its effective date.  Unless the Board determines
otherwise, there are certain continuous service requirements.





The Plan provides the Board with the
general power to amend the Plan, or any portion thereof at any time in any
respect without the approval of the Company’s stockholders, provided however,
that the stockholders must approve any amendment which increases the fixed
maximum percentage of shares of common stock issuable pursuant to the Plan,
reduces the exercise price of an Award held by a director, officer or ten
percent stockholder or extends the term of an Award held by a director, officer
or ten percent stockholder.  Notwithstanding the foregoing,
stockholder approval may still be necessary to satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), Rule
16b-3 of the Securities Exchange Act of 1934, as amended or any applicable stock
exchange listing requirements. The Board may amend the Plan in any respect it
deems necessary or advisable to provide eligible employees with the maximum
benefits provided or to be provided under the provisions of the Code and the
regulations promulgated thereunder relating to Incentive Stock Options and/or to
bring the Plan and/or Incentive Stock Options granted under it into compliance
therewith.  Rights under any Award granted before amendment of the
Plan cannot be impaired by any amendment of the Plan unless the Participant
consents in writing.  The Board is empowered to amend the terms of any
one or more Awards; provided, however, that the rights under any Award shall not
be impaired by any such amendment unless the applicable Participant consents in
writing and further provided that the Board cannot amend the exercise price of
an option, the Fair Market Value of an Award or extend the term of an option or
Award without obtaining the approval of the stockholders if required by the
rules of the Toronto Stock Exchange or any stock exchange upon which the common
stock is listed.





NOTE 17 -
Debt





Long
      term debt consists of the following:
                
                (in
      thousands)October
      31,
                  2009
                
                
                July
      31,
                  2009Total
      long-term debt
                
                $
                7,100
                
                
                $
                8,000Less
      current portion
                
                
                3,600
                
                
                
                3,600Long-term
      debt
                
                $
                3,500
                
                
                $
                4,400





-20-





In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank, as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006.  Under the Credit Agreement, MSR and Oro
borrowed money in an aggregate principal amount of up to US$12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico.  The Company guaranteed
the repayment of the Term Loan and the performance of the obligations under the
Credit Agreement.  As of October 31, 2009 and 2008, the accrued
interest on the Term Loan was approximately $17 and $59,
respectively.





Term Loan principal shall be repaid
quarterly. Payments commenced on September 30, 2008 and consisted of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900 and two final payments in the amount of $400.  There is no
prepayment fee.  Principal under the Term Loan shall bear interest at
a rate per annum equal to the LIBOR Rate plus 2.5% per annum.





The Credit Agreement contains covenants
customary for a term note, including but not limited to restrictions (subject to
certain exceptions) on incurring additional debt, creating liens on its
property, declaring or paying dividends, disposing of any assets, merging with
other companies and making any investments.  The Company is required
to meet and maintain certain financial covenants, including (i) a ratio of
current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S.$15,000, and (iii) a quarterly average minimum liquidity of
U.S.$500.





As of
October 31, 2009, the Company and its related entities were in compliance with
all debt covenants and default provisions.  The accounts of Caborca
Industrial are not subject to the debt covenants and default
provisions.





The Term Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro.  As
additional collateral for the Loan, the Company, together with its subsidiary,
Leadville Mining & Milling Holding Corporation, has pledged all of its
ownership interest in MSR and Oro.





On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period and determined that during
that time it was not cost beneficial to maintain the revolving loan on a going
forward basis.




Future
principal payments on the term loan are as follows (in thousands):





Fiscal
      Years Ending July 31,2010
                    
                    $
                    2,7002011
                    
                    
                    3,6002012
                    
                    
                    800$
                    7,100




-21-




NOTE 18 -
Sales Contracts, Commodity and Financial Instruments





Interest
Rate Swap Agreement





On
October 11, 2006, prior to our initial draw on the Credit Agreement, the Company
entered into an interest rate swap agreement covering about 75% of the expected
variable rate debt exposure.  Only 50% coverage is required under the
Credit Agreement.  The termination date on this swap position is
December 31, 2010.  However, the Company intends to use
discretion in managing this risk as market conditions vary over time, allowing
for the possibility of adjusting the degree of hedge coverage as it deems
appropriate.  In any case, the Company’s use of interest rate
derivatives will be restricted to use for risk management
purposes.




The Company uses variable-rate debt to
finance a portion of the El Chanate Project.  Variable-rate debt
obligations expose the Company to variability in interest payments due to
changes in interest rates.  As a result of these arrangements, the
Company will continuously monitor changes in interest rate exposures and
evaluate hedging opportunities.  The Company’s risk management policy
permits it to use any combination of interest rate swaps, futures, options, caps
and similar instruments, for the purpose of fixing interest rates on all or a
portion of variable rate debt, establishing caps or maximum effective interest
rates, or otherwise constraining interest expenses to minimize the variability
of these effects.




The interest rate swap agreements are
accounted for as cash flow hedges, whereby “effective” hedge gains or losses are
initially recorded in other comprehensive income and later reclassified to the
interest expense component of earnings coincidently with the earnings impact of
the interest expenses being hedged.  “Ineffective” hedge results are
immediately recorded in earnings also under interest expense.  No
component of hedge results will be excluded from the assessment of hedge
effectiveness.  The amount expected to be reclassified from other
comprehensive income to earnings during the year ending July 31, 2010 from these
two swaps was determined to be immaterial.





The following is a reconciliation of
the derivative contract regarding the Company’s Interest Rate Swap
agreement:




(in
      thousands)Liability
      balance as of July 31, 2009
                  
                  $
                  193Change
      in fair value of swap agreement
                  
                  
                  16Net
      cash settlements
                  
                  
                  (55
                  )Liability
      balance as of October 31, 2009
                  
                  $
                  154




The Company is exposed to credit losses
in the event of non-performance by counterparties to these interest rate swap
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position with
each counterparty as required by ASC guidance for derivatives and
hedging.




The
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):




Quarter
                        Ended
                      
                      Derivatives in Cash
                        Flow Hedging
                        Relationships
                      
                      Effective
                        Results
                        Recognized
                        in OCI
                      
                      Location of Results
                        Reclassified from AOCI
                        to Earnings
                      
                      Amount
                        Reclassified
                        from AOCI
                        to Income
                      
                      
                      Ineffective
                        Results
                        Recognized
                        in Earnings
                      
                      
                      Location
                        of
                        Ineffective
                        Results7/31/08
                      
                      Interest
      Rate contracts
                      
                      $
                      19
                      
                      Interest
      Income (Expense)
                      
                      
                      (49
                      )
                      
                      
                      -
                      
                      
                      
                      N/A10/31/08
                      
                      Interest
      Rate contracts
                      
                      $
                      (38
                      )
                      Interest
      Income (Expense)
                      
                      
                      (38
                      )
                      
                      
                      -
                      
                      
                      
                      N/A1/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (95
                      )
                      Interest
      Income (Expense)
                      
                      
                      (35
                      )
                      
                      
                      -
                      
                      
                      
                      N/A4/30/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (16
                      )
                      Interest
      Income (Expense)
                      
                      
                      (55
                      )
                      
                      
                      -
                      
                      
                      
                      N/A7/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (19
                      )
                      Interest
      Income (Expense)
                      
                      
                      (55
                      )
                      
                      
                      -
                      
                      
                      
                      N/A10/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (53
                      )
                      Interest
      Income (Expense)
                      
                      
                      (53
                      )
                      
                      
                      -
                      
                      
                      
                      N/A




-22-




Fair
Value of Derivative Instruments in a Statement of Financial Position and the
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):




Liability
      DerivativesJuly
      31, 2008
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      192Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      738Liability
      DerivativesOctober
      31, 2008
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      199Derivatives
      designated as non- hedging instrumentsGold
      derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      734Liability
      DerivativesJanuary
      31, 2009
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      268Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      719Liability
      DerivativesApril
      30, 2009
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      228Liability
      DerivativesJuly
      31, 2009
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      193Liability
      DerivativesOctober
      31, 2009
                                                      
                                                      Balance
      Sheet Location
                                                      
                                                      Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                      
                                                      Current
      Liabilities
                                                      
                                                      $
                                                      154




-23-




NOTE 19 –
Accrued Expenses





Accrued
expenses consist of the following:





