SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





xQUARTERLY
      REPORT UNDER
      SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      quarterly period ended January 31, 2007





OR





oTRANSITION
      REPORT UNDER
      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 small business issuer as specified in its charter)





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





76
      Beaver Street, 26 TH floor, New York, NY 10005


(Address
      of principal executive offices)





Issuer's
      telephone number:  (212)
      344-2785






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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.





Yes  x No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes oNo  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 March 14, 2007Common
                Stock, par value $.0001 per share
            165,629,248




Transitional
      Small Business Format (check one);  Yes o No x











**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 and
      six
      months ended January 31, 2007.





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, 2006.





The
      results reflected for the three and six months ended January 31, 2007 are not
      necessarily indicative of the results for the entire fiscal year.





-2-




CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED BALANCE SHEET(UNAUDITED)




January
                31,2007ASSETSCurrent
                Assets:Cash
                and Cash Equivalents
            
            $
            6,106,420Loans
                Receivable - Affiliate (Note 8 and 11)
            
            
            45,495Prepaid
                Assets
            
            
            74,243Marketable
                Securities (Note 3)
            
            
            85,000Deposits
                (Note 17)
            
            
            598,812Other
                Current Assets (Note 18)
            
            
            610,567Total
                Current Assets
            
            
            7,520,537Mining
                Concessions (Note 7)
            
            
            70,104Property
                & Equipment - net (Note 4)
            
            
            11,894,788Intangible
                Assets - net (Note 5)
            
            
            512,000Other
                Assets:Other
                Investments (Note 9)
            
            
            28,052Deferred
                Financing Costs (Note 13)
            
            
            660,655Mining
                Reclamation Bonds (Note 6)
            
            
            35,550Other
            
            
            42,286Security
                Deposits
            
            
            9,599Total
                Other Assets
            
            
            776,142Total
                Assets
            
            $
            20,773,571LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Accounts
                Payable
            
            $
            234,206Accrued
                Expenses
            
            
            393,150Derivative
                Contracts (Note 16)
            
            
            343,625Total
                Current Liabilities
            
            
            970,981Note
                Payable
            
            
            8,750,000Total
                Long-term Liabilities (Note 13)
            
            
            8,750,000Commitments
                and ContingenciesStockholders’
                Equity:Common
                Stock, Par Value $.0001 Per Share;Authorized
                200,000,000 shares; Issued andOutstanding
                151,489,250 Shares
            
            
            15,149Additional
                Paid-In Capital
            
            
            48,945,745Deficit
                Accumulated in the Development Stage
            
            
            (34,222,755
            )Deferred
                Financing Costs (Note 13)
            
            
            (3,903,363
            )Deferred
                Compensation
            
            
            (52,500
            )Accumulated
                Other Comprehensive Loss (Note 10)
            
            
            270,315Total
                Stockholders’ Equity
            
            
            11,052,590Total
                Liabilities and Stockholders’ Equity
            
            $
            20,773,571




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




-3-




CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED STATEMENT OF OPERATIONS(UNAUDITED)




For
                the PeriodSeptember
                17, 1982For
                The Three Months Ended
            
            (Inception)
                ToJanuary
                31,
            
            January
                31,2007
            
            2006
            
            2007Revenues
            
            $
            -
            
            $
            -
            
            $
            -Costs
                and Expenses:Mine
                Expenses
            
            
            301,451
            
            
            500,831
            
            
            10,118,390Write-Down
                of Mining, Milling and Other Property and Equipment
            
            
            -
            
            
            -
            
            
            1,299,445Selling,
                General and Administrative Expenses
            
            
            548,925
            
            
            424,954
            
            
            13,179,622Stocks
                and Warrants issued forServices
            
            
            101,209
            
            
            -
            
            
            9,600,447Depreciation
                and Amortization
            
            
            272,607
            
            
            10,767
            
            
            760,178Total
                Costs and Expenses
            
            
            1,224,192
            
            
            936,552
            
            
            34,958,082Loss
                from Operations
            
            
            (1,224,192
            )
            
            (936,552
            )
            
            (34,958,082
            )Other
                Income (Expense):Interest
                Income
            
            
            12,112
            
            
            15,274
            
            
            1,013,407Interest
                Expense
            
            
            (175,254
            )
            
            -
            
            
            (197,835
            )Miscellaneous
            
            
            -
            
            
            -
            
            
            36,199Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            -
            
            
            (155,713
            )Gain
                on Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            1,907,903Option
                Payment
            
            
            -
            
            
            -
            
            
            70,688Loss
                on change in fair value of derivative
            
            
            (286,150
            )
            
            
            
            
            (1,109,931
            )Loss
                on Write-Off of Investment
            
            
            -
            
            
            -
            
            
            (10,000
            )Loss
                on Joint Venture
            
            
            -
            
            
            -
            
            
            (901,700
            )Loss
                on Option
            
            
            -
            
            
            -
            
            
            (50,000
            )Gain
                (Loss) on Other Investments
            
            
            -
            
            
            -
            
            
            (3,697
            )Loss
                on Write -Off of Minority Interest
            
            
            -
            
            
            -
            
            
            (150,382
            )Total
                Other Income (Expense)
            
            
            (449,292
            )
            
            15,274
            
            
            448,939Loss
                Before Minority Interest
            
            
            (1,673,484
            )
            
            (921,278
            )
            
            (34,509,143
            )Minority
                Interest
            
            
            -
            
            
            -
            
            
            286,388Net
                Loss
            
            $
            (1,673,484
            )
            $
            (921,278
            )
            $
            (34,222,755
            )Net
                Loss Per Common Share - Basic and Diluted
            
            $
            (0.01
            )
            $
            (0.01
            )Weighted
                Average Common Shares Outstanding
            
            
            138,074,015
            
            
            98,506,970


The
        accompanying notes are an integral part of the financial
        statements.
  -4-


CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED STATEMENT OF OPERATIONS(UNAUDITED)




For
                the PeriodSeptember
                17, 1982For
                The Six Months Ended
            
            (Inception)
                ToJanuary
                31,
            
            January
                31,2007
            
            2006
            
            2007Revenues
            
            $
            -
            
            $
            -
            
            $
            -Costs
                and Expenses:Mine
                Expenses
            
            
            513,678
            
            
            1,041,382
            
            
            10,118,390Write-Down
                of Mining, Milling and Other Property and Equipment
            
            
            -
            
            
            -
            
            
            1,299,445Selling,
                General and Administrative Expenses
            
            
            1,181,162
            
            
            714,301
            
            
            13,179,622Stocks
                and Warrants issued forServices
            
            
            101,209
            
            
            -
            
            
            9,600,447Depreciation
                and Amortization
            
            
            346,052
            
            
            19,337
            
            
            760,178Total
                Costs and Expenses
            
            
            2,142,101
            
            
            1,775,020
            
            
            34,958,082Loss
                from Operations
            
            
            (2,142,101
            )
            
            (1,775,020
            )
            
            (34,958,082
            )Other
                Income (Expense):Interest
                Income
            
            
            33,690
            
            
            40,780
            
            
            1,013,407Interest
                Expense
            
            
            (197,835
            )
            
            -
            
            
            (197,835
            )Miscellaneous
            
            
            -
            
            
            -
            
            
            36,199Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            -
            
            
            (155,713
            )Gain
                on Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            1,907,903Option
                Payment
            
            
            -
            
            
            -
            
            
            70,688Loss
                on change in fair value of derivative
            
            
            (528,007
            )
            
            
            
            
            (1,109,931
            )Loss
                on Write-Off of Investment
            
            
            -
            
            
            -
            
            
            (10,000
            )Loss
                on Joint Venture
            
            
            -
            
            
            -
            
            
            (901,700
            )Loss
                on Option
            
            
            -
            
            
            -
            
            
            (50,000
            )Gain
                (Loss) on Other Investments
            
            
            -
            
            
            -
            
            
            (3,697
            )Loss
                on Write -Off of Minority Interest
            
            
            -
            
            
            -
            
            
            (150,382
            )Total
                Other Income (Expense)
            
            
            (692,152
            )
            
            40,780
            
            
            448,939Loss
                Before Minority Interest
            
            
            (2,834,253
            )
            
            (1,734,240
            )
            
            (34,509,143
            )Minority
                Interest
            
            
            -
            
            
            -
            
            
            286,388Net
                Loss
            
            $
            (2,834,253
            )
            $
            (1,734,240
            )
            $
            (34,222,755
            )Net
                Loss Per Common Share - Basic and Diluted
            
            $
            (0.02
            )
            $
            (0.02
            )Weighted
                Average Common Shares Outstanding
            
            
            133,811,028
            
            
            96,418,426


The
        accompanying notes are an integral part of the financial
        statements.
  -5-





CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR
                THE SIX MONTHS ENDED JULY 31, 2007
              (UNAUDITED)




Common
                  Stock
              
              Additional
                paid-in-
              
              Deficit
                    Accumulated
                  in
                    the
                  Development
              
              Accumulated
                Other
                  Comprehensive Income/
              
              Deferred
                Financing
              
              Deferred
                  Compensation
              
              Total
                  StockholderShares
              
              Amount
              
              capital
              
              Stage
              
              (Loss)
              
              Costs
              
              Costs
              
              EquityBalance
                  at July 31, 2006
              
              
              131,635,129
              
              
              13,163
              
              
              40,733,825
              
              
              (31,388,503
              )
              
              146,493
              
              
              (522,541
              )
              
              (52,500
              )
              
              8,929,937Deferred
                  Financing Costs
              
              
              1,150,000
              
              
              115
              
              
              350,635
              
              
              -
              
              
              -
              
              
              (350,750
              )
              
              -
              
              
              -Deferred
                  Financing Costs
              
              
              -
              
              
              -
              
              
              3,314,449
              
              
              -
              
              
              -
              
              
              (3,314,449
              )
              
              -
              
              
              -Amortization
                  of Deferred Finance Costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              284,377
              
              
              -
              
              
              284,377Options
                  and warrants issued for services
              
              
              -
              
              
              -
              
              
              135,322
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              135,322Private
                  Placement, Net
              
              
              12,561,667
              
              
              1,256
              
              
              3,484,606
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,485,862Common
                  Stock issued upon the exercising of options and warrants
              
              
              6,142,454
              
              
              615
              
              
              926,908
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              927,523Unrealized
                  loss on marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,000
              )
              
              -
              
              
              -
              
              
              (5,000
              )Change
                  in fair value on interest rate swaps
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (33,433
              )
              
              -
              
              
              -
              
              
              (33,433
              )Equity
                  adjustment from foreign currency translation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              162,255
              
              
              -
              
              
              -
              
              
              162,255Net
                  loss for the six months endedJanuary
                  31, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,834,253
              )
              
              -
              
              
              
              
              
              -
              
              
              (2,834,253
              )Balance
                  - January 31, 2007
              
              
              151,489,250
              
              $
              15,149
              
              $
              48,945,745
              
              $
              (34,222,756
              )
              $
              270,315
              
              $
              (3,903,363
              )
              $
              (52,500
              )
              $
              11,052,590




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




-6-


CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)




For
                The PeriodSeptember
                17, 1982For
                The Six Months Ended
            
            (Inception)
                ToJanuary
                31,
            
            January
                31,2007
            
            2006
            
            2007Cash
                Flow From Operating Activities:Net
                Loss
            
            $
            (2,834,253
            )
            $
            (1,734,240
            )
            $
            (34,222,756
            )Adjustments
                to Reconcile Net Loss toNet
                Cash Provided by (Used in) Operating Activities:Depreciation
                and Amortization
            
            
            346,952
            
            
            19,337
            
            
            769,648Gain
                on Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            (1,907,903
            )Minority
                Interest in Net Loss of Subsidiary
            
            
            -
            
            
            -
            
            
            (286,388
            )Write-Down
                of Impaired Mining, Milling and Other
            
            
            -Property
                and Equipment
            
            
            -
            
            
            -
            
            
            1,299,445Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            -
            
            
            155,713Loss
                on change in fair value of derivative
            
            
            528,268
            
            
            