(in thousands)October 31,
                    2009
                  
                  
                  July 31,
                    2009Net
      smelter return
                  
                  $
                  258
                  
                  
                  $
                  212Mining
      contract
                  
                  
                  312
                  
                  
                  
                  30Income
      tax payable
                  
                  
                  1,132
                  
                  
                  
                  507Utilities
                  
                  
                  148
                  
                  
                  
                  128Interest
                  
                  
                  17
                  
                  
                  
                  21Legal
      and professional
                  
                  
                  70
                  
                  
                  
                  125Salaries,
      wages and related benefits
                  
                  
                  721
                  
                  
                  
                  533Other
      liabilities
                  
                  
                  101
                  
                  
                  
                  77$
                  2,759
                  
                  
                  $
                  1,633





NOTE 20 -
Income Taxes





The
Company’s Income tax (expense) benefit for the three months ended consisted
of:





(in thousands)October 31,
                    2009
                  
                  
                  October 31,
                    2008Current:United
      States
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  (1,719
                  )
                  
                  
                  (927
                  )(1,719
                  )
                  
                  
                  (927
                  )Deferred:United
      States
                  
                  
                  -
                  
                  
                  
                  -Foreign
                  
                  
                  -
                  
                  
                  
                  --
                  
                  
                  
                  -Total
                  
                  $
                  (1,719
                  )
                  
                  $
                  (927
                  )




The
Company’s Income (loss) before income tax for the three months ended consisted
of:





(in
      thousands)October 31,
                    2009
                  
                  
                  October 31,
                    2008United
      States
                  
                  $
                  (1,908
                  )
                  
                  $
                  (1,524
                  )Foreign
                  
                  
                  6,566
                  
                  
                  
                  4,387Total
                  
                  $
                  4,658
                  
                  
                  $
                  2,863




-24-




The
Company’s current intent is to permanently reinvest its foreign affiliate’s
earnings; accordingly, no U.S. income taxes have been provided for the
unremitted earnings of the Company’s foreign affiliate.




On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system.  This
new flat tax system integrates with the regular income tax system and is based
on cash-basis net income that includes only certain receipts and
expenditures.  The flat tax is set at 17.5% of cash-basis net income
as determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.




Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly
period.  There is the possibility of implementation amendments by the
Mexican Government and the estimated future income tax liability recorded at the
balance sheet date may change.





Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are,
on a more likely than not basis, not expected to be realized; in accordance with
ASC guidance for income taxes. Net deferred tax benefits related to the U.S.
operations have been fully reserved. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the period that such
tax rate changes are enacted.




NOTE 21 -
Fair Value Measurements





ASC
guidance for fair value measurements and disclosures establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are described
below:




Level 1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities;Level 2
              Quoted
      prices in markets that are not active, or inputs that are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability; andLevel 3
              Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (supported by little or no
      market activity).




-25-




The
following table sets forth the Company’s financial assets and liabilities
measured at fair value by level within the fair value hierarchy. As required by
ASC guidance, assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.





Fair Value at October 31, 2009
                                (in thousands)Total
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3Assets:Cash
      equivalents
                              
                              $
                              3,288
                              
                              
                              $
                              3,288
                              
                              
                              $
                              -
                              
                              
                              $
                              -Marketable
      securities
                              
                              
                              40
                              
                              
                              
                              40
                              
                              
                              
                              -
                              
                              
                              
                              -$
                              3,328
                              
                              
                              $
                              3,328
                              
                              
                              $
                              -
                              
                              
                              $
                              -Liabilities:Interest
      rate swap
                              
                              
                              154
                              
                              
                              
                              -
                              
                              
                              
                              154
                              
                              
                              
                              -$
                              154
                              
                              
                              $
                              -
                              
                              
                              $
                              154
                              
                              
                              $
                              -





The
Company’s cash equivalent instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. The
cash instruments that are valued based on quoted market prices in active markets
are primarily money market securities.




The
Company’s marketable equity securities are valued using quoted market prices in
active markets and as such are classified within Level 1 of the fair value
hierarchy. The fair value of the marketable equity securities is calculated as
the quoted market price of the marketable equity security multiplied by the
quantity of shares held by the Company.





The
Company has an interest rate swap contract to hedge a portion of the interest
rate risk exposure on its outstanding loan balance. The hedged portion of the
Company’s debt is valued using pricing models which require inputs, including
risk-free interest rates and credit spreads. Because the inputs are derived from
observable market data, the hedged portion of the debt is classified within
Level 2 of the fair value hierarchy.





NOTE 22 –
Subsequent Events





On
November 2, 2009, Robert Roningen resigned as a member of the Board of Directors
of the Company.  He also resigned as Executive Vice President and
Secretary of the Company, effective November 12, 2009.  The Company
appointed Christopher M. Chipman to replace Mr. Roningen as Secretary of the
Company.  Mr. Roningen did not resign from the Company’s Board of
Directors as a result of any disagreements with the Company on any matter
relating to the Company’s operations, policies or practices.





On
November 4, 2009, Roger Newell resigned as a Director of the
Company.  Mr. Newell did not resign from the Company’s Board of
Directors as a result of any disagreements with the Company on any mater
relating to the Company’s operations, policies or practices.


-26-


Item
2.              Management's Discussion and
Analysis of Financial Condition and Results of Operations.


(in
thousands, except for per share and ounce amounts)





Cautionary Statement on
Forward-Looking Statements





Certain
statements in this report constitute “forwarding-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”). Certain of such forward-looking statements can be
identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties.  All statements other
than statements of historical fact, included in this report regarding our
financial position, business and plans or objectives for future operations are
forward-looking statements.  Without limiting the broader description
of forward-looking statements above, we specifically note that statements
regarding exploration, costs, grade, production and recovery rates, strip
ratio, permitting, financing needs and the availability of financing on
acceptable terms or other sources of funding are all forward-looking in
nature.





Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including but not limited to, the factors discussed below in Part
II; Item 1A. “Risk Factors,” which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements and other
factors referenced in this report.  We do not undertake and
specifically decline any obligation to publicly release the results of any
revisions which may be made to any forward-looking statement to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.





We
utilize certain Non-GAAP performance measures and ratios in managing the
business and may provide users of this financial information with additional
meaningful comparisons between current results and results in prior operating
periods. Non-GAAP financial measures should be viewed in addition to, and not as
an alternative to, the reported operating results or cash flow from operations
or any other measure of performance prepared in accordance with accounting
principles generally accepted in the United States. In addition, the
presentation of these measures may not be comparable to similarly titled
measures other companies use.





General





Capital
Gold Corporation (the “Company”, “we” or “our”) is a gold production and
exploration company. Through our wholly owned subsidiaries, we own 100% of 16
mining concessions totaling approximately 3,544 hectares (8,756 acres or 13.7
square miles) located in the Municipality of Altar, State of Sonora, Republic of
Mexico.  We commenced mining operations on two of these concessions in
late March 2007 and achieved gold production and revenue from operations in
early August 2007.  We sometimes refer to the operations on these two
concessions as the El Chanate Project.


-27-


Receipt of Technical Report
for Updated Reserves at El Chanate





As
previously announced, during 2009 and subsequent to the fiscal year ended July
31, 2009, we conducted exploration activities in the El Chanate pit area
including, core drilling at depth to determine the potential of increasing its
reserves further. The data obtained from geological mapping of the deposit’s
mine pit areas, combined with assays from samples of the exploration drilling
therein, were used to expand information in our mine database. SRK Consulting
(U.S.), Inc. (“SRK”) of Lakewood, Colorado, an independent consulting firm, used
this data to re-estimate El Chanate’s Mineral Reserves. These efforts resulted
in a significant expansion of our reserve estimates, which we reported in our
Form 10-K for the year ended July 31, 2009.  With the receipt of SRK’s
technical report titled NI 43-101 Technical Report, Capital Gold Corporation, El
Chanate Gold Mine, Sonora, Mexico and dated November 27, 2009 (the “SRK
Report”), with respect to the updated reserve estimation and the updated mine
plan and mine production schedule, current as of October 1, 2009 , we are
re-publishing our previously announced reserve estimates along with additional
information. The SRK Report complies with Canadian National Instrument 43-101
Standards of Disclosure for Mineral Projects (“NI 43-101”). Both Bart A. Stryhas
PhD., Principal Resource Geologist, and Bret C. Swanson, BE(Mining), MAusIMM,
are “Qualified Persons” as defined by NI 43-101.