            
            
            1,110,192Loss
                on Write-Off of Investment
            
            
            -
            
            
            -
            
            
            10,000Loss
                on Joint Venture
            
            
            -
            
            
            -
            
            
            901,700Loss
                on Write-Off of Minority Interest
            
            
            -
            
            
            -
            
            
            150,382Value
                of Common Stock and Warrants Issued forServices
            
            
            135,322
            
            
            -
            
            
            12,720,937Changes
                in Operating Assets and Liabilities:(Increase)
                Decrease in Prepaid Expenses
            
            
            (34,169
            )
            
            (15,891
            )
            
            (55,251
            )(Increase)
                Decrease in Other Current Assets
            
            
            3,873,285
            
            
            (14,316
            )
            
            (1,392,554
            )(Increase)
                in Other Deposits
            
            
            (348,812
            )
            
            (36,000
            )
            
            (616,812
            )Increase
                (Decrease) in Other Assets
            
            
            767
            
            
            755
            
            
            (41,901
            )(Increase)
                in Security Deposits
            
            
            -
            
            
            -
            
            
            (9,605
            )Increase
                (Decrease) in Accounts Payable
            
            
            (24,766
            )
            
            33,880
            
            
            317,418Increase
                (Decrease) in Accrued Expenses
            
            
            36,478
            
            
            (66,675
            )
            
            173,407Net
                Cash Provided by (Used in) Operating Activities
            
            
            1,679,072
            
            
            (1,813,150
            )
            
            (20,924,328
            )Cash
                Flow From Investing Activities:(Increase)
                in Other Investments
            
            
            (6,572
            )
            
            (260
            )
            
            (28,312
            )Purchase
                of Mining, Milling and Other Property andEquipment
            
            
            (10,872,197
            )
            
            (45,958
            )
            
            (14,063,479
            )Purchase
                of Concessions
            
            
            -
            
            
            -
            
            
            (25,324
            )Investment
                in Intangibles
            
            
            (500,000
            )
            
            -
            
            (518,620)Proceeds
                on Sale of Mining, Milling and Other Propertyand
                Equipment
            
            
            -
            
            
            -
            
            
            275,638Proceeds
                From Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            2,131,616Expenses
                of Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            (101,159
            )Advance
                Payments - Joint Venture
            
            
            -
            
            
            -
            
            
            98,922Investment
                in Joint Venture
            
            
            -
            
            
            -
            
            
            (101,700
            )Investment
                in Privately Held Company
            
            
            -
            
            
            -
            
            
            (10,000
            )Net
                Assets of Business Acquired (Net of Cash)
            
            
            -
            
            
            -
            
            
            (42,130
            )Investment
                in Marketable Securities
            
            
            -
            
            
            -
            
            
            (50,000
            )




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





-7-




For
                The PeriodSeptember
                17, 1982For
                The Six Months Ended
            
            (Inception)
                ToJanuary
                31,
            
            January
                31,2007
            
            2006
            
            2007Net
                Cash Used in Investing Activities
            
            
            (11,378,769
            )
            
            (46,218
            )
            
            (12,434,548
            )Cash
                Flow From Financing Activities:Advances
                to Affiliate
            
            
            (3,750
            )
            
            (5,825
            )
            
            (49,072
            )Proceeds
                from Borrowing on Credit Facility
            
            
            8,750,000
            
            
            
            
            
            8,750,000Proceeds
                of Borrowings - Officers
            
            
            -
            
            
            -
            
            
            18,673Repayment
                of Loans Payable - Officers
            
            
            -
            
            
            -
            
            
            (18,673
            )Proceeds
                of Note Payable
            
            
            -
            
            
            -
            
            
            11,218Payments
                of Note Payable
            
            
            -
            
            
            -
            
            
            (11,218
            )Proceeds
                From Issuance of Common Stock, net
            
            
            4,413,385
            
            
            715,820
            
            
            31,264,229Commissions
                on Sale of Common Stock
            
            
            -
            
            
            -
            
            
            (5,250
            )Deferred
                Finance Costs
            
            
            (257,271
            )
            
            (100,000
            )
            
            (708,048
            )Expenses
                of Initial Public Offering
            
            
            -
            
            
            -
            
            
            (408,763
            )Capital
                Contributions - Joint Venture Subsidiary
            
            
            -
            
            
            -
            
            
            304,564Purchase
                of Certificate of Deposit - Restricted
            
            
            -
            
            
            -
            
            
            (5,000
            )Purchase
                of Mining Reclamation Bonds
            
            
            -
            
            
            -
            
            
            (30,550
            )Net
                Cash Provided By (Used In) Financing Activities
            
            
            12,902,364
            
            
            (609,995
            )
            
            39,112,110Effect
                of Exchange Rate Changes
            
            
            162,255
            
            
            50,152
            
            
            353,186Increase
                (Decrease) In Cash and Cash Equivalents
            
            
            3,364,922
            
            
            (1,199,222
            )
            
            6,106,420Cash
                and Cash Equivalents - Beginning
            
            
            2,741,498
            
            
            4,281,548
            
            
            -Cash
                and Cash Equivalents - Ending
            
            $
            6,106,420
            
            $
            3,082,326
            
            $
            6,106,420Supplemental
                Cash Flow Information:Cash
                Paid For Interest
            
            $
            216,420
            
            $
            -
            
            $
            216,420Cash
                Paid For Income Taxes
            
            $
            557
            
            $
            7,731
            
            $
            46,531Non-Cash
                Financing Activities:Issuances
                of Common Stock as Commissionson
                Sales of Common Stock
            
            $
            -
            
            $
            -
            
            $
            440,495Issuance
                of common stock and warrants as payment of financing costs
            
            $
            3,665,199
            
            $
            270,000
            
            $
            4,187,740Change
                in Fair Value of Derivative Instrument
            
            $
            33,433
            
            $
            -
            
            $
            33,433Issuance
                of Common Stock and Options/warrants as Payment for
                Expenses
            
            $
            -
            
            $
            -
            
            $
            192,647Issuance
                of Common Stock as Payment for Mining,Milling
                and Other Property and Equipment
            
            $
            -
            
            $
            -
            
            $
            4,500Exercise
                of Options as Payment of Accounts Payable
            
            $
            -
            
            $
            -
            
            $
            36,000


The
        accompanying notes are an integral part of the financial
        statements.
  -8-







CAPITAL
      GOLD CORPORATION


(A
      DEVELOPMENT STAGE ENTERPRISE)


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JANUARY
      31, 2007





NOTE
      1 -
      Basis of Presentation





The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of Capital Gold Corporation ("Capital Gold", "the Company", "we" or
      "us") and its subsidiaries, which are wholly and majority owned as well as
      the
      accounts within Caborca Industrial S.A. de C.V. (“Caborca Industriale”), a
      Mexican corporation 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 cost. This entity is considered a variable
      interest entity under accounting rules provided under FIN 46, “Consolidation of
      Variable Interest Entities”.





Capital
      Gold was incorporated in February 1982 in the State of Nevada. During March
      2003
      the Company's stockholders approved an amendment to the Articles of
      Incorporation to change its name from Leadville Mining and Milling Corp. to
      Capital Gold Corporation. In November 2005, the Company reincorporated in
      Delaware. The Company owns rights to property located in the State of Sonora,
      Mexico and the California Mining District, Lake County, Colorado and is in
      the
      process of completing construction and development of an open-pit gold mining
      operation to mine two of its Mexican concessions. All of the Company's mining
      activities are now being performed in Mexico. The Company is a development
      stage
      enterprise.





On
      June
      29, 2001, the Company exercised an option and purchased from AngloGold North
      America Inc. and AngloGold (Jerritt Canyon) Corp. 100% of the issued and
      outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of those two
      companies (“Minera Chanate”). Minera Chanate's assets consisted of certain
      exploitation and exploration concessions in the States of Sonora, Chihuahua
      and
      Guerrero, Mexico. We sometimes refer to these concessions as the El Chanate
      Concessions.





Pursuant
      to the terms of the agreement, on December 15, 2001, the Company made a $50,000
      payment to AngloGold. AngloGold will be entitled to receive the remainder of
      the
      purchase price by way of an ongoing percentage of net smelter returns of between
      2% and 4% plus 10% net profits interest (until the total net profits interest
      payment received by AngloGold equals $1,000,000). AngloGold's right to a payment
      of a percentage of net smelter returns and the net profits interest will
      terminate at such point as they aggregate $18,018,355. In accordance with the
      agreement, the foregoing payments are not to be construed as royalty payments.
      Should the Mexican government or other jurisdiction determine that such payments
      are royalties, we could be subject to and would be responsible for any
      withholding taxes assessed on such payments.





Under
      the
      terms of the agreement, the Company has granted AngloGold the right to designate
      one of its wholly-owned Mexican subsidiaries to receive a one time option to
      purchase 51% of Minera Chanate (or such entity that owns the Minera Chanate
      concessions at the time of option exercise). That Option is exercisable over
      a
      180 day period commencing at such time as the Company notifies AngloGold that
      it
      has made a good faith determination that it has gold-bearing ore deposits on
      any
      one of the identified group of El Chanate Concessions, when aggregated with
      any
      ore that the Company has mined, produced and sold from such concessions, of
      in
      excess of 2,000,000 troy ounces of contained gold. The exercise price would
      equal twice the Company's project costs on the properties during the period
      commencing on December 15, 2000 and ending on the date of such
      notice.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles for
      interim financial information and with instructions to Form 10-QSB. 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.




-9-




Results
      of operations for interim periods are not necessarily indicative of the results
      of operations for a full year.





The
      condensed consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and satisfaction
      of
      liabilities in the normal course of business. The Company is a development
      stage
      enterprise and has recurring losses from operations and operating cash
      constraints that raise substantial doubt about the Company's ability to continue
      as a going concern. These statements should be read in conjunction with the
      Company’s consolidated financial statements included within its Form 10-KSB for
      the fiscal year ended July 31, 2006, as filed with the SEC on November 1,
      2006.





NOTE
      2 -
      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 in the discretion of the Board of Directors.





Such
      options and warrants may be exercisable at varying exercise prices currently
      ranging from $0.22 to $0.41 per share of common stock with certain of these
      grants becoming exercisable immediately upon grant subject to stockholder
      approval. Certain grants vest for a period of five months to two years
      (generally concurrent with service periods for grants to employees/consultants
      -
      See Note 15 - Employee and Consulting Agreements). Certain grants contain a
      provision whereby they become immediately exercisable upon a change of
      control.





Effective
      February 1, 2006, the Company adopted the provisions of SFAS No. 123R. Under
      FAS
      123R, share-based compensation cost is measured at the grant date, based on
      the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. The Company adopted the provisions of FAS 123R using
      a
      modified prospective application. Under this method, compensation cost is
      recognized for all share-based payments granted, modified or settled after
      the
      date of adoption, as well as for any unvested awards that were granted prior
      to
      the date of adoption. Prior periods are not revised for comparative purposes.
      Because the Company previously adopted only the pro forma disclosure provisions
      of SFAS 123, it will recognize compensation cost relating to the unvested
      portion of awards granted prior to the date of adoption, using the same estimate
      of the grant-date fair value and the same attribution method used to determine
      the pro forma disclosures under SFAS 123, except that forfeitures rates will
      be
      estimated for all options, as required by FAS 123R.





The
      cumulative effect of applying the forfeiture rates is not material. FAS 123R
      requires that excess tax benefits related to stock options exercises be
      reflected as financing cash inflows instead of operating cash
      inflows.





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
      six months ended January 31, 2007 and 2006, were $0.32 and $0, respectively.
      The
      fair values of the options and warrants granted were estimated based on the
      following weighted average assumptions:




Six
                    Months ended January 31,2007
              
              2006Expected
                  volatility
              
              
              66
              %
              
              -Risk-free
                  interest rate
              
              
              6.25
              %
              
              -Expected
                  dividend yield
              
              
              -
              
              
              -Expected
                  life
              
              
              2.0
                  years
              
              
              -


-10-





Stock
                option and warrant activity for employees during the six months ended
                January 31, 2007 is as follows:




Number
                of
              Options
            
            Weighted
              Average
              exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              intrinsic
              valueOutstanding
                at July 31, 2005
            
            
            4,711,363
            
            $
            .30
            
            
            0.30
            
            $
            1,277,977Options
                granted
            
            
            4,611,363
            
            
            .13
            
            
            -
            
            
            -Options
                exercised
            
            
            (590,909
            )
            
            .05
            
            
            -
            
            
            -Options
                expired
            
            
            (3,161,363
            )
            
            .05
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            5,570,454
            
            $
            .16
            
            
            1.17
            
            $
            702,250Options
                granted
            
            
            550,000
            
            $
            .34
            
            
            -
            
            
            -Options
                exercised
            
            
            (2,870,454
            )
            $
            .05
            
            
            -
            
            
            -Options
                expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warrants
                and options outstanding at January 31, 2007
            
            
            3,250,000
            
            $
            .29
            
            
            1.26
            
            $
            67,950Warrants
                and options exercisable at January 31, 2007
            
            
            1,250,000
            
            $
            .22
            
            
            0.42
            
            $
            48,750




Unvested
                stock option and warrant balances for employees at January 31, 2007
                are as
                follows:




WeightedWeighted
            
            averageAverage
            
            remainingNumber
                of Options
            
            Exercise
              price
            
            contracted
              term
                (years)
            
            Aggregate
                Intrinsic
                  valueOutstanding
                at August 1, 2006
            
            
            -
            
            
            -
            
            
            -
            
            $
            -Options
                granted
            
            
            150,000
            
            $
            .32
            
            
            1.42
            
            
            16,500Unvested
                Options outstanding at January 31, 2007
            
            
            150,000
            
            $
            .32
            
            
            1.42
            
            $
            16,500




-11-




Stock
                option and warrant activity for non-employees during the six months
                ended
                January 31, 2007 is as follows:




WeightedWeighted
            
            averageAverage
            
            remainingNumber
                of Options
            
            Exercise
              price
            
            contracted
              term
                (years)
            
            Aggregate
                Intrinsic
                  valueOutstanding
                at July 31, 2005
            
            
            31,902,004
            
            $
            .30
            
            
            1.13
            
            $
            3,430,120Options
                granted
            
            
            6,844,000
            
            
            .28
            
            
            -
            
            
            -Options
                exercised
            
            
            (12,835,004
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            (350,000
            )
            
            .10
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            25,561,000
            
            $
            .29
            
            
            1.33
            
            $
            1,939,530Options
                granted
            
            
            16,682,542
            
            $
            .33
            
            
            -
            
            
            -Options
                exercised
            
            
            (16,912,000
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            _(1,275,000
            )
            
            .30
            
            
            -
            
            
            -Warrants
                and options outstanding at January 31, 2007
            
            
            24,256,542
            
            $
            .32
            
            
            1.70
            
            $
            355,402Warrants
                and options exercisable at January 31, 2007
            
            
            23,806,542
            
            $
            .32
            
            
            1.74
            
            $
            356,402




Prior
      to
      the adoption of FAS 123R, the Company applied the intrinsic value-based method
      of accounting prescribed by Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related interpretations including FASB Interpretation No. 44, *Accounting
      for Certain Transactions involving Stock Compensation an interpretation of
      APB
      Opinion No.*  *25* issued
      in March 2000 (“FIN 44”), to account for its fixed plan stock options.
      Under this method, compensation expense was recorded on the date of grant only
      if the current market price of the underlying stock exceeded the exercise price.
      SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      established accounting and disclosure requirements using a fair value-based
      method of accounting for stock-based employee compensation plans. In
      December 2002, the FASB issued SFAS No. 148, *Accounting
      for Stock-Based Compensation Transition and Disclosure, an amendment of FASB
      Statement No.*  *123* .
      This
      Statement amended FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      provide alternative methods of transition for a voluntary change to the fair
      value method of accounting for stock-based employee compensation.


-12-




The
      following table illustrates the effect on the net loss and net loss per share
      as
      if the Company had applied the fair value recognition provisions of SFAS
      No. 123 to stock based compensation prior to February 1, 2006:




Year
                Ended
              July
                31, 2006Net
                loss
            
            $
            (4,804,692
            )Add
                stock-based employee compensation expense (recovery) included in
                reported
                net income (loss)
            
            
            -Deduct
                total stock-based employee compensation expensedetermined
                under fair value based method for all awards,net
                of tax
            
            
            (773,263
            )Pro
                forma net loss
            
            $
            (5,577,955
            )Pro
                forma net loss per common share (Basic and diluted)
            
            $
            (.05
            )Weighted
                average common shares outstanding: Basicand
                diluted
            
            
            112,204,471Net
                loss per common share (Basic and Diluted), as reported
            
            $
            (.04
            )




NOTE
      3 -
      Marketable Securities





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




January
                  31,2007Marketable
                  equity securities, at cost
              
              $
              50,000Marketable
                  equity securities, at fair value
              
              $
              85,000
  (See
        Notes 8 & 10)
  NOTE
        4 -
        Property and Equipment
 
 Property
        and Equipment consist of the following at January 31, 2007:
  Construction
                  in progress
              
              $
              11,119,047Water
                  Well
              
              
              141,242Building
              
              
              116,922Equipment
              
              
              411,273Vehicle
              
              
              132,134Improvements
              
              
              15,797Office
                  Equipment
              
              
              17,874Furniture
              
              
              2,354Total
              
              
              11,956,643Less:
                  accumulated depreciation
              
              
              (61,855
              )Property
                  and equipment, net
              
              $
              11,894,788
  -13-




The
      Company has open purchase orders on material and equipment regarding its El
      Chanate Project amounting to approximately $2,305,000 as of January 31, 2007,
      and had paid approximately $1,868,000 on these commitments.





Depreciation
      expense for the six months ended January 31, 2007 and 2006 was $21,638 and
      $12,272, respectively.





NOTE
      5 -
      Intangible Assets





Intangible
      assets consist of the following as of January 31, 2007:


Repurchase
                  of Net Profits Interest from FG
              
              $
              500,000Investment
                  in Right of Way
              
              
              18,620Less:
                  accumulated amortization of Right of Way
              
              
              (6,620
              )Intangible
                  assets, net
              
              $
              512,000




On
      September 13, 2006, the Company repurchased the 5% net profits interest formerly
      held by Grupo Minera FG (“FG”), and subsequently acquired by Daniel Gutierrez
      Cibrian, with respect to the operations at the El Chanate mine. That net profits
      interest had originally been granted to FG in connection with the April 2004
      termination of the joint venture agreement between FG and MSR, Capital Gold’s
      wholly owned Mexican subsidiary. MSR also received a right of first refusal
      to
      carry out the works and render construction services required to effectuate
      the
      El Chanate Project. This right of first refusal is not applicable where a
      funding source for the project determines that others should render such works
      or services. FG has assigned or otherwise transferred to MSR all permits,
      licenses, consents and authorizations (collectively, “authorizations”) for which
      FG had obtained in its name in connection with the development of the El Chanate
      Project to the extent that the authorizations are assignable. To the extent
      that
      the authorizations are not assignable or otherwise transferable, FG has given
      its consent for the authorizations to be cancelled so that they can be re-issued
      or re-granted in MSR’s name. The foregoing has been completed. The purchase
      price for the buyback of the net profits interest was $500,000, and was
      structured as part of the project costs financed by the recently completed
      loan
      agreement with Standard Bank, Plc. (See Note 13). Mr. Gutierrez will retain
      a 1%
      net profits interest in MSR, payable only after a total $US 20 million in net
      profits has been generated from operations at El Chanate. The Company recorded
      this transaction on its balance sheet as an intangible asset under guidance
      provided by FAS 142 - *Goodwill
      and Other Intangible Assets* to be
      amortized over the period of which the asset is expected to contribute directly
      or indirectly to the Company’s cash flow.





Amortization
      expense for the six months ending January 31, 2007 and 2006 was $1,800 and
      $2,065, respectively.




NOTE
      6 -
      Mining Reclamation Bonds





These
      represent certificates of deposit that have been deposited as security for
      Mining Reclamation Bonds in Colorado. They bear interest at rates varying from
      4.35% to 5.01% annually and mature at various dates through 2010.





NOTE
      7 -
      Mining Concessions





Mining
      concessions consists of the following:


El
                    Charro
                
                $
                25,324El
                    Chanate
                
                
                44,780Total
                
                $
                70,104




The
      El
      Chanate concessions are carried at historical cost and were acquired in
      connection with the purchase of the stock of Minera Chanate (see Note
      1).




-14-





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





NOTE
      8 -
      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
      president and chairman of the board of directors is an officer and director
      of
      that corporation. These loans are non-interest bearing and due on demand (see
      Note 3 & 11).





NOTE
      9 -
      Other Investments





Other
      investments are carried at cost and consist of tax liens purchased on properties
      located in Lake County, Colorado.





NOTE
      10 -
      Other Comprehensive Income (Loss)-Supplemental Non-Cash Investing
      Activities





Other
      comprehensive income (loss) consists of accumulated foreign translation gains
      and losses and unrealized gains and losses on marketable securities and is
      summarized as follows:


Balance
                  - July 31, 2005
              
              $
              157,714Equity
                  Adjustments from Foreign Currency Translation
              
              
              48,779Unrealized
                  Gains (loss) on Marketable Securities
              
              
              (60,000
              )Balance
                  - July 31, 2006
              
              
              146,493Change
                  in fair value of derivative instrument
              
              
              (33,433
              )Equity
                  Adjustments from Foreign Currency Translation
              
              
              162,255Unrealized
                  Gains (loss) on Marketable Securities
              
              
              (5,000
              )Balance
                  - January 31, 2007
              
              $
              270,315





NOTE
      11 -
      Related Party Transactions





In
      August
      2002, the Company purchased marketable equity securities of a related company.
      The Company recorded approximately $4,500 and $5,850 in expense reimbursements
      including office rent from this entity for the six months ended January 31,
      2007
      and 2006, respectively (see Notes 3 and 8).





The
      Company utilizes a Mexican Corporation 100% owned by two officers/Directors
      and
      stockholders of the Company for mining support services. These services include
      but are not limited to the payment of mining salaries and related costs. The
      Mexican Corporation bills the Company for these services at cost. Mining
      expenses charged by the Mexican Corporation and reported on the statement of
      operations amounted to approximately $181,000 and $50,000 for the six months
      ended January 31, 2007 and 2006, respectively.




During
      the six months ended January 31, 2007 and 2006, the Company paid its V.P.
      Development and Director $0 and $33,000, respectively, for professional
      geologist and management services rendered to the Company. This individual
      also
      earned wages of $60,000 during the six months ended January 31, 2007. During
      the
      six months ended January 31, 2007 and 2006, the Company paid its V.P.
      Exploration and Director consulting fees of $0 and $33,000, respectively. In
      addition, this individual earned wages of $60,000 during the six months ended
      January 31, 2007. During the six months ended January 31, 2007 and 2006, we
      paid
      a director legal and consulting fees of $12,000 and $0,
      respectively. ****





-15-


The
      Company’s V.P. Development and Director has, since 1995, been a senior
      consultant in the Minerals Advisory Group LLC, Tucson, Arizona, an entity that
      provided $3,000 of services to the Company for the six months ended January
      31,
      2007.





In
      January 2006, the Company extended the following stock options through January
      3, 2007, all of which are exercisable at $0.05 per share: Chief Executive
      Officer and Director - 1,250,000 shares; Director - 500,000 shares; V.P.
      Investor Relations and Director - 327,727 shares; V.P. Development and Director
      - 500,000 shares; and V.P. Mine Development - 25,000 shares.  There
      was not a material increase in the intrinsic value of these options at the
      date
      of modification as compared to the intrinsic value of the original issuance
      of
      these stock options on the applicable measurement date. All of these options
      were exercised prior to their extended expiration.