Our
proven and probable reserve tonnage has increased to 70.6 million metric tonnes
with an average gold grade of 0.66 grams per tonne (77.8 million US short
tons at 0.0193 ounces per ton). The proven and probable reserve has 1,504,000
contained ounces of gold. The open pit strip ratio for the life of mine is
2.88:1 (2.88 tonnes of waste to one tonne of ore).  For the next three
years, we anticipate the open pit strip ratio will be consistent with our strip
ratio experienced for the fiscal year ended July 31, 2009. Determination of
operational pre-stripping (Increase in strip ratio) will be made after further
geological drilling and consolidation of corporate strategy within the three
year window of opportunity. There is also the potential to improve the life of
mine strip ratio as the report identifies material within the pit design
classified as waste that with additional drilling could be reclassified as ore.
The updated pit design for the revised mine plan is based on a plant recovery of
gold that varies by rock types, but is expected to average 58.25%. A gold price
of US$800 (SEC three year average as of October 1, 2009) per ounce was used to
re-estimate the reserves compared with a gold price of $750 per ounce used in
the previous reserve estimate.  The stated proven and probable mineral
reserves have been prepared in accordance with the Canadian Institute of Mining,
Metallurgy and Petroleum (CIM).  CIM definitions for proven and
probable reserves convert directly from measured and indicated mineral resources
with the application of appropriate economic parameters. These reserves are
equivalent to proven and probable reserves as defined by the United States
Securities and Exchange Commission (SEC) Industry Guide 7.





The
following summary is extracted from the SRK Report.   Please note
that the reserves as stated are an estimate of what can be economically and
legally recovered from the mine and, as such, incorporate losses for dilution
and mining recovery.  The 1,504,000 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process.  Total gold
produced is estimated to be 876,000 ounces, or approximately 58.25% of the
contained gold. The gold recovery rate is expected to average approximately
58.25% for the entire ore body.  Individual portions of the ore body
may experience varying recovery rates ranging from about 48% to
65%.  Oxidized and sandstone ore types may have recoveries of about
65%; siltstone ore types recoveries may be about 48% and latite intrusive ore
type recoveries may be about 50%.


-28-


Production
Summary


Metric
                              
                              U.S.MaterialsReservesProven
                              22.4
      Million Tonnes @   0.70   g/t(1)
                              
                              24.7
      Million Tons @   0.0204 opt(1)Probable
                              48.2 Million
      Tonnes  @  0.65   g/t(1)
                              
                              53.0 Million Tons @   0.0189
      opt(1)Total
      Reserves(2)
                              70.6
      Million Tonnes  @  0.66   g/t(1)
                              
                              77.7
      Million Tons @   0.0193 opt(1)Waste
                              203.5 Million Tonnes
                              
                              224.3 Million TonsTotal
      Ore/Waste
                              274.1
      Million Tonnes
                              
                              302.0
      Million tonsContained
      Gold
                              46.78
      Million grams
                              
                              1,504,000  OzProductionOre
      Crushed
                              5.4
      Million Tonnes /Year
                              
                              6.0
      Million Tons/Year14,868
      Mt/d(1)
                              
                              16,390
      t/d(1)Operating
      Days/Year
                              365
      Days per year
                              
                              365
      Days per yearGold
      Plant Average Recovery
                              58.25
      %
                              
                              58.25%Average
      Annual Production
                              2.1  Million
      grams
                              
                              67,391  OzTotal
      Gold Produced
                              27.25 Million grams
                              
                              876,080  Oz





(1)
            “g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
      metric tonnes per day and “t/d” means tons per
  day.


(2)
            The
      reserve estimates are mainly based on a gold cutoff grade of 0.15 g/t for
      sandstone and 0.19 grams for siltstone and latite within the pit
      design.




The SRK
resource estimation is based on information from 371 holes for a total of 55,294
meters of drilling.  There are 333 reverse circulation holes and 38
core holes.  The drill holes were carefully logged, sampled and tested
with gold fire assay (industry standard).  A geological model was
constructed based on four general rock groups which are cut by thrust faults and
normal faults.  The mineral resource model blocks are 6m (meters) x 6m
x 6m. All block grade estimates were made using 6m bench
composites.  An ordinary Kriging algorithm was employed to generate a
categorical indicator grade shell based on a 0.1ppm gold
threshold.  An inverse distance cubed algorithm was used for the gold
grade estimation within the grade shells.





The life
of mine plan used as the basis for the reserve is based on operating gold cutoff
grades of 0.15 to 0.19 g/t, depending on the ore type to be
processed.  The internal (in-pit) and break even cutoff grade
calculations are as follows:


-29-





Cutoff
      Grade Calculation
                  Internal
      Cutoff Grade
                  
                  Break
      Even Cutoff GradeBasic
      ParametersGold
      Price
                  US$800/oz
                  
                  US$800/ozGold
      Selling Cost (4% Royalty, Refining, Transport, Silver Credit,
      etc)
                  $25.258/oz
                  
                  $25.258/ozGold
      Recovery*
                  58.25%
                  
                  58.25%Operating
      Costs per Tonne of OreMiningProcessing
      – Heap leach
                  
                  
                  $1.08/tonne$2.357/tonne
                  
                  $2.357/tonneTotal$2.357/tonne
                  
                  $3.44/tonneCutoff
      GradeHead
      Grade Cutoff (58.25% average recovery)
                  Grams
      per Tonne
                  
                  Grams
      per TonneRecovered
      Gold Grade Cutoff0.15
      g/t gold
                  
                  0.24
      g/t gold0.09
      g/t gold
                  
                  0.14
      g/t gold





* Plant
recovery of gold varies by rock type but weighted average gold recovery is
expected to average 58.25% based on work done to date.




In August
2009, we initiated the construction of an additional leach pad area with
capacity for eight million tonnes of ore, at a cost of approximately
$3,300.  Permitting and site clearing have been completed, the
construction contractor has nearly completed the earthworks and geomembrane
liners are being applied.  Golder Engineering of Tucson, Arizona is
overseeing construction activities and quality control and assurance for the
project. The construction schedule anticipates that stacking ore on the new pad
will commence in January 2010.





On
October 1, 2009, the Company committed to the procurement of a new secondary
crusher for the El Chanate mine.  The cost for this equipment is
approximately $1,000, with one-third due upon execution of the sales order,
one-third due in 30 days and one-third upon shipment.





The
following table represents a summary of our proven and probable mineral
reserves.





Proven and probable mineral reserve (Ktonnes of ore)
                  
                  October 31,
                    2009
                  
                  
                  July 31,
                    2009Ore
                  
                  
                  -
                  
                  
                  
                  -Beginning
      balance (Ktonnes)
                  
                  
                  40,911
                  
                  
                  
                  35,417Additions
                  
                  
                  30,388
                  
                  
                  
                  9,342Reductions
                  
                  
                  (1,136
                  )
                  
                  
                  (3,848
                  )Ending
      Balance
                  
                  
                  70,163
                  
                  
                  
                  40,911Contained
      goldBeginning
      balance (thousand of ounces)
                  
                  
                  859
                  
                  
                  
                  719Additions
                  
                  
                  662
                  
                  
                  
                  239Reductions
                  
                  
                  (27
                  )
                  
                  
                  (99
                  )Ending
      Balance
                  
                  
                  1,494
                  
                  
                  
                  859


-30-


El
Oso Project - Saric Properties – Sonora, Mexico





In April
2008, we leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,304 additional
hectares adjacent to this property. The approximate 4,100 hectare area is
accessible by paved roads and has cellular phone service from
hilltops.  These concessions and this claim are about 60 miles
northeast of the El Chanate project. Mineralization is evident throughout the
concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. We have completed exploration work consisting of
geological mapping, systematic geochemical sampling of rock and soils,
geophysical surveys, trenching and 73 reverse circulation drill holes totaling
6,121 meters and more recently a one meter interval topographic survey over the
concession area.  SRK of Lakewood, Colorado has  visited the
site and has monitored the quality assurance and quality control during these
drill campaigns.  SRK will also assist on the next phase of the
exploration program.  All of the drill hole samples have
been  assayed by ALS Chemex.  The ALS Chemex facility in
Hermosillo does the sample preparation, and the assays are performed at the ALS
Chemex’s Vancouver laboratory.  ALS Chemex laboratories provide the
highest level of quality and have ISO 9001:2000 certification at all
locations.