NOTE
      12 -
      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 the services provided
      or
      property received.




During
      the year ended July 31, 2006, the Company issued 4,825,913 shares of stock
      upon
      the exercising of common stock purchase warrants and options for net proceeds
      of
      $741,820, including 200,000 and 300,000 shares to its CEO and V.P. Mine
      Development for net proceeds of $10,000 and $15,000, respectively. The Company
      has also issued 1,000,000 shares of Common Stock (See Note 13) in connection
      with receiving a commitment letter from Standard Bank informing the Company
      of
      its approval for providing a $12 million (now $12.5 million) senior financing
      facility.





The
      Company closed two private placements in 2006 pursuant to which the Company
      issued an aggregate of 21,240,000 units, each unit consisting of one share
      of
      the Company’s common stock and a warrant to purchase 1⁄4 of a share of the
      Company’s common stock for net proceeds of $4,999,500, net of commissions of
      $310,500. The Company also received net proceeds of $2,373,600, net of
      commissions of $206,430, from the exercising of 8,600,000 warrants in February
      2006. The
      Warrant issued to each purchaser is exercisable for one share of the Company’s
      common stock, at an exercise price equal to $0.30 per share. Each Warrant has
      a
      term of eighteen months and is fully exercisable from the date of
      issuance. The
      Company issued to the placement agent in one of the placements eighteen month
      warrants to purchase up to 934,000 shares of the Company’s common stock at an
      exercise price of $0.25 per share. Such placement agent warrants are valued
      at
      approximately $189,000 using the Black-Scholes option pricing method.





The
      Company issued 1,150,000 shares of common stock and 12,600,000 common stock
      purchase warrants to Standard Bank as part of a commitment fee to entering
      into
      the credit facility on August 15, 2006, with its wholly-owned subsidiaries
      MSR
      and Oro. The Company recorded the issuance of the 1,150,000 shares of common
      stock and 12,600,000 warrants as deferred financing costs of approximately
      $351,000 and $3,314,000, respectively, as a reduction of stockholders' equity
      on
      the Company's balance sheet. The issuance of 1,150,000 shares was recorded
      at
      the fair market value of the Company's common stock at the closing date or
      $0.305 per share. The warrants were valued at approximately $3,314,000 using
      the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet (See
      Note 13). The balance of deferred financing costs net of amortization as of
      January 31, 2007, as a reduction of stockholders' equity, was approximately
      $3,903,000. Amortization expense for the six months ended January 31, 2007,
      was
      $284,000.





The
      Company closed two private placements in January 2007 pursuant to which it
      issued an aggregate of 12,561,667 units, each unit consisting of one share
      of
      its common stock and a warrant to purchase 1⁄4 of a share of its common stock for
      proceeds of approximately $3,486,000, net of commissions of approximately
      $283,000. The Company also received proceeds of approximately $928,000 from
      the
      exercising of an aggregate of 6,142,454 of warrants issued in past private
      placements. The Warrant issued to each purchaser in the January 2007 placements
      is exercisable for one share of common stock, at an exercise price equal to
      $0.40 per share. Each Warrant has a term of eighteen months and is fully
      exercisable from the date of issuance. The Company issued to the placement
      agents eighteen month warrants to purchase up to an aggregate of 942,125 shares
      of common stock at an exercise price of $0.30 per share. Such placement agent
      warrants are valued at approximately $142,000 using the Black-Scholes option
      pricing method.




-16-





Recapitalization





The
      Board
      of Directors recommended an amendment to the Company's Certificate of
      Incorporation to increase the Company's authorized shares of capital stock
      from
      200,000,000 to 250,000,000 shares. This amendment was approved by the
      stockholders on February 21, 2007 and the Company effected the authorized share
      increase on February 26, 2007.





Warrants
      and Options





On
      November 30, 2006, the Company’s board of directors granted 100,000 common stock
      options to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, the Company’s
      independent directors. The options are to purchase shares of the Company’s
      common stock at an exercise price of $0.33 per share (the closing price of
      our
      common stock on that date) for a period of two years. The options could not
      be
      exercised unless and until they were been approved by the Company’s
      stockholders. The Company utilized the Black-Scholes method to fair value the
      300,000 options received by the directors. The Company recorded approximately
      $40,000 as stock based compensation expense in the fiscal quarter ended January
      31, 2007.





On
      December 13, 2006, the Company issued two year options to purchase our common
      stock at an exercise price of $0.36 per share to its Chief Operating Officer,
      Chief Financial Officer and the Company’s Canadian counsel. These options are
      for the purchase of 250,000 shares, 100,000 shares and 100,000 shares,
      respectively. These
      options could not be exercised unless and until they were approved by the
      Toronto Stock Exchange and Stockholders. The
      Company utilized the Black-Scholes method to fair value the 450,000 options
      received by these individuals. The Company recorded approximately $61,000 as
      stock based compensation expense in the fiscal quarter ended January 31,
      2007.





Warrant
      Re-pricing





In
      December 2005, the Board of Directors ratified the temporary re-pricing of
      certain warrants that were issued in connection with the February 2005 private
      placement from $0.30 per share to $0.20 per share exercise price. In addition,
      warrants issued to the placement agent were also re-priced from $0.25 per share
      to $0.20 per share exercise price. These re-pricings were in effect for the
      period November 28, 2005 through January 31, 2006.





2006
      Equity Incentive Plan





The
      2006
      Equity Incentive Plan (the “Plan”) 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.





The
      Plan
      is administered by the Company’s Board of Directors or a committee thereof. 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. As
      of
      January 31, 2007, 450,000 options have been granted under the Plan to two of
      the
      Company’s officers and its Can adian
      counsel.





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.




-17-





The
      exercise price of an option must be 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
      and the options are not transferable.





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 Code, Rule 16b-3 of the Exchange Act 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
      TSX
      or any stock exchange upon which the common stock is listed.





Rights
      Agreement





On
      August
      14, 2006, the Board of Directors (the "Board") of the Company declared a cash
      dividend (the "Dividend") of one Series B common share purchase right (a
      "Right") for each outstanding share of common stock, par value $.0001 per share.
      Each Right represented the right to purchase one one-thousandth of Series B
      Share. The Dividend was payable to holders of record on August 14, 2006. In
      connection with the Dividend, the Company entered into a Rights Agreement with
      American Stock Transfer & Trust Company as Rights Agent (the "Rights
      Agreement"), specifying the terms of the Rights. The Rights would impose a
      significant penalty upon any person or group that acquires beneficial ownership
      of 20% or more of the Company's outstanding common stock without the prior
      approval of the Board. The Rights Agreement provided an exemption for any person
      who was, as of August 15, 2006, the beneficial owner of 20% or more of the
      Company’s outstanding common stock, so long as such person did not, subject to
      certain exceptions, acquire additional shares of the Company’s common stock
      after that date. The Rights Agreement would not have interfered with any merger
      or other business combination approved by the Board. By its terms, The Rights
      Agreement terminated if it was not approved by the Company’s stockholders on or
      before February 4, 2007. This did not occur and, accordingly, it
      terminated.





NOTE
      13 -
      Project Finance Facility





On
      August
      15, 2006, the Company entered into a credit facility (the “Credit Facility”)
      involving its wholly-owned subsidiaries MSR and Oro, as borrowers, us, as
      guarantor, and Standard Bank plc (“Standard Bank”), as the lender and the
      offshore account holder. Under the Credit Facility, MSR and Oro have agreed
      to
      borrow money in an aggregate principal amount of up to US$12.5 million (the
      “Loan”) for the purpose of constructing, developing and operating our El Chanate
      Project (the “Mine”). The Company is guaranteeing the repayment of the loan and
      the performance of the obligations under the Credit Facility. The Loan is
      scheduled to be repaid in fourteen quarterly payments with the first principal
      payment due after certain Mine start-up production and performance criteria
      are
      satisfied, which the Company believes it will occur in the first calendar
      quarter of 2008. The Loan bears interest at LIBOR plus 4.00%, with LIBOR
      interest periods of 1, 2, 3 or 6 months and with interest payable at the end
      of
      the applicable interest period.




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on its property, disposing of any
      assets, merging with other companies and making any investments. The Company
      will be required to meet and maintain certain financial covenants, including
      (i)
      a debt service coverage ratio of not less than 1.2 to 1.0, (ii) a projected
      debt
      service coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage
      ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio of at least
      2.0
      to 1.0 and (v) a minimum reserve tail. The Company will also be required to
      maintain a certain minimum level of unrestricted cash, and upon meeting certain
      Mine start-up production and performance criteria, MSR and Oro will be required
      to maintain a specified amount of cash as a reserve for debt
      repayment.




-18-





The
      Loan
      is secured by all of the tangible and intangible assets and property owned
      by
      MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
      Pledge Agreement, an Account Pledge Agreement and certain other agreements
      entered into in Mexico (the “Mexican Collateral Documents”). As additional
      collateral for the Loan, the Company, together with its subsidiary, Leadville
      Mining & Milling Holding Corporation, have pledged all of its ownership
      interest in MSR and Oro. In addition to these collateral arrangements, MSR
      and
      Oro are required to deposit all proceeds of the Loan and all cash proceeds
      received from operations and other sources in an offshore, controlled account
      with Standard Bank. Absent a default under the loan documents, MSR and Oro
      may
      use the funds from this account for specific purposes such as approved project
      costs and operating costs.





As
      part
      of the fee for entering into and closing the Credit Facility, the Company issued
      to Standard Bank 1,150,000 shares of its restricted common stock and a warrant
      for the purchase of 12,600,000 shares of our common stock at an exercise price
      of $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b)
      the
      date one year after the repayment of the Credit Facility. Previously, pursuant
      to the mandate and commitment letter for the facility, the Company issued to
      Standard Bank 1,000,000 shares of its restricted common stock and a warrant
      for
      the purchase of 1,000,000 shares of its common stock at an exercise price of
      $0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. The Company recorded
      the issuance of the 1,000,000 shares of common stock as deferred financing
      costs
      of approximately $270,000 as a reduction of stockholders' equity on its balance
      sheet. The issuance of these shares was recorded at the fair market value of
      the
      Company’s common stock at the commitment letter date or $0.27 per share. In
      addition, the warrants were valued at approximately $253,000 using the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet in
      2006. The Company registered for public resale the 2,150,000 shares issued
      to
      Standard Bank and the 13,600,000 shares issuable upon exercise of warrants
      issued to Standard Bank. ****





In
      March
      2006, The Company entered into a gold price protection arrangement with Standard
      Bank to protect it against future fluctuations in the price of gold. The Company
      agreed to a series of gold forward sales and call option purchases in
      anticipation of entering into the Credit Facility. Under the price protection
      agreement, the Company has agreed to sell a total volume of 121,927 ounces
      of
      gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
      during the period from March 2007 to September 2010. The Company will also
      purchase call options from Standard Bank on a quarterly basis during this same
      period covering a total volume of 121,927 ounces of gold at a price of $535
      per
      ounce. While the period of the derivative contracts has commenced, the Company
      does not anticipate any material adverse effect from the fact that it has not
      commenced to sell gold because the price of gold is substantially above $535
      per
      ounce. The Company paid a fee to Standard Bank in connection with the price
      protection agreement. In addition, the Company provided aggregate cash
      collateral of approximately $4.3 million to secure its obligations under this
      agreement. The cash collateral was returned to the Company after the Credit
      Facility was executed in August 2006.





As
      of
      January 31, 2007, the Company has drawn down a total of $8,750,000 on the Credit
      Facility.





On
      October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
      the Company entered into interest rate swap agreements in accordance with the
      terms of the Credit Facility, which requires that the Company hedge at least
      50
      percent of our outstanding debt under this facility. The agreements entered
      into
      cover $9,375,000 or 75% of the outstanding debt. Both swaps covered this same
      notional amount of $9,375,000, but over different time horizons. The first
      covered the six months commencing October 11, 2006 and a termination date of
      March 31, 2007 and the second covering the period from March 30, 2007 with
      a
      termination date of 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 (See Note 16).