The lease agreement required an initial
payment of $45 upon execution of the lease.  We are required to pay
and additional $250, consisting of ten payments of $25 every four months
beginning six months after execution of the lease agreement. The agreement also
contains an option to acquire the mining concessions for a cash payment of
$1,500 at the end of the term (December 2010).  If we elect not to
exercise this option, we would have the ability to mine the concessions by
paying a 1% net smelter return to the owners of the leased concessions, capped
at $3,000.  Prior payments made under this lease agreement would be
deductible from the $3,000 cap.





We
continue to investigate other exploration projects in northern Mexico and other
locations.





Result
of Operations





Three months ended
October 31, 2009 compared to three months ended October 31,
2008





Net income for the three months ended
October 31, 2009 and 2008 was approximately $2,939 and $1,936, respectively,
representing an increase of approximately 52% over the prior
period.  Net income before income taxes was $4,658 and $2,863 for the
three months ended October 31, 2009 and 2008, respectively, which represented an
increase of 63%.  Net income and net income before taxes increased
primarily as a result of higher revenues from a higher gold price being realized
from ounces sold during the three months ended October 31, 2009, as compared to
the same period a year ago. Income tax expense increased in conjunction with the
increase in net income before tax, which was anticipated.





Revenues & Costs
Applicable to Sales





Gold
sales for the three months ended October 31, 2009 totaled approximately $11,727
as compared to $9,175 in the prior period representing an increase of
approximately $2,552 or 28%.  We sold 11,733 ounces at an average
realizable price per ounce of approximately $999 in the current
period.  We sold 11,413 ounces at an average realizable price per
ounce of $805 during the same period last year.


-31-


Costs
applicable to sales were approximately $4,110 and $3,042, respectively, for the
three months ended October 31, 2009 and 2008, an increase of approximately
$1,068 or 35%.  Cash costs of $338 per ounce of gold sold for the
three months ended October 31, 2009 was 25% higher than the $270 for the three
months ended October 31, 2008.   The primary reason for this
increase in cost per ounce sold in the current period is attributable to higher
leaching and ADR plant costs as well as higher mining costs incurred as compared
to the prior period.  The increase in leaching and ADR plant costs of
approximately $588,  primarily cyanide, water and electricity, was
mainly the result of increasing the solution flow through the leach pad as we
increased the level of lifts (height of the pad).  The $313 increase
in mining costs was primarily due to a price escalation within our mining
contract with Sinergia, as well as higher consumption of diesel fuel for two
trucks and loader that were acquired during the quarter ended October 31,
2008.  Total costs of $389 per ounce of gold sold for the three months
ended October 31, 2009, was 25% higher than the $310 total cost in the prior
period.  The primary reason for this increase in total costs was
attributed to the same reason as detailed above for the increase in cash costs
per ounce sold.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $254 and $297 for the
three months ended October 31, 2009 and 2008, on silver ounces sold of 15,760
and 25,334, respectively.





Depreciation and
Amortization





Depreciation and amortization expense
during the three months ended October 31, 2009 and 2008 was approximately $843
and $703, respectively.  The primary reason for the increase of
approximately $140, or 20%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions made during the last nine months of the fiscal year ended July 31,
2009. Depreciation and amortization also includes deferred financing costs
resulting from the credit arrangements entered into with Standard
Bank.  This accounted for approximately $233 and $239 of depreciation
and amortization expense during the three months ended October 31, 2009 and
2008, respectively.





General and Administration
Expense





General
and administrative expenses during the three months ended October 31, 2009 were
approximately $1,630, an increase of approximately $252, or 18%, from the three
months ended October 31, 2008. This increase resulted primarily from a one-time
charge of $426 related to the termination of an employment agreement of an
executive officer without cause pursuant to a restructuring of our corporate
investor relations function.  Had this one-time charge not been
reflected in the current period, general and administrative expenses would have
decreased by $174, as compared to the prior quarter. This decrease was mainly
the result of lower equity based compensation expense in the current period due
to the termination noted above and the resignations of directors.





Exploration
Expense





Exploration
expense during the three months ended October 31, 2009 and 2008 was
approximately $331 and $490, respectively, or a decrease of $159, or
32%.  The primary reason for the decrease can be attributed to the
prior year containing exploration expense associated with a 10 hole, deep core
drilling campaign at our El Chanate mine totaling 2,500 meters.  Both
periods presented include activity associated with on-going exploration,
drilling and geochemical work being conducted on our leased and owned
concessions located northwest of Saric, Sonora.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended October 31, 2009 and 2008, was approximately $0 and $304, respectively,
and was reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.


-32-


Interest expense was approximately
$134 for the three months ended October 31, 2009 compared to approximately $200
for the same period a year earlier.  This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period.  As of October 31, 2009 and
2008, there was $7,100 and $11,375, respectively, outstanding on our term note
with Standard Bank.





Changes in Foreign Exchange
Rates





During the three months ended October
31, 2009 and 2008, we recorded equity adjustments from foreign currency
translations of approximately $188 and $2,192, respectively.  These
translation adjustments are related to changes in the rates of exchange between
the Mexican Peso and the U.S. dollar and are included as a component of other
comprehensive income.  The Mexican Peso and the U.S. dollar exchange
rate as of October 31, 2009 was 13.0950.  As of July 31, 2009, such
exchange rate was 12.9933.





Summary of Quarterly
Results


(000’s except per share
Data)





For
      the three
                    
                    
                    For
      the threemonths
      ended
                    
                    
                    months
      endedOctober 31,
                      2009
                    
                    
                    October 31,
                      2008Revenues
                    
                    
                    11,727
                    
                    
                    
                    9,175Net
      Income
                    
                    
                    2,939
                    
                    
                    
                    1,936Basic
      net income per share
                    
                    
                    0.02
                    
                    
                    
                    0.01Diluted
      net income per share
                    
                    
                    0.01
                    
                    
                    
                    0.01Gold
      ounces sold
                    
                    
                    11,733
                    
                    
                    
                    11,413Average
      price received
                    
                    $
                    999
                    
                    
                    $
                    805Cash
      cost per ounce sold(1)
                    
                    $
                    338
                    
                    
                    $
                    270Total
      cost per ounce sold(1)
                    
                    $
                    389
                    
                    
                    $
                    310





(1)
            "Cash
      costs per ounce sold" is a Non-GAAP measure which includes all direct
      mining costs, refining and transportation costs and by-product credits as
      well as royalties as reported in the Company's financial statements.
       “Total cost per ounce sold” is a Non-GAAP measure which includes
      “cash costs per ounce sold” as well as depreciation and amortization as
      reported in the Company's financial
statements.


-33-


Summary of Results of
Operations





For
      the three
                    
                    
                    For
      the threemonths
      ended
                    
                    
                    months
      endedOctober
      31,
                      2009
                    
                    
                    October
      31,
                      2008Tonnes
      of ore mined
                    
                    
                    1,135,892
                    
                    
                    
                    1,028,640Tonnes
      of waste removed
                    
                    
                    1,192,826
                    
                    
                    
                    1,292,800Ratio
      of waste to ore
                    
                    
                    1.05
                    
                    
                    
                    1.26Tonnes
      of ore processed
                    
                    
                    1,122,183
                    
                    
                    
                    1,007,681Grade
      (grams/tonne)
                    
                    
                    0.70
                    
                    
                    
                    0.86Gold
      (ounces)-      
      Produced(1)
                    
                    
                    11,908
                    
                    
                    
                    11,888-      
      Sold
                    
                    
                    11,733
                    
                    
                    
                    11,413


(1)
            Gold
      produced each year does not necessarily correspond to gold sold during the
      year, as there is a time delay in the actual sale of the
    gold.





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the three months ended October 31, 2009 and 2008 was
$2,931 and $3,561.  The primary reason for
the period-to-period decrease in cash flow provided by operating activities was
due to an increase in inventory balances during the current period of $3,239
offset by an increase in net income and also accounts payable as compared to the
prior year.