-19-




NOTE
      14 -
      Mining and Engineering Contracts





In
      early
      December 2005, the Company’s wholly-owned Mexican subsidiary, MSR, which holds
      the rights to develop and mine El Chanate Project, entered into a Mining
      Contract with a Mexican mining contractor, Sinergia Obras Civiles y Mineras,
      S.A. de C.V,("Sinergia"). The Mining Contract becomes effective if and when
      MSR
      sends the Contractor a formal "Notice of Award".





On
      August
      2, 2006, the Company amended the November 24, 2005 Mining Contract between
      its
      subsidiary, MSR, and Sinergia. Pursuant to the amendment, MSR's right to deliver
      the Notice to Proceed to Sinergia is extended to November 1, 2006. Provided
      that
      this Notice is delivered to Sinergia on or before that date, with a specified
      date of commencement of the Work (as defined in the contract) not later than
      February 1, 2007, the mining rates set forth in the Mining Contract will still
      apply; subject to adjustment for the rate of inflation between
      September 23, 2005 and the date of commencement of the work. As
      consideration for these changes, the Company paid Sinergia $200,000 of the
      requisite advance payment discussed below. On November 1, 2006, MSR delivered
      the Notice of Award specifying January 25, 2007, as the date of commencement
      of
      Work. Based
      on
      a revised crushing and stacking plan and since MSR is manufacturing the leach
      pad overliner material both Sinergia and MSR have mutually agreed to delay
      mining until the end of March. This satisfies the needs of both parties. The
      conditions of the contract remain the same and there will be no additional
      payments for the rescheduling .





Pursuant
      to the Mining Contract, Sinergia, using its own equipment, will generally
      perform all of the mining work (other than crushing) at the El Chanate Project
      for the life of the mine. MSR delivered to the Contractor a mobilization payment
      of $70,000 and the advance payment of $520,000. The advance payments are
      recoverable by MSR out of 100% of subsequent payments due to Sinergia under
      the
      Mining Contract. Pursuant to the Mining Contract, upon termination, Sinergia
      would be obligated to repay any portion of the advance payment that had not
      yet
      been recouped. Sinergia’s mining rates are subject to escalation on an annual
      basis. This escalation is tied to the percentage escalation in Sinergia’s costs
      for various parts for its equipment, interest rates and labor. One of the
      principals of Sinergia is one of the former principals of FG. FG was our former
      joint venture partner.





In
      June
      2006, the Company's Mexican operating subsidiary retained the contracting
      services of Mexican subsidiary of M3 Engineering & Technology Corporation
      ("M3M") to provide EPCM (engineering procurement construction management)
      services. M3M supervises the construction and integration of the various
      components necessary to commence production at the El Chanate Project. The
      contracted services shall not exceed $1,200,000 and the contract is based on
      the
      EPCM services to be provided by M3M. As of January 31, 2007, the Company has
      incurred approximately $575,000 pursuant to this contract.





NOTE
      15 -
      Employee and Consulting Agreements





The
      Company entered into employment agreements, effective July 31, 2006, with the
      following executive officers: Gifford A. Dieterle, President and Treasurer,
      Roger A. Newell, Vice President of Development, Jack V. Everett, Vice President
      of Exploration, and Jeffrey W. Pritchard, Vice President of Investor Relations.
      On December 5, 2006, effective January 1, 2007, The Company entered into an
      employment agreement with J. Scott Hazlitt, Vice President of Mine
      Development.





The
      agreements run for a period of three years and automatically renew for
      successive one-year periods unless the Company or the executive provides the
      other party with written notice of their intent not to renew at least 30 days
      prior to the expiration of the then current employment period.





Mr.
      Dieterle is entitled to a base annual salary of at least $180,000, Mr. Hazlitt
      is entitled to a base annual salary of at least $105,000 and each of the other
      executives is entitled to a base annual salary of at least $120,000. Each
      executive is entitled to a bonus or salary increase in the sole discretion
      of
      the board of directors. In addition, Messrs. Dieterle, Newell, Everett and
      Pritchard each received two year options to purchase an aggregate of 250,000
      shares of the Company’s common stock at an exercise price of $0.32 per share
      (the closing price on July 31, 2006).




-20-





The
      Company has the right to terminate any executive’s employment for cause or on 30
      days’ prior written notice without cause or in the event of the executive’s
      disability (as defined in the agreements). The agreements automatically
      terminate upon an executive’s death. “Cause” is defined in the agreements as (1)
      a failure or refusal to perform the services required under the agreement;
      (2) a
      material breach by executive of any of the terms of the agreement; or (3)
      executive’s conviction of a crime that either results in imprisonment or
      involves embezzlement, dishonesty, or activities injurious to the Company’s
      reputation. In the event that the Company terminates an executive’s employment
      without cause or due to the disability of the executive, the executive will
      be
      entitled to a lump sum severance payment equal to one month’s salary, in the
      case of termination for disability, and up to 12 month’s salary (depending upon
      years of service), in the case of termination without cause.





Each
      executive has the right to terminate his employment agreement on 60 days’ prior
      written notice or, in the event of a material breach by the Company of any
      of
      the terms of the agreement, upon 30 days’ prior written notice. In the event of
      a claim of material breach by the Company of the agreement, the executive must
      specify the breach and our failure to either (i) cure or diligently commence
      to
      cure the breach within the 30 day notice period, or (ii) dispute in good faith
      the existence of the material breach. In the event that an agreement terminates
      due to the Company’s breach, the executive is entitled to severance payments in
      equal monthly installments beginning
      in the month following the executive’s termination equal to three month’ salary
      plus one additional month’s salary for each year of service to the Company.
      Severance payments cannot exceed 12
      month’s salary.





In
      conjunction with the employment agreements, the Company’s board of directors
      deeming it essential to the best interests of its stockholders to foster the
      continuous engagement of key management personnel and recognizing that, as
      is
      the case with many publicly held corporations, a change of control might occur
      and that such possibility, and the uncertainty and questions which it might
      raise among management, might result in the departure or distraction of
      management personnel to the detriment of the company and its stockholders,
      determined to reinforce and encourage the continued attention and dedication
      of
      members of the Company’s management to their engagement without distraction in
      the face of potentially disturbing circumstances arising from the possibility
      of
      a change in control of the company, it entered into identical agreements
      regarding change in control with the executives. Each
      of
      the agreements regarding change in control continues through December 31, 2009
      (December 31, 2010 for Mr. Hazlitt) and extends automatically to the third
      anniversary thereof unless the Company gives notice to the executive prior
      to
      the date of such extension that the agreement term will not be
      extended. Notwithstanding the foregoing, if a change in control occurs during the term
      of
      the agreements, the term of the agreements will continue through the second
      anniversary of the date on which the change in control occurred. Each of the
      agreements entitles the executive to change of control benefits, as defined
      in
      the agreements and summarized below, upon his termination of employment with
      the
      Company during a potential change in control, as defined in the agreements,
      or
      after a change in control, as defined in the agreements, when his termination
      is
      caused (1) by the Company for any reason other than permanent disability or
      cause, as defined in the agreement (2) by the executive for good reason as
      defined in the agreements or, (3) by the executive for any reason during the
      30
      day period commencing on the first date which is six months after the date
      of
      the change in control. Each executive would receive a lump sum cash payment
      of
      three times his base salary and outplacement benefits. Each agreement also
      provides that the executive is entitled to a payment to make him whole for
      any
      federal excise tax imposed on change of control or severance payments received
      by him.





On
      March
      1, 2006, the Company entered into a consulting agreement with Christopher
      Chipman pursuant to which the Company has retained Mr. Chipman as its Chief
      Financial Officer. Pursuant to the Agreement with Mr. Chipman, Mr. Chipman
      devotes approximately 50% of his time to the Company's business. He receives
      a
      monthly fee of $7,500 and he was issued two year options to purchase an
      aggregate of 50,000 shares of the Company's common stock at an exercise price
      of
      $.34 per share. The options will vest at the rate of 10,000 shares per month
      during the initial period of his engagement. Notwithstanding the foregoing,
      the
      options are not exercisable unless and until the issuance of the options is
      approved by the Company's stockholders. The agreement runs for an initial one
      year period, and is renewable thereafter for an additional year. The Company
      can
      terminate the agreement at any time; however, if the Company terminates the
      agreement other than for cause (as defined in the agreement), the Company is
      required to pay Mr. Chipman the fees otherwise due and payable to him through
      the last day of the then current term of the Agreement or six months from such
      termination, which ever is shorter. Mr. Chipman can terminate the Agreement
      on
      30 days notice. On September 1, 2006, the Company amended its consulting
      agreement with its Chief Financial Officer. Pursuant to the agreement, the
      Company’s Chief Financial Officer devotes approximately 50% of his time to our
      business. He receives a monthly fee of $10,000. The agreement runs for an
      initial one year period, and is renewable thereafter for an additional year.
      He
      can terminate the Agreement on 60 days notice. In conjunction with the amended
      consulting agreement, the Company entered into a change of control agreement
      similar to the agreements entered into with other executive officers; except
      that the Company’s CFO agreement renews annually and his benefits are based upon
      one times his base annual fee.




-21-





On
      May
      12, 2006, the Company entered into an employment agreement with John Brownlie,
      pursuant to which Mr. Brownlie serves as Vice President Operations. Mr. Brownlie
      receives a base annual salary of $150,000 and is entitled to annual bonuses.
      Upon his employment, he received options to purchase an aggregate of 200,000
      shares of the Company’s common stock at an exercise price of $.32 per share.
      50,000 options vested immediately and the balance vest upon the Company
      achieving "Economic Completion" as that term is defined in the Standard Bank
      Credit Facility (when the Company has commenced mining operations and has been
      operating at anticipated capacity for 60 to 90 days). The term of the options
      is
      two years from the date of vesting. The agreement runs for an initial two year
      period, and automatically renews thereafter for additional one year periods
      unless terminated by either party within 30 days of a renewal date. The Company
      can terminate the agreement for cause or upon 30 days notice without cause.
      Mr.
      Brownlie can terminate the agreement upon 60 days notice without cause or,
      if
      there is a breach of the agreement by the Company that is not timely cured,
      upon
      30 days notice. In the event that the Company terminates him without cause
      or he
      terminates due to the Company’s breach, he will be entitled to certain severance
      payments. The Company utilized the Black-Scholes method to fair value the
      200,000 options received by Mr. Brownlie. The Company recorded approximately
      $70,000 as deferred compensation expense as of the date of the agreement and
      recorded the vested portion or $17,500 as stock based compensation expense
      for
      the year ended July 31, 2006.





NOTE
      16 -
      Sales Contracts, Commodity and Financial Instruments





In
      March
      2006, the Company entered into two identically structured derivative contracts
      with Standard Bank (See Note 13). Each derivative consisted of a series of
      forward sales of gold and a purchase gold cap. The Company agreed to sell a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. The Company also agreed to a purchase gold cap on a quarterly
      basis during this same period and at identical volumes covering a total volume
      of 121,927 ounces of gold at a price of $535 per ounce. While the period of
      the
      derivative contracts has commenced, the Company does not anticipate any material
      adverse effect from the fact that it has not commenced to sell gold because
      the
      price of gold is substantially above $535 per ounce. Under FASB Statement No.
      133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as Other Income or
      Expense. These contracts were not designated as hedging derivatives; and
      therefore, special hedge accounting does not apply.





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply during the period March 1, 2006 through July 31, 2006 and
      was
      the primary reason for the decrease in premium on the derivative contracts.
      As
      of January 31, 2007, the carrying value of this derivative liability was
      approximately $344,000. The change in fair value on these derivative contracts
      was approximately $528,000 for the six months ended January 31, 2007, and
      decreased as a result of the increases in gold prices during this period. This
      change in fair value was recorded as an other expense on the Company’s income
      statement.