Investing
Activities




Cash used in investing
activities during the three months ended October 31, 2009, amounted to
approximately $1,948, primarily for the acquisition of an additional tertiary
crusher and screen plant, additional water rights, as well as costs incurred for
leach pad expansion.  In August 2009, we initiated the construction of
an additional leach pad area with capacity for an additional eight million
tonnes of ore at an approximate cost of $3,300.  Permitting and site
clearing has been completed. The construction contractor has nearly completed
the earthworks, and geomembrane liners are being applied.  Golder
Engineering of Tucson, Arizona is overseeing construction activities and quality
control and assurance for the project. The construction schedule anticipates
that stacking ore on the new pad will commence in January 2010.  On
October 1, 2009, the Company committed to the procurement of a new secondary
crusher for the El Chanate mine.  The cost for this equipment is
approximately $1,000 with one-third due upon execution of the sales order,
one-third due in 30 days and one-third upon shipment.  Cash used in investing
activities during the three months ended October 31, 2008, amounted to
approximately was $2,027, primarily from the acquisition of mobile equipment,
conveyors and ADR plant equipment, including the carbon regeneration
kiln.




Financing
Activities




Cash used in financing
activities during the three months ended October 31, 2009 amounted to
approximately $846, primarily from the repayment of the Credit Agreement in the
amount of $900.  We also received proceeds of approximately $53 in the
current period from the issuance of common stock upon the exercising of 125,000
options.  Cash used
in financing activities during the three months ended October 31, 2008
amounted to approximately $1,126, primarily from the repayment of the note
payable in the amount of $1,125.


-34-




Term
loan and Revolving Credit Facility





In September 2008, we closed an Amended
And Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), us,
as guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender.  The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006.  Under the
CreditAgreement, MSR and Oro borrowed money in an aggregate principal amount of
up to $12,500 (the “Term Loan”) for the purpose of constructing, developing and
operating the El Chanate gold mining project in Sonora State,
Mexico.  We guaranteed the repayment of the Term Loan and the
performance of the obligations under the Credit Agreement.  As of
October 31, 2009, the outstanding amount on the term note was $7,100 and accrued
interest on this agreement was approximately $17.





Term Loan principal shall be repaid
quarterly and commenced on September 30, 2008 and consisted of four payments in
the amount of $1,125, followed by eight payments in the amount of $900 and two
final payments in the amount of $400. There is no prepayment
fee.  Principal under the Term Loan shall bear interest at a rate per
annum equal to the LIBOR Rate, as defined in the Credit Agreement, for the
applicable Interest Period plus the Applicable Margin. An Interest Period can be
one, two, three or six months, at the option of the Borrowers. The Applicable
Margin for the Term Loan is 2.5% per annum Pursuant to the terms of the Credit
Agreement, operating accounts remain subject to an account pledge agreement
between MSR and Standard Bank.





The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro.  As
additional collateral for the Loan, the Company, together with its subsidiary,
Leadville Mining & Milling Holding Corporation, pledged all of its ownership
interest in MSR and Oro.





On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period and determined that during
that time it was not cost beneficial to maintain the revolving loan on a going
forward basis.





Debt
Covenants





Our
Credit Agreement with Standard Bank requires us, among other obligations, to
meet certain financial covenants including (i) a ratio of current assets to
current liabilities at all times greater than or equal to 1.20:1.00, (ii) a
quarterly minimum tangible net worth at all times of at least $15,000, and (iii)
a quarterly average minimum liquidity of $500. In addition, the Credit Agreement
restricts, among other things, our ability to incur additional debt, create
liens on our property, dispose of any assets, merge with other companies, enter
into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with
the restrictions contained in the Credit Agreement could lead to an event of
default thereunder which could result in an acceleration of such
indebtedness.




As of
October 31, 2009, we and our related entities were in compliance with all debt
covenants and default provisions.





Environmental
and Permitting Issues





Management
does not expect that environmental issues will have an adverse material effect
on our liquidity or earnings.  The Company complies with all laws,
rules and regulations concerning mining, environmental, health, zoning and
historical preservation issues and we are not aware of any environmental at the
El Chanate concessions.  We have received the required Mexican
government permits for operations.  Any revisions to our mine plan may
require us to amend the permits.


-35-


We
received the annual extension to the explosive use permit from the relevant
authorities.  The permit is valid through December 2009.





We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the
future.  As of October 31, 2009, we have estimated the reclamation
costs for the El Chanate site to be approximately $3,200.  Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation at each mine
site.  We reviewed the estimated present value of the El Chanate mine
reclamation and closure costs as of July 31, 2009.  This resulted in
an accrual for reclamation obligations as of July 31, 2009 of $1,594 relating to
mineral properties in accordance with ASC guidance for asset retirement and
environmental obligations.  As of October 31, 2009, our reclamation
and remediation liability was $1,652.





Recently
IssuedAccounting Pronouncements





See Note
2 to the Condensed Consolidated Financial Statements contained in Item 1.
Financial Statements above.





Disclosure
About Off-Balance Sheet Arrangements





We do not
have any transactions, agreements or other contractual arrangements that
constitute off-balance sheet arrangements.





Critical
Accounting Policies





Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of
America.  Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses.  These estimates and assumptions
are affected by management’s application of accounting
policies.  Critical accounting policies for us include inventory,
revenue recognition, property, plant and mine development, impairment of
long-lived assets, accounting for equity-based compensation, environmental
remediation costs and accounting for derivative and hedging
activities.




Ore on Leach Pads and
Inventories (“In-Process Inventory”)




Costs that are incurred in or benefit
the productive process are accumulated as ore on leach pads and inventories. Ore
on leach pads and inventories are carried at the lower of average cost or
market. The current portion of ore on leach pads and inventories is determined
based on the amounts to be processed within the next 12 months. The major
classifications are as follows:


-36-




Ore
on Leach Pads




The recovery of gold from ore is
achieved through the heap leaching process. Under this method, ore is placed on
leach pads where it is treated with a chemical solution, which dissolves the
gold contained in the ore. The resulting “pregnant” solution is further
processed in a processing plant that extracts gold from this solution producing
gold doré. Costs are applied to ore on leach pads based on current mining costs,
including applicable depreciation, depletion and amortization relating to the
mining operation. Costs are removed from ore on leach pads as ounces are
recovered based on the average cost per estimated recoverable ounce of gold on
the leach pad.




The estimates of recoverable gold on
the leach pads are calculated from the quantities of ore placed on the leach
pads (measured tonnes added to the leach pads), the grade of ore placed on the
leach pads (based on fire assay data) and a recovery percentage (based on ore
type and column testwork). It is estimated that the Company’s leach pad at El
Chanate will recover all ounces placed within a one year period from date of
placement.




Although the quantities of recoverable
gold placed on the leach pads are reconciled by comparing the grades of ore
placed on pads to the quantities of gold actually recovered (metallurgical
balancing), the nature of the leaching process inherently limits the ability to
precisely monitor inventory levels. As a result, the metallurgical balancing
process needs to be constantly monitored and estimates need to be refined based
on actual results over time. The Company’s operating results may be impacted by
variations between the estimated and actual recoverable quantities of gold on
its leach pads.




In-process
Inventory




In-process inventories represent
materials that are currently in the process of being converted to a saleable
product. Conversion processes vary depending on the nature of the ore and the
specific processing facility, but include leach in-circuit, flotation and column
cells and carbon in-pulp inventories. In-process material are measured based on
assays of the material fed into the process and the projected recoveries of the
respective plants. In-process inventories are valued at the average cost of the
material fed into the process attributable to the source material coming from
the mines and/or leach pads plus the in-process conversion costs, including
applicable depreciation relating to the process facilities incurred to that
point in the process.




Precious
Metals Inventory




Precious metals inventories include
gold doré and/or gold bullion. Precious metals that result from the Company’s
mining and processing activities are valued at the average cost of the
respective in-process inventories incurred prior to the refining process, plus
applicable refining costs.




Materials
and Supplies




Materials and supplies are valued at
the lower of average cost or net realizable value. Cost includes applicable
taxes and freight.




Property, Plant and Mine
Development




Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated productive lives,
which do not exceed the related estimated mine lives, of such facilities based
on proven and probable reserves.


-37-




Mineral exploration costs are expensed
as incurred. When it has been determined that a mineral property can be
economically developed as a result of establishing proven and probable reserves,
costs incurred prospectively to develop the property will be capitalized as
incurred and are amortized using the units-of-production (“UOP”) method over the
estimated life of the ore body based on estimated recoverable ounces or pounds
in proven and probable reserves.





Impairment of Long-Lived
Assets




We review and evaluate our long-lived
assets for impairment when events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. An impairment is considered to
exist if the total estimated future cash flows on an undiscounted basis are less
than the carrying amount of the assets, including goodwill, if any. An
impairment loss is measured and recorded based on discounted estimated future
cash flows. Future cash flows are estimated based on quantities of recoverable
minerals, expected gold and other commodity prices (considering current and
historical prices, price trends and related factors), production levels and
operating costs of production and capital, all based on life-of-mine plans.
Existing proven and probable reserves and value beyond proven and probable
reserves, including mineralization other than proven and probable reserves and
other material that is not part of the measured, indicated or inferred resource
base, are included when determining the fair value of mine site reporting units
at acquisition and, subsequently, in determining whether the assets are
impaired. The term “recoverable minerals” refers to the estimated amount of gold
or other commodities that will be obtained after taking into account losses
during ore processing and treatment. Estimates of recoverable minerals from such
exploration stage mineral interests are risk adjusted based on management’s
relative confidence in such materials. In estimating future cash flows, assets
are grouped at the lowest level for which there are identifiable cash flows that
are largely independent of future cash flows from other asset groups. Our
estimates of future cash flows are based on numerous assumptions and it is
possible that actual future cash flows will be significantly different than the
estimates, as actual future quantities of recoverable minerals, gold and other
commodity prices, production levels and operating costs of production and
capital are each subject to significant risks and uncertainties.




Reclamation and Remediation
Costs (Asset Retirement Obligations)




Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and closure costs. The asset retirement obligation is based on when
the spending for an existing environmental disturbance and activity to date will
occur. We review, on an annual basis, unless otherwise deemed necessary, the
asset retirement obligation at our mine site in accordance with ASC guidance for
asset retirement and environmental obligations.





Deferred Financing
Costs





Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.


-38-


Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements, net profit interests, etc. are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with ASC guidance for goodwill and other
intangibles. There was no impairment at October 31, 2009.





Fair Value of Financial
Instruments





The carrying value of our financial
instruments, including cash and cash equivalents, loans receivable and accounts
payable approximated fair value because of the short maturity of these
instruments.





Revenue
Recognition





Revenue
is recognized from the sale of gold doré when persuasive evidence of an
arrangement exists, the price is determinable, the product has been shipped to
the refinery, the title has been transferred to the customer and collection of
the sales price is reasonably assured from the customer.  The Company
sells its precious metal content to a financial institution. Revenues are
determined by selling the precious metal content at the spot price. Sales are
calculated based upon assay of the doré’s precious metal content and its
weight.  The Company sells approximately 95% of the precious metal
content contained within the doré from the refinery based upon the preliminary
assay of the Company. The residual ounces are sold upon obtaining the final
assay and settlement for the shipment. The Company forwards an irrevocable
transfer letter to the refinery to authorize the transfer of the precious metal
content to the customer.  The sale is recorded by the Company upon the
refinery pledging the precious metal content to the customer.  The
Company waits until the doré precious metal content is pledged to the customer
at the refinery to recognize the sale because collectability is not ensured
until the doré precious metal content is pledged.  The sale price is
not subject to change subsequent to the initial revenue recognition
date.




Revenues
from by-product sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $254 and $297 for
the three months ended October 31, 2009 and 2008.





Foreign Currency
Translation





Assets
and liabilities of the Company's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).





Comprehensive Income
(Loss)





Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in our interest rate swap agreement and net unrealized gains and
losses on available-for-sale securities.


-39-


Income
Taxes




On
October 1, 2007, the Mexican government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system.  This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures.  The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively.  If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax.  If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.




Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
This legislation remains subject to ongoing varying interpretations.  There
is the possibility of implementation amendments by the Mexican government and
the estimated future income tax liability recorded at the balance sheet date may
change.





Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.




Equity Based
Compensation





In
connection with offers of employment to our executives as well as in
consideration for agreements with certain consultants, we issue options and
warrants to acquire our common stock. Employee and non-employee awards are made
in the discretion of the Board of Directors.





We
account for stock compensation under ASC guidance for compensation – stock
compensation, which requires the Company to expense the cost of employees
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This expense must be recognized ratably over
the requisite service period following the date of grant.





Accounting for Derivatives
and Hedging Activities





On
October 11, 2006, prior to our initial draw on the CreditAgreement, we entered
into interest rate swap agreements in accordance with the terms of the
CreditAgreement, which requires that we hedge at least 50% of our outstanding
debt under thisagreement.  The agreements entered into cover $9,375 or
75% of the outstanding debt. Both swaps covered this same notional amount of
$9,375, but over different time horizons.  The first covered the six
months that commenced on  October 11, 2006 and terminated on March 31,
2007 and the second covers the period from March 30, 2007 through
December 31, 2010. We intend to use discretion in managing this risk as
market conditions vary over time, allowing for the possibility of adjusting the
degree of hedge coverage as we deem appropriate.  However, any use of
interest rate derivatives will be restricted to use for risk management
purposes.





We used
variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
debt obligations expose us to variability in interest payments due to changes in
interest rates.  As a result of these arrangements, we will
continuously monitor changes in interest rate exposures and evaluate hedging
opportunities. Our risk management policy permits us to use any combination of
interest rate swaps, futures, options, caps and similar instruments, for the
purpose of fixing interest rates on all or a portion of variable rate debt,
establishing caps or maximum effective interest rates, or otherwise constraining
interest expenses to minimize the variability of these effects.


-40-


The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense.  No component of hedge results is excluded from the
assessment of hedge effectiveness.





We are exposed to credit losses in the
event of non-performance by counterparties to these interest rate swap
agreements, but we do not expect any of the counterparties to fail to meet their
obligations. To manage credit risks, we select counterparties based on credit
ratings, limit our exposure to a single counterparty under defined guidelines,
and monitor the market position with each counterparty as required by ASC
guidance for derivatives and hedging.





Use of
Estimates





The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.





Item 3.  Quantitative and
Qualitative Disclosures About Market Risk.(in thousands, except for per
share and ounce amounts)




Metal
Price




Changes
in the market price of gold significantly affect our profitability and cash
flow.  Gold prices can fluctuate widely due to numerous factors, such
as demand; forward selling by producers; central bank sales, purchases and
lending; investor sentiment; the relative strength of the U.S. dollar and global
mine production levels.




Foreign
Currency




Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow.  Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic
conditions.  Most of our assets and operations are in Mexico;
therefore, we are more susceptible to fluctuations in the Mexican peso / U.S.
dollar exchange.  Our Mexico operations sell their metal production
based on a U.S. dollar gold price as is the general, world-wide
convention.  Fluctuations in the local currency exchange rates in
relation to the U.S. dollar can increase or decrease profit margins to the
extent costs are paid in local currency at foreign
operations.  Foreign currency exchange rates in relation to the U.S.
dollar have not had a material impact on our determination of proven and
probable reserves.  However, if a sustained weakening of the U.S.
dollar in relation to the Mexican peso that impacts our cost structure was not
mitigated by offsetting increases in the U.S. dollar gold price or by other
factors, then profitability, cash flows and the amount of proven and probable
reserves in the applicable foreign country could be reduced.  The
extent of any such reduction would be dependent on a variety of factors
including the length of time of any such weakening of the U.S. dollar, and
management’s long-term view of the applicable exchange rate.  We
believe, however, that this exchange rate variability has not had a material
impact on our financial statements.


-41-





Interest
Rate Swap Contracts





On
October 11, 2006, prior to our initial draw on the Credit Agreement, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Agreement.  Although the Credit Agreement requires that we hedge at
least 50% of our outstanding debt under thisagreement, we elected to cover
$9,375 or 75% of the outstanding debt.  The termination date on our
existing swap position is December 31, 2010.  However, we intend to
use discretion in managing this risk as market conditions vary over time,
allowing for the possibility of adjusting the degree of hedge coverage as we
deem appropriate.  In any case, our use of interest rate derivatives
will be restricted to use for risk management purposes.