On
      October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
      the Company entered into interest rate swap agreements in accordance with the
      terms of the Credit Facility, which requires that the Company hedge at least
      50
      percent of the Company’s outstanding debt under this facility. The agreements
      entered into cover $9,375,000 or 75% of the outstanding debt. Both swaps covered
      this same notional amount of $9,375,000, but over different time horizons.
      The
      first covered the six months commencing October 11, 2006 and a termination
      date
      of March 31, 2007 and the second covering the period from March 30, 2007 and
      a
      termination date of December 31, 2010. 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 the Company
      deems appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.




-22-




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
      OCI to earnings during the 12 months ending July 31 2007 from these two swaps
      was determined to be immaterial. As of January 31, 2007, the Company recorded
      $33,433 as a derivative liability with the offset going to other comprehensive
      income.




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 monitor
      the
      market position with each counterparty as required by
      SFAS 133.




NOTE
      17 -
      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:


January
                  31,2007Advance
                  payment on Mining Contract to Sinergia
              
              $
              520,000Sinergia
                  Mobilization Payment
              
              
              70,000Other
              
              
              8,812Total
                  Deposits
              
              $
              598,812


NOTE
      18 -
      Other Current Assets





Other
      current assets consist of the following:




January
                  31,2007Value
                  added tax to be refunded
              
              $
              568,490Other
              
              
              42,077Total
                  Other Current Assets
              
              $
              610,567





NOTE
      18 -
      Subsequent Events





On
      February 1, 2007, the Company completed an additional draw down on its credit
      facility from Standard Bank receiving proceeds of $3,250,000 increasing the
      total outstanding balance on the Credit Facility to $12,000,000. The Company
      is
      using and anticipates using these proceeds for its El Chanate
      Project.





On
      February 5, 2007, Dave Loder, the General Manager of our El Chanate Project,
      resigned for personal reasons unrelated to his employment with the Company.
      We
      have hired, on a temporary basis, an experienced replacement and are actively
      looking for a permanent replacement. We do not believe, that Mr. Loder’s
      departure will have a material adverse affect on our business.




-23-





On
      February 7, 2007, Robert Roningen resigned as our Secretary and, on February
      9,
      2007, John Brownlie, our Vice President of Operations, was appointed Chief
      Operating Officer and Jeffrey W. Pritchard, our Vice President of Investor
      Relations, was appointed Secretary. Mr. Brownlie’s appointment as our Chief
      Operating Officer did not result in any changes to his compensation arrangement
      under his employment agreement with the Company.





In
      February 2007, the Company received proceeds of approximately $4,242,000 from
      the exercising of an aggregate of 14,140,000 of warrants issued in past private
      placements.





On
      February 21, 2007, the Company’s stockholders, among other things, approved the
      2006 Equity Incentive Plan, an amendment to the Company’s Certificate of
      Incorporation increasing the number of authorized shares of Common Stock from
      200,000,000 to 250,000,000 and approved the issuance of an aggregate of
      2,450,000 outstanding
      options (including the options issued to the Company’s executive officers and
      directors - See Note 12) that required stockholder approval pursuant to the
      rules of the Toronto Stock Exchange.





On
      March
      2, 2007, MSR, the Company’s wholly-owned subsidiary entered into a sales
      contract with Degussa Mexico S.A. de C.V. to supply sodium cyanide solid bricks
      for use in the heap leach process with the El Chanate Project. The contract
      period initiates April 1, 2007 and extends through March 31, 2010 and estimates
      total yearly requirements at 1,000 metric tons plus or minus 20%. The total
      minimum annual commitment associated with this contract is anticipated to be
      between $1,500,000 in year one and two and $1,600,000 in year
      three.





NOTE
      19 -
      New Accounting Pronouncements




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments” (“FAS 155”) - an amendment of FASB Statements
      No. 133 and 140. FAS 155 amends SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities” (“FAS 133”), and SFAS No. 140 (“FAS 140”),
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities”, to permit fair value re-measurement of any hybrid financial
      instrument that contains an embedded derivative that would otherwise require
      bifurcation. Additionally, FAS 155 seeks to clarify which interest-only strips
      and principal-only strips are not subject to the requirements of FAS 133 and
      to
      clarify that concentrations of credit risk in the form of subordination are
      not
      embedded derivatives. This Statement is effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. Management does not believe the adoption
      of this standard will have a material impact on the financial condition or
      the
      results of operations of the Company.




On
      July
      13, 2006, the Financial Accounting Standards Board issued Interpretation No.
      48,
      "Accounting for Uncertainty in Income Taxes" (“FIN 48”). The requirements are
      effective for fiscal years beginning after December 15, 2006. The purpose
      of FIN 48 is to clarify and set forth consistent rules for accounting for
      uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings in
      the
      year of adoption. Management does not believe the adoption of this standard
      will
      have a material impact on the financial condition or the results of operations
      of the Company.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.”
This new standard provides guidance for using fair value to measure assets
      and
      liabilities. The FASB believes the standard also responds to investors’ requests
      for expanded information about the extent to which companies measure assets
      and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. Statement 157 applies whenever
      other standards require (or permit) assets or liabilities to be measured at
      fair
      value but does not expand the use of fair value in any new circumstances.





Currently,
      over 40 accounting standards within GAAP require (or permit) entities to measure
      assets and liabilities at fair value. Prior to Statement 157, the methods for
      measuring fair value were diverse and inconsistent, especially for items that
      are not actively traded. The standard clarifies that for items that are not
      actively traded, such as certain kinds of derivatives, fair value should reflect
      the price in a transaction with a market participant, including an adjustment
      for risk, not just the company’s market-to-market model value. Statement 157
      also requires expanded disclosure of the effect on earnings for items measured
      using unobservable data.




-24-





Under
      Statement 157, fair value refers to the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants in the market in which the reporting entity transacts. In this
      standard, the FASB clarifies the principle that fair value should be based
      on
      the assumptions market participants would use when pricing the asset or
      liability. In support of this principle, Statement 157 establishes a fair value
      hierarchy that prioritizes the information used to develop those assumptions.
      The fair value hierarchy gives the highest priority to quoted prices in active
      markets and the lowest priority to unobservable data, for example, the reporting
      entity’s own data. Under the standard, fair value measurements would be
      separately disclosed by level within the fair value hierarchy.





The
      provisions of Statement 157 are effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. Earlier application is encouraged, provided that the reporting
      entity has not yet issued financial statements for that fiscal year, including
      any financial statements for an interim period within that fiscal year.
      Management does not believe the adoption of this standard will have a material
      impact in the financial condition or results of operations of the
      Company.





-25-




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





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 and Section 21E of the
      Securities and Exchange Act of 1934. Certain, but not necessarily all, 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,
      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
      “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.




**Results
      of Operations**





**General**





Sonora,
      Mexico





Through
      a
      wholly-owned subsidiary and an affiliate, Capital Gold Corporation owns 100%
      of
      16 mining concessions located in the Municipality of Altar, State of Sonora,
      Republic of Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7
      square miles). We are in the process of completing construction and development
      of an open-pit gold mining operation to mine two of these concessions. We
      sometimes refer to the planned operations on these two concessions as the El
      Chanate Project. We anticipate that mining operations will commence in late
      March 2007.





Construction
      activities at the El Chanate Project commenced in August 2006. Engineering
      Procurement and Construction Management activities commenced June 1, 2006.
      Also
      in August 2006, we completed debt financing for the construction of the El
      Chanate mine. We anticipate revenues from mining operations will commence by
      the
      end of the second calendar quarter 2007. Please see *“Current
      Status of El Chanate”* below
      for
      a discussion of the current status of our El Chanate project.





We
      believe that surface gold mine and facility at El Chanate will be capable of
      producing about 2.6 million metric tons per year of ore from which we anticipate
      recovering about 44,000 to 48,000 ounces of gold per year, over a seven year
      mine life. We are following the updated feasibility study (the “2005 Study”) for
      the El Chanate Project prepared by M3 Engineering of Tucson, Arizona which
      was
      completed in October 2005, as further updated by an August 2006 technical report
      from SRK Consulting, Denver, Colorado. The original feasibility study (the
“2003
      Study”) was completed by M3 Engineering in August 2003. Since completion of the
      2003 Study, both the price of gold and production costs have increased and
      equipment choices have broadened from those identified in the 2003
      Study.





The
      2005
      Study includes the following changes from the 2003 Study:





·
            an
                increase in the mine life from five to six
                years,


·
            an
                increase in the base gold price from $325/oz to
                $375/oz,






-26-




·
            use
                of a mining contractor,


·
            revised
                mining, processing and support costs,


·
            stockpiling
                of low grade material for possible processing in year six, if justified
                by
                gold prices at that time,


·
            a
                reduced size for the waste rock dump and revised design of reclamation
                waste dump slopes,


·
            a
                revised process of equipment selection
                and


·
            evaluation
                of the newly acquired water well for processing the
                ore.





In
      view
      of a significant rise in the gold price, in June 2006, we commissioned SRK
      Consulting, Denver, Colorado, to prepare an updated Canadian Securities
      Administration National Instrument 43-101 compliant technical report on our
      El
      Chanate Project. SRK completed this technical report in August 2006 (the “2006
      Update”). The 2006 Update provided the following updated information from the
      2005 Study:





·
            an
                18% increase in the proven mineral reserve
                tonnage,


·
            a
                59% increase in the probable mineral reserve
                tonnage


·
            an
                increase in mine life from six to seven
                years,


·
            an
                increase in the base gold price from $375/oz to $450/oz
                and


·
            Stockpiling
                of low grade material for possible processing in year seven, if justified
                by gold prices at that time.





Pursuant
      to the 2005 Study, as updated by the 2006 Update using a $450 per ounce gold
      price, our estimated mine life is seven years and the ore reserve is 490,000
      ounces of gold present in the ground. Of this, we anticipate recovering
      approximately 332,000 ounces of gold over the seven year life of the mine.
      The
      targeted cash cost (which includes mining, processing and on-property general
      and administrative expenses) per the 2005 Study is $259 per ounce. We believe
      that cash costs may decrease as the production rate increases. Total costs
      (which include cash costs as well as off-property costs such as property taxes,
      royalties, refining, transportation and insurance costs and exclude financing
      costs) will vary depending upon the price of gold (due to the nature of
      underlying payment obligations to the original owner of the property). Total
      costs are estimated in the 2005 Study to be $339 per ounce at a gold price
      of
      $417 per ounce (the three year average gold price as of the date of that study).
      We will be working on measures to attempt to reduce costs going forward. Ore
      reserves and production rates are based on a gold price of $450 per ounce,
      which
      is the Base Case in the 2006 Update. During 2006, the spot price for gold on
      the
      London Exchange has fluctuated between $524.75 and $725.00 per ounce. The 2005
      Study contains the same mining rate as the 2003 Study of 7,500 metric tonnes
      per
      day of ore. It should be noted that, during the preliminary engineering phase
      of
      the project it was decided to design the crushing screening and ore stacking
      system with the capability of processing 10,000 tonnes per day of ore. This
      will
      make allowances for any possible increase in production and for operational
      flexibility. It was found that the major components in the feasibility study
      would be capable of handling the increase in tonnage. Design changes were made
      where necessary to accommodate the increased tonnage. The 2005 Study takes
      into
      consideration a more modern crushing system than the one contemplated in the
      2003 Study. The crushing system referred to in the 2005 Study is a new system,
      that, we believe will provide more efficient processing capabilities than the
      used equipment referred to in the 2003 Study. In addition, the 2005 Study
      assumes a contractor will mine the ore and haul it to the crushers. In the
      2003
      Study, we planned to perform these functions. We have engaged a mining
      contractor to perform these services.





The
      2005
      Study assumes a mining production rate of 2.6 million tonnes of ore per year
      or
      7,500 tonnes per day. The processing plant will operate 365 days per year.
      The
      processing plan for this open pit heap leach gold project calls for crushing
      the
      ore to 100% minus 3/8 inch. Carbon columns will be used to recover the
      gold.