Market
Risk Disclosures
 October
31, 2009
 (in
thousands)
 
 Instruments
entered into for hedging purposes -
 
 Type of Derivative
                  
                  Notional Size
                  
                  
                  Fixed Price or
                    Strike Price
                  
                  Underlying Price
                  Termination or
                    Expiration
                  
                  Fair ValueInterest
      Rate Swaps
                  
                  $
                  3,938
                  (1)
                  
                  
                  5.30
                  %
                  3
      Mo. USD LIBOR
                  12/31/2010
                  
                  $
                  (154
                  )
 
 (1)The value shown reflects
the notional as of October 31, 2009. Over the term of the swap, the notional
amortizes, dropping to approximately $656.





As of October 31, 2009, the dollar
value of a basis point for this interest rate swap was approximately $239,
suggesting that a one-basis point rise (fall) of the yield curve would likely
foster an increase (decrease) in the interest rate swaps value by approximately
$239.  Because hedge accounting is applied, the contract serves to
lock in a fixed rate of interest for the portion of the variable rate debt equal
to the swap's notional size.  The swap covers only 75% of our variable
rate exposure.





Item
4. Controls and
Procedures.





The term "disclosure controls and
procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").  This term
refers to the controls and procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized, and reported
within the required time periods.  In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.  Our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report.  They have concluded that, as of that date, our disclosure
controls and procedures were effective at ensuring that required information
will be disclosed on a timely basis in our reports filed under the Exchange
Act.


-42-





No change in our internal control over
financial reporting occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.


-43-


PART
II - OTHER INFORMATION





Item
1.                 Legal
Proceedings.





None.





Item
1A.              Risk
Factors





The
risks described below should not be considered to be comprehensive and
all-inclusive.  Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business
operations.  If any events occur that give rise to the following
risks, our business, financial condition, cash flow or results of operations
could be materially and adversely affected, and as a result, the trading price
of our common stock could be materially and adversely impacted.  These
risk factors should be read in conjunction with other information set forth in
this report, including our Consolidated Financial Statements and the related
Notes.





Risks related to our
business and operations








While
we believe that we will continue to generate positive cash flow and profits from
operations, if we encounter unexpected problems, we may need to raise additional
capital.   If additional capital is required and we are unable to
obtain it from outside sources, we may be forced to reduce or curtail our
operations or our anticipated exploration activities.





Prior to
the first fiscal quarter of 2008, we were not able to generate cash flow from
operations.  While we now are generating positive cash flow and
profits, if we encounter unexpected problems and we are unable to continue to
generate positive cash flow and profits, we may need to raise additional
capital.  We also may need to raise additional capital for property
acquisition and new exploration. To the extent that we need to obtain additional
capital, management intends to raise such funds through the sale of our
securities and/or joint venturing with one or more strategic
partners.  We cannot assure that adequate additional funding, if
needed, will be available or on terms acceptable to us.  If we need
additional capital and we are unable to obtain it from outside sources, we may
be forced to reduce or curtail our operations or our anticipated exploration
activities.





Our
Credit Agreement with Standard Bank plc (“Standard Bank”) imposes restrictive
covenants on us.





Our
Credit Agreement with Standard Bank requires us, among other obligations, to
meet certain financial covenants including, but not limited to, (i) a ratio of
current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S.$15,000,000, and (iii) a quarterly average minimum liquidity of
U.S.$500,000.  In addition, the Credit Agreement restricts, among
other things, our ability to incur additional debt, create liens on our
property, dispose of any assets, merge with other companies, enter into hedge
agreements, organize or invest in subsidiaries or make any investments above a
certain dollar limit.  A failure to comply with the restrictions contained
in the Credit Agreeement could lead to an event of default thereunder which
could result in an acceleration of such indebtedness.





Our
mining contractor is using reconditioned equipment which could adversely affect
our cost assumptions and our ability to economically and successfully mine the
project.





Sinergia
Obras Civiles Y Mineras, S.A. de C.V. (“Sinergia”), our mining contractor, is
using fully functioning, but older equipment.  Such equipment is
subject to the risk of more frequent breakdowns and need for repair than new
equipment.  If the equipment that we or Sinergia uses breaks down and
needs to be repaired or replaced, we will incur additional costs and operations
may be delayed, resulting in lower amounts of gold recovered.  In such
event, our capital and operating cost assumptions may be inaccurate and our
ability to economically and successfully mine the El Chanate project may be
hampered, resulting in decreased revenues and, possibly, a loss from
operations.








The
gold deposit we have identified at El Chanate is relatively
low-grade.  If our estimates and assumptions are inaccurate, our
results of operation and financial condition could be materially adversely
affected.





The gold
deposit we are mining at our El Chanate mine is relatively
low-grade.  If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if we experience problems related to the mining, processing,
or recovery of gold from ore at the mine, our results of operation and financial
condition could be materially adversely affected.  Moreover, it is
possible that actual costs and economic returns may differ materially from our
best estimates.  There can be no assurance that our operations at El
Chanate will continue to be profitable.





Gold
prices can fluctuate on a material and frequent basis due to numerous factors
beyond our control.  Our ability to generate profits from operations
could be materially and adversely affected by such fluctuating
prices.





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the twelve months ended
October 31, 2009, the spot price for gold on the London Exchange has fluctuated
between $713.50 and $1,061.75 per ounce.  Gold prices are affected by
numerous factors beyond our control, including:





·
            Industrial
      and commercial demand for gold,


·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





Each of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments.  The current
significant instability in the financial markets heightens these
fluctuations.   The price of gold has historically fluctuated
widely and, depending on the price of gold, revenues from mining operations may
not be sufficient to offset the costs of such operations.





We
may not be successful in hedging against interest rate fluctuations and may
incur mark-to-market losses and lose money through our hedging
programs.





We have
entered into interest rate swap agreements.  The terms of our Credit
Agreement with Standard Bank required that we hedge at least 50% of our
outstanding loan balance.  There can be no assurance that we will be
able to successfully hedge against interest rate fluctuations.




Further,
there can be no assurance that the use of hedging techniques will always be to
our benefit.  Hedging instruments that protect against the market
price volatility of metals may prevent us from realizing the full benefit from
subsequent increases in market prices with respect to covered production, which
would cause us to record a mark-to-market loss, thus decreasing our
profits.  Hedging contracts also are subject to the risk that the
other party may be unable or unwilling to perform its obligations under these
contracts.  Any significant nonperformance could have a material
adverse effect on our financial condition, results of operations and cash
flows.








Our
material property interests are in Mexico. Risks of doing business in a foreign
country could adversely affect our results of operations and financial
condition.





We face
risks normally associated with any conduct of business in a foreign country with
respect to our El Chanate Project in Sonora, Mexico, including various levels of
political and economic risk.  The occurrence of one or more of these
events could have a material adverse impact on our efforts or operations which,
in turn, could have a material adverse impact on our cash flows, earnings,
results of operations and financial condition.  These risks include
the following:





·
            labor
      disputes,


·
            invalidity
      of governmental orders,


·
            uncertain
      or unpredictable political, legal and economic
    environments,


·
            war
      and civil disturbances,


·
            changes
      in laws or policies,


·
            taxation,


·
            delays
      in obtaining or the inability to obtain necessary governmental
      permits,


·
            governmental
      seizure of land or mining claims,


·
            limitations
      on ownership,


·
            limitations
      on the repatriation of earnings,


·
            increased
      financial costs,


·
            import
      and export regulations, including restrictions on the export of gold,
      and


·
            foreign
      exchange controls.





These
risks may limit or disrupt the project, restrict the movement of funds or impair
contract rights or result in the taking of property by nationalization or
expropriation without fair compensation.





We
sell gold in U.S. dollars; however, we incur a significant amount of our
expenses in Mexican pesos.  If applicable currency exchange rates
fluctuate, our revenues and results of operations may be materially and
adversely affected.





We sell
gold in U.S. dollars.  We incur a significant amount of our expenses
in Mexican pesos.  As a result, our financial performance would be
affected by fluctuations in the value of the Mexican peso to the U.S.
dollar.





Changes
in regulatory policy could adversely affect our exploration and future
production activities.





Any
changes in government policy may result in changes to laws
affecting:





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


·
            repatriation
      of income and/or


·
            return
      of capital.