The
      following Summary is extracted from the 2005 Study, as updated by the 2006
      Update. 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 489,952 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
      331,560 ounces, or approximately 68% of the contained gold. The gold recovery
      rate is expected to average approximately 68% for the entire ore body.
      Individual portions of the ore body may experience varying recovery rates
      ranging from about 73% to 48%. Oxidized and sandstone ore types may have
      recoveries of about 73%; fault zone ore type recoveries may be about 64%; and
      siltstone ore types recoveries may be about 48%.





-27-


El
      Chanate Project


**Production
      Summary**





Metric
            
            U.S.**Materials**
              **Reserves**
              ****Proven
              Probable
              Total
                Reserves
              Other
                Mineralized Materials
              Waste
              Total
              
              Contained
                Gold
              
              **Production**
              Ore
                Crushed
              
              
              Operating
                Days/Year
              Gold
                Plant Average Recovery
              Average
                Annual Production
              Total
                Gold Produced
            
            11.7
                Million Tonnes @ 0.811 g/t*
              8.2 Million Tonnes@0.705g/t*
              19.9
                Million Tonnes @ 0.767 g/t*
              0 Million Tonnes
              19.9
                Million Tonnes
              39.7
                Million Tonnes
              
              15.24
                Million grams
              
              
              2.6
                Million Tonnes /Year
              7,500 Mt/d*
              
              365
                Days per year
              67.7
                %
              1.35
                Million grams
              10.31
                Million grams
            
            12.9
                Million Tons @ 0.024 opt*
              9.0 Million Tons@0.021opt*
              21.9
                Million Tons @ 0.022 opt*
              0 Million Tons
              21.9
                Million Tons
              43.8
                Million tons
              
              489,952
                Oz
              
              
              2.87
                Million Tons/Year
              8,267
                t/d
              
              365
                Days per year
              67.7
                %
              43,414
                Oz
              331,560
                Oz








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


·
            The
                reserve estimates are based on a recovered gold cutoff grade of 0.20
                grams
                per metric tonne as described below.




In
      the
      mineral resource block model developed, with blocks 10m (meters) x 10m x 5m
      high, Measured and Indicated resources (corresponding to Proven and Probable
      reserves respectively when within the pit design) were classified in accordance
      with the following scheme:




·
            Blocks
                with 4 or more drill holes within a search radius of 40m x 40m x
                25m and
                inside suitable geological zones were classified as Measured
                (corresponding to Proven);




·
            Blocks
                with 3 or more holes within a search radius of 75m x 75m x 50m and
                inside
                suitable geological zones were classified as Indicated (corresponding
                to
                Probable);




·
            Blocks
                with 1 or 2 holes within a search radius of 75m x 75m x 50m and inside
                suitable geological zones were classified as Inferred (and which
                was
                classed as waste material in the mining reserves
                estimate);




·
            Blocks
                outside the above search radii or outside suitable geological zones
                were
                not assigned a classification.




The
      proven and probable reserve estimates are based on a recovered gold internal
      cutoff grade of 0.20 grams/tonne. (A constant recovered gold cutoff grade was
      used for reserves calculation as the head gold grade cutoff varies with the
      different ore types due to their variable gold recoveries.) The internal
      (in-pit) cutoff grade was used for reserves reporting.




-28-




**Cutoff
                Grade Calculation**
              **Basic
                Parameters**
              Gold
                Price
              Gold
                Recovery
              
              **Operating
                Costs per Tonne of Ore**
              Royalty
                (4%)
              Smelting
                & Refining
              Mining
                *
              Processing
              Heap
                Leach Pad Development
              G&A
              Total
              
              **Internal
                Cutoff Grade**
              Head
                Grade Cutoff (67.7% recov.)
              Recovered
                Gold Grade Cutoff
            
            **Internal
                Cutoff Grade**
              
              US$450/oz
              67.7%
              
              $ 
                per Tonne of Ore
              0.115
              0.015
              0.070
              1.680
              0.185
              0.810
              2.875
              
              Grams
                per Tonne
              0.29
              0.20
            
            **Break
                Even Cutoff Grade**
              
              US$450/oz
              67.7%
              
              $ 
                per Tonne of Ore
              0.164
              0.021
              1.250
              1.680
              0.185
              0.810
              4.110
              
              Grams
                per Tonne
              0.41
              0.28







*
      The
      calculation of an internal cutoff grade does not include the basic mining costs
      (which are considered to be sunk costs for material within the designed pit).
      The $0.07 per tonne cost included is the incremental (added) cost of hauling
      ore
      over hauling waste, and which is included in the calculation.





Current
      Status of El Chanate





We
      have
      made significant progress in the construction and commissioning of our mine
      at
      El Chanate. As of March 13, 2007, engineering and procurement is complete,
      we
      have obtained all permits required to commence mining operations, the majority
      of equipment has been delivered and installed and the infrastructure support
      buildings have been constructed. The current status of the relevant areas is
      as
      follows:





Electrical
      power is supplied from the National grid by CFE (Commission Federal de
      Electricidad) in Caborca at 34.5 kilo volt-amps and is converted to 480 volts
      at
      seven transformer stations throughout the site. The transmission lines and
      transformers have been installed and commissioned and approved for use by CFE.
      An emergency generator has been installed adjacent to the solution ponds to
      circulate the leach pad solution in the event of power interruptions. An
      additional substation is being built by the local power company 20 kilometers
      from the mine in the town of Altar. It will have the capability to increase
      power to the mine later this year should additional power be required in the
      event of additional consumption requirements for increased production or
      seasonal fluctuations.





Process
      water is supplied from a well owned by MSR, one of our Mexican subsidiaries.
      The
      well’s casing has been inspected and equipped with a new pump and electrical
      hardware. The well is located nine kilometers from the mine and can supply
      water
      in sufficient quantity to support the mine through a new eight inch diameter
      steel pipeline. While there are issues about the adequacy of water supply over
      the entire life of the project, based on the anticipated water consumption
      for
      at least the first few years of operation, we believe that we have an allocation
      to meet our requirements. The capability of acquiring additional water through
      third party allocation purchase is available, as is the conservation of water
      through good operational practice. If we need to obtain additional rights,
      but
      are unable to procure them our planned operations may be adversely affected.
      See
“ *Our
      currently permitted water rights may not be adequate for all of our total
      project needs over the entire course of our anticipated mining operations.
      If we
      need to obtain additional rights, but are unable to procure them our planned
      operations may be adversely affected* ”
in
      “Risk Factors” below.





The
      mine
      access road is nine kilometers long and is capable of supporting all anticipated
      traffic. The road connects with a main asphalt road (Route 2) that is maintained
      by the state highways department. There are two arroyos that cross the mine
      access road, both of which have concrete crossings to prevent erosion of the
      road at these locations, giving year round access to the site. The internal
      access roads have been constructed for the life of the mine.




-29-




The
      mine
      is supported by a number of infrastructure buildings all of which have been
      or
      are being constructed. The completed buildings in use are an explosive and
      detonator store, a 5,000 sq. ft warehouse, the mine office and the security
      guardhouse and first aid centre. Buildings due for completion by the end of
      March 2007 are, the laboratory, lime storage building and a cyanide and carbon
      storage building. The refinery building is anticipated to be completed by
      mid-April 2007.





The
      crushing and screening plant consists of three stage crushing and closed circuit
      screening. All of the equipment is new and has a design capacity of 1,000 tons
      per hour (tph) for the primary crushing circuit and 400 tph for the balance
      of
      the crushing circuit. A 20,000 ton buffer stockpile separates the primary
      crusher from the rest of the circuit allowing the crushing circuits to operate
      independently of each other. The crushed ore is stacked on the leach pad by
      a
      series of conveyors and a radial stacker. The equipment is new and has been
      commissioned and is currently stacking ore for over liner production and
      leaching. Ore is placed on a leach pad that is (HDPE) plastic lined to contain
      the gold bearing solution and transport it via lined launders (plastic lined
      earth trenches) to ponds which are double plastic lined. The initial leach
      pad
      will consist of four panels, three of which will be lined at this time (the
      ultimate leach pad will consist of ten panels). These four panels will allow
      for
      the stacking of approximately one year of crushed ore. The launder and ponds
      have been constructed for the mine life. The first two panels are complete
      and
      the remainder of the launder and pond construction is scheduled for completion
      during March 2007. We anticipate that we will begin to apply cyanide solution
      to
      the ore by the end of April 2007. We anticipate that gold Dore (bars of
      semi-purified gold) production will begin between 45 to 75 days thereafter.





The
      initial supply of ore to the crushing plant and leach pad is being loaded and
      delivered by a group of local truckers. Sinergia, the mining contractor, is
      in
      the process of mobilizing the mining fleet to commence mining on March 25,
      2007.
      The Sinergia mining fleet is not new, however it has been refurbished at
      Sinergia’s repair facility and at the Caterpillar dealer in Hermosillo. This
      process has been monitored by us and third party specialists and we believe
      the
      equipment will be suitable for mining when required. Sinergia is constructing
      staff accommodation within an existing Ejido village adjacent to the mine site.
      On site power, water, and fuel supply has been made available for Sinergia’s use
      as prescribed in the mining contract.





The
      gold
      in the cyanide/gold solution (pregnant solution) will be recovered using
      activated carbon held in tanks. The activated carbon will be transferred on
      a
      daily basis to a processing plant (ADR Plant) that, with the use of chemicals,
      will extract the gold from the pregnant solution. The gold from the solution
      will be deposited by an electrowinning (electrolysis) process and then dried,
      mixed with fluxes (substances that reduce the melting point of the material
      and
      remove impurities in the metal) and smelted in a furnace to produce gold Dore.
      The solution that has been stripped of gold will gravitate to the barren
      solution pond. Cyanide will be added to this and the solution will be pumped
      to
      freshly stacked ore. The ADR Plant is not new. It has been refurbished; all
      of
      the pumps, valves, piping, instruments and electrical components have been
      replaced. The pumps and piping associated with the solution ponds are also
      new.
      We anticipate that the ADR Plant will be operational and ready for use by mid
      April 2007.





We
      have
      filled all key positions in finance, human resources, operations and mine
      support (other than a General Manager), and the majority of the remainder of
      the
      staff is also in place. Our Chief Operating Officer is acting as our General
      Manager until a replacement can be found. We are actively searching for a
      replacement and we do not believe that it will be a problem finding a suitable
      candidate. We forecast a total staffing complement of between 70 and 80 people.
      The mine has three towns in close proximity where the staff live. With this
      local infrastructure, the staff will be bussed to site, eliminating the need
      for
      an on site camp. Certain duties such as security and staff transport will be
      contracted. In the town of Caborca we own a house and rent an office. While
      we
      have constructed and are using an on-site office, we will retain an “in town”
office for the project life.





We
      have
      entered into a supply agreement for cyanide and have ordered consumable supplies
      such as explosives and carbon. Wear parts and critical spare parts have also
      been delivered to the mine. A fully equipped laboratory has been constructed
      at
      the mine with the capability of monitoring the mine operation and conducting
      metallurgical test work. We anticipate that the laboratory will be fully
      functional during April 2007.





-30-




During
      the construction and commissioning process, we have been assisted by a number
      of
      suppliers and consultants to ensure that the transition into full production
      becomes a seamless event. Given the location of the mine, there are many local
      services available to support the operation. Where we feel it is prudent to
      retain critical items such as pond and water well pumps, we have done so and
      we
      have constructed storage facilities to store in excess of three months supply
      of
      reagents should we foresee supply shortages looming.





To
      support the mine we have purchased a number of vehicles and support equipment
      that were used during construction. The equipment consists of a 35 ton crane,
      a
      water truck, an ambulance, a D4 dozer, a front end loader and a forklift/tool
      handler. We also have purchased a number of additional equipment such as
      lighting plants, welders and small tools.