Any such
changes may affect our ability to undertake exploration and development
activities in respect of future properties in the manner currently contemplated,
as well as our ability to continue to explore, develop and operate those
properties in which we have an interest or in respect of which we have obtained
exploration and development rights to date. The possibility, particularly in
Mexico, that future governments may adopt substantially different policies,
which might extend to expropriation of assets, cannot be ruled
out.








As
we currently do not enter into forward sales, commodity, derivatives or hedging
arrangements with respect to our future gold production, we are exposed to the
impact of any significant decrease in the gold price.





As
a general rule, we sell our gold at the prevailing market price. Currently, we
generally do not enter into forward sales, commodity, derivative or hedging
arrangements to establish a price in advance for the sale of future gold
production, although we may do so in the future. As a result, we may realize the
benefit of any short-term increase in the gold price, but are not protected
against decreases in the gold price, and if the gold price decreases
significantly, our revenues may be materially adversely affected.





Compliance
with environmental regulations could adversely affect our exploration and future
production activities.





With
respect to environmental regulation, future environmental legislation could
require:





·
            stricter
      standards and enforcement,


·
            increased
      fines and penalties for
non-compliance,


·
            more
      stringent environmental assessments of proposed projects
    and


·
            a
      heightened degree of responsibility for companies and their officers,
      directors and employees.





There can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect our operations. We could be held
liable for environmental hazards that exist on the properties in which we hold
interests, whether caused by previous or existing owners or operators of the
properties. Any such liability could adversely affect our business and financial
condition.





We
have insurance against losses or liabilities that could arise from our
operations.  If we incur material losses or liabilities in excess of
our insurance coverage, our financial position could be materially and adversely
affected.





Mining
operations involve a number of risks and hazards, including:





·
            environmental
      hazards,


·
            industrial
      accidents,


·
            metallurgical
      and other processing,


·
            acts
      of God, and/or


·
            mechanical
      equipment and facility performance
problems.





Such
risks could result in:





·
            damage
      to, or destruction of, mineral properties or production
      facilities,


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses, and/or


·
            possible
      legal liability.





Industrial
accidents could have a material adverse effect on our future business and
operations.  We currently maintain general liability, business
interruption, auto and property insurance coverage.   We cannot
be certain that the insurance we have in place will cover all of the risks
associated with mining or that we will be able to maintain insurance to cover
these risks at economically feasible premiums. We also might become subject to
liability for pollution or other hazards which we cannot insure against or which
we may elect not to insure against because of premium costs or other reasons.
Losses from such events may have a material adverse effect on our financial
position.








Calculation
of reserves and metal recovery dedicated to future production is not exact,
might not be accurate and might not accurately reflect the economic viability of
our properties.





Reserve
estimates may not be accurate.  There is a degree of uncertainty
attributable to the calculation of reserves, resources and corresponding grades
being dedicated to future production. Until reserves or resources are actually
mined and processed, the quantity of reserves or resources and grades must be
considered as estimates only. In addition, the quantity of reserves or resources
may vary depending on metal prices. Any material change in the quantity of
reserves, resource grade or stripping ratio may affect the economic viability of
our properties. In addition, there can be no assurance that mineral recoveries
in small scale laboratory tests will be duplicated in large tests under on-site
conditions or during production.





We are dependent
on the efforts of certain key personnel and contractors to develop our El
Chanate Project.  If we lose the services of these personnel and
contractors and we are unable to replace them, our operations at our El Chanate
Project may be disrupted and/or materially adversely
affected.





We are
dependent on a relatively small number of key personnel, including but not
limited to John Brownlie, President and Chief Operating Officer who, among other
duties, oversees the El Chanate Project, the loss of any one of whom could have
an adverse effect on us.  We are also dependent upon Sinergia to
provide mining services.  Sinergia commenced mining operations on March 25,
2007, and transitioned from the pre-production to production phase of the mining
contract in July 2007.  Sinergia’s mining fleet is not new.  If
we lose the services of our key personnel, or if Sinergia is unable to
effectively maintain its fleet, our operations at our El Chanate Project may be
disrupted and/or materially adversely affected.





There
are uncertainties as to title matters in the mining industry.  We
believe that we have good title to our properties; however, any defects in such
title that cause us to lose our rights in mineral properties could jeopardize
our business operations.





We have
investigated our rights to explore, exploit and develop our concessions in
manners consistent with industry practice and, to the best of our knowledge,
those rights are in good standing.  However, we cannot assure that the
title to or our rights of ownership in the El Chanate concessions will not be
challenged by third parties or governmental agencies. In addition, there can be
no assurance that the concessions in which we have an interest are not subject
to prior unregistered agreements, transfers or claims and title may be affected
by undetected defects.  Any such defects could have a material adverse
effect on us.





Our
ability to maintain long-term profitability eventually will depend on our
ability to find, explore and develop additional properties.  Our
ability to acquire such additional properties could be hindered by competition.
If we are unable to acquire, develop and economically mine additional
properties, we most likely will not be able to be profitable on a long-term
basis.





Gold is a non-renewable resource and
gold mines continue to deplete their reserves while in
operation.  They eventually become deplete of ore or become
uneconomical to sustain mining operations.  The acquisition of gold
properties and their exploration and development are subject to intense
competition. Companies with greater financial resources and larger staffs for
exploration and development may be in a better position than us to compete for
such mineral properties.  If we are unable to find, develop and
economically mine new properties, we most likely will not be able to be
profitable on a long-term basis.





Our
ability on a going forward basis to discover additional viable and economic
mineral reserves is subject to numerous factors, most of which are beyond our
control and are not predictable. If we are unable to discover such reserves, we
most likely will not be able to be profitable on a long-term basis.





Exploration
for gold is speculative in nature, involves many risks and is frequently
unsuccessful. Few properties that are explored are ultimately developed into
commercially producing mines.  As noted above, our long-term
profitability will be, in part, directly related to the cost and success of
exploration programs.  Any gold exploration program entails risks
relating to:








·
            the
      location of economic ore bodies,


·
            development
      of appropriate metallurgical
processes,


·
            receipt
      of necessary governmental approvals,
and


·
            construction
      of mining and processing facilities at any site chosen for
      mining.





The
commercial viability of a mineral deposit is dependent on a number of factors
including:





·
            the
      price of gold,


·
            the
      particular attributes of the deposit, such as
  its


o
            size,


o
            grade,
      and


o
            proximity
      to infrastructure,


·
            financing
      costs,


·
            taxation,


·
            royalties,


·
            land
      tenure,


·
            land
      use,


·
            water
      use,


·
            power
      use,


·
            importing
      and exporting gold, and


·
            environmental
      protection.





The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





The
market price of our stock may be adversely affected by market
volatility  due to the current significant instability in the
financial markets.





As a
result of the current substantial instability in the financial markets, our
stock price has recently fluctuated significantly.  We cannot predict
if or when current adverse economic conditions will be resolved and what the
affect this instability will continue to have on the price of our
stock.





We
do not intend to pay cash dividends in the near future.





Our Board
of Directors determine whether to pay cash dividends on our issued and
outstanding shares.  The declaration of dividends would depend upon
our future earnings, our capital requirements, our financial condition and other
relevant factors.  Our board does not intend to declare any dividends
on our shares for the foreseeable future. We anticipate that we will retain any
earnings to finance the growth of our business and for general corporate
purposes.





Provisions
of our Certificate of Incorporation, By-laws and Delaware law could defer a
change of our management which could discourage or delay offers to acquire
us.





Provisions
of our Certificate of Incorporation, By-laws and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
different series of shares of common stock without any vote or further action by
our stockholders and our Board of Directors has the authority to fix and
determine the relative rights and preferences of such series of common stock. As
a result, our Board of Directors could authorize the issuance of a series of
common stock that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are
distributed to the holders of other common stock and the right to the redemption
of the shares, together with a premium, prior to the redemption of other series
of our common stock.







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





None.





Item
3.                Defaults Upon Senior
Securities.





None.





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





None.





Item
5.                Other
Information.





None.





Item
6.                Exhibits.





23.1
                    
                    Consent
      of SRK Consulting (U.S.), Inc.31.1
                    
                    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Executive Officer.31.2
                    
                    Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Financial Officer.32.1
                    
                    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Executive Officer.32.2
                    
                    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Financial
Officer.