In
      February 2007, we commenced a 51-hole drilling campaign to determine additional
      proven and probable gold reserves at the El Chanate Project. 26 holes are being
      drilled to determine whether additional gold ounces can be added to our reserve
      totals. The remaining 25 holes are exploration holes. The 51 holes will total
      almost 7,000 meters, and are positioned to fill in gaps in the ore body and
      test
      the southern and eastern limits of the currently known ore zones. Subsequently,
      nine additional holes have been added to the program, bringing the new total
      to
      60 holes.





Leadville,
      Colorado





We
      own or
      lease a number of claims and properties, all of which are located in California
      Mining District, Lake County, Colorado, Township 9 South, Range 79. During
      the
      quarter ended January 31, 2007, activity at our Leadville, Colorado properties
      consisted primarily of administrative expenses. Primarily as a result of our
      focus on El Chanate, we ceased activities in Leadville, Colorado. During the
      year ended July 31, 2002, we performed a review of our Leadville mine and mill
      improvements and determined that an impairment loss should be realized.
      Therefore, we significantly reduced the carrying value of certain assets
      relating to our Leadville, Colorado assets by $999,445. During the year ending
      July 31, 2004, we again performed a review of our Colorado mine and mill
      improvements and determined that an additional impairment loss should be
      recognized. Accordingly, we further reduced the net carrying value to $0,
      recognizing an additional loss of $300,000.





Three
      Months Ended January 31, 2007 compared to Three Months Ended January 31,
      2006





Net
      Loss





Our
      net
      loss for the three months ended January 31, 2007 was approximately $1,673,000,
      an increase of approximately $752,000 or 82% from the three months ended January
      31, 2006. The primary reason for the increase in net loss during the three
      months ended January 31, 2007 was 1) an increase in selling, general and
      administrative expenses of approximately $124,000 as compared to the same period
      a year ago and 2) losses of approximately $286,000 in the 2007 period due to
      the
      change in fair value of our derivative instruments, 3) an increase in stock
      based compensation expense of approximately $101,000 as compared to the same
      period a year ago, 4) an increase in interest expense of approximately $175,000
      due to interest charges on outstanding balances on our Credit Facility, and
      5)
      an increase in depreciation and amortization expense of approximately $262,000
      mainly due to the amortization of deferred financing costs. These increases
      in
      loss were offset by a decrease in mine expenses of approximately $200,000 due
      to
      higher planning and engineering costs being expensed in the prior period. Net
      loss per share was $.01 for the three months ended January 31, 2007 and 2006,
      respectively.





Revenues





We
      generated no revenues from mining operations during the three months ended
      January 31, 2007 and 2006. There were de minimis non-operating revenues during
      the three months ended January 31, 2007 and 2006 of approximately $12,000 and
      $15,000, respectively. These non-operating revenues primarily represent interest
      income.





-31-




Mine
      Expenses





Mine
      expenses during the three months ended January 31, 2007 were $301,000, a
      decrease of $200,000 or 40% from the three months ended January 31, 2006. Mine
      expenses were lower in the 2007 versus the same period a year earlier primarily
      due to higher engineering and planning costs related to our El Chanate Project
      being expensed in the prior period.





Selling,
      General and Administration Expense





Selling,
      general and administrative expenses during the three months ended January 31,
      2007 were $515,000, an increase of approximately $124,000 or 29% from the three
      months ended January 31, 2006. The increase in selling, general and
      administrative expenses resulted primarily from higher salaries and wages and
      higher professional fees versus the same period a year earlier.





Stocks
      and Warrants Issued for Services





Stocks
      and warrants issued for services during the three months ended January 31,
      2007
      were $101,000 as compared to no such costs for the same period a year earlier.
      This increase primarily resulted from the issuance of stock options to our
      independent directors, outside Canadian Counsel and certain executives.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the three months ended January 31, 2007 and
      2006
      was approximately $273,000 and $11,000, respectively. The primary reason for
      the
      increase was due to the initiation of amortization charges on deferred financing
      costs resulting from the Credit Facility entered into in August 2006 with
      Standard Bank Plc. This accounted for approximately $262,000 of the increase
      in
      the 2007 quarter versus the same period a year ago.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the three months
      ended January 31, 2007 and 2006, was approximately $286,000 and $0,
      respectively. **** This
      was
      primarily due to us entering into two identically structured derivative
      contracts with Standard Bank in March 2006. Each derivative consisted of a
      series of forward sales of gold and a purchase gold cap. We agreed to sell
      a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. We also agreed to a purchase gold cap on a quarterly basis
      during this same period and at identical volumes covering a total volume of
      121,927 ounces of gold at a price of $535 per ounce. While the period of the
      derivative contracts has commenced, we do not anticipate any material adverse
      effect from the fact that we have not commenced to sell gold because the price
      of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as *Other
      Income or Expense.* These
      contracts were not designated as hedging derivatives; and therefore, special
      hedge accounting does not apply.





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply in second quarter 2006, and was the primary reason for the
      decrease in premium on the derivative contracts. The change in fair value during
      the three months ended January 31, 2007 reduced the carrying value on these
      derivative contracts by approximately $286,000, and was reflected as an other
      expense during the 2007 period. There was no such transactions entered into
      during the same period in 2006.





Interest
      expense was approximately $175,000 for the three months ended January 31, 2007
      versus no such expense for the same period in 2006. This increase was mainly
      due
      to interest expense associated with outstanding balances on our draw downs
      from
      the Credit Facility entered into in August 2006 with Standard Bank Plc. related
      to project costs for our El Chanate Project. As of March 7, 2007, our
      outstanding balance on the Credit Facility was $12,000,000.





-32-





Six
      Months Ended January 31, 2007 compared to Six Months Ended January 31,
      2006





Net
      Loss





Our
      net
      loss for the six months ended January 31, 2007 was approximately $2,834,000,
      an
      increase of approximately $1,100,000 or 63% from the six months ended January
      31, 2006. The primary reason for the increase in loss during the six months
      ended January 31, 2007 was 1) an increase in selling, general and administrative
      expenses of approximately $467,000 as compared to the same period a year ago
      and
      2) losses of approximately $528,000 in the 2007 period due to the change in
      fair
      value of our derivative instruments, 3) an increase in stock based compensation
      expense of approximately $101,000 as compared to the same period a year ago,
      4)
      an increase in interest expense of approximately $198,000 due to interest
      charges on outstanding balances on our Credit Facility, and 5) an increase
      in
      depreciation and amortization expense of approximately $327,000 mainly due
      to
      the amortization of deferred financing costs. These increases in loss were
      offset by a decrease in mine expenses of approximately $527,000 due to higher
      planning and engineering costs being expensed in the prior period. Net loss
      per
      share was $.02 for the six months ended January 31, 2007 and 2006,
      respectively.





Revenues





We
      generated no revenues from mining operations during the six months ended January
      31, 2007 and 2006. There were de minimis non-operating revenues during the
      six
      months ended January 31, 2007 and 2006 of approximately $34,000 and $41,000,
      respectively. These non-operating revenues primarily represent interest
      income.





Mine
      Expenses





Mine
      expenses during the six months ended January 31, 2007 were $514,000, a decrease
      of $527,000 or 51% from the six months ended January 31, 2006. Mine expenses
      were lower in the 2007 versus the same period a year earlier primarily due
      to
      higher engineering and planning costs related to our El Chanate Project being
      expensed in the prior period.





Selling,
      General and Administration Expense





Selling,
      general and administrative expenses during the six months ended January 31,
      2007
      were $1,181,000, an increase of approximately $467,000 or 65% from the six
      months ended January 31, 2006. The increase in selling, general and
      administrative expenses resulted primarily from higher salaries and wages,
      higher professional and consulting fees as well as an increase in insurance
      costs versus the same period a year earlier.





Stocks
      and Warrants Issued for Services





Stocks
      and warrants issued for services during the six months ended January 31, 2007
      were $101,000 as compared to no such costs for the same period a year earlier.
      This increase primarily resulted from the issuance of stock options to our
      independent directors, outside Canadian Counsel and certain executives.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the six months ended January 31, 2007 and 2006
      was approximately $346,000 and $19,000, respectively. The primary reason for
      the
      increase was due to the initiation of amortization charges on deferred financing
      costs resulting from the Credit Facility entered into in August 2006 with
      Standard Bank Plc. This accounted for approximately $332,000 of the increase
      in
      the 2007 period versus the same period a year ago.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the six months
      ended January 31, 2007 and 2006, was approximately $528,000 and $0,
      respectively. **** This
      was
      primarily due to us entering into two identically structured derivative
      contracts with Standard Bank in March 2006. Each derivative consisted of a
      series of forward sales of gold and a purchase gold cap. We agreed to sell
      a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. We also agreed to a purchase gold cap on a quarterly basis
      during this same period and at identical volumes covering a total volume of
      121,927 ounces of gold at a price of $535 per ounce. While the period of the
      derivative contracts has commenced, we do not anticipate any material adverse
      effect from the fact that we have not commenced to sell gold because the price
      of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
      “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as *Other
      Income or Expense.* These
      contracts were not designated as hedging derivatives; and therefore, special
      hedge accounting does not apply.




-33-




The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply in second quarter 2006, and was the primary reason for the
      decrease in premium on the derivative contracts. The change in fair value during
      the six months ended January 31, 2007 reduced the carrying value on these
      derivative contracts by approximately $528,000, and was reflected as an other
      expense during the 2007 period. There was no such transactions entered into
      during the same period in 2006.





Interest
      expense was approximately $198,000 for the six months ended January 31, 2007
      versus no such expense for the same period in 2006. This increase was mainly
      due
      to interest expense associated with our outstanding balances on our draw downs
      associated with the Credit Facility entered into in August 2006 with Standard
      Bank Plc related to project costs for our El Chanate Project.





Loss
      from Changes in Foreign Exchange Rates





During
      the six months ended January 31, 2007, we recorded equity adjustments from
      foreign currency translations of approximately $  162,000.
      These translation adjustments are related to changes in the rates of exchange
      between the Mexican Peso and the US dollar.





**Liquidity
      and Capital Resources; Plan of Operations**





As
      of
      January 31, 2007, we had working capital of approximately $6,550,000. Cash
      provided by operating activities for the six months ended January 31, 2007
      was
      approximately $1, 679,000, primarily due to cash
      collateral returned to us after our Credit Facility was executed in August
      2006
      with Standard Bank related to our Gold Price Protection Agreement. Cash
      used
      in investing activities for the six months ending January 31, 2007, amounted
      to
      $11,379,000, primarily from the purchase and erection of property, plant and
      equipment related to our El Chanate Project. Cash provided by financing
      activities for the six months ended January 31, 2007 amounted to $12,902,000,
      primarily from proceeds from our Credit Facility of $8,750,000 and approximately
      $4,413,000 in proceeds from the sale of common stock. Our
      plans
      over the next 12 months primarily include: 1) completing construction of the
      El
      Chanate project in Mexico, 2) completing our drilling campaign, initiated in
      February 2007, designed to determine if an increase in our proven and probable
      gold reserves is warranted, 3) commencing gold production, and 4) possible
      exploration and/or acquisitions in northern Mexico. We anticipate that mining
      operations at El Chanate will begin in late March 2007 with revenues anticipated
      to begin by the end of the second calendar quarter 2007. We believe, but cannot
      assure, that we have sufficient available funds to cover completion of the
      construction of the mine, the drilling campaign initiated in February 2007,
      operating and general and administrative expenses until revenues from gold
      mining operations reach positive cash flow. We also anticipate that we have
      sufficient funds to conduct exploration/acquisition activities.





Historically,
      we have not generated any material revenues from operations and have been in
      a
      precarious financial condition. Our consolidated financial statements have
      been
      prepared on a going concern basis, which contemplates the realization of assets
      and satisfaction of liabilities in the normal course of business. We have
      recurring losses from operations. Our primary source of funds during the six
      months ended January 31, 2007 was from the sale and issuance of equity
      securities as well as proceeds from our Credit Facility with Standard Bank
      for
      the El Chanate Project. We anticipate that our operations and project costs
      through fiscal 2007 will be funded from the proceeds from our recent private
      placements and warrant exercises as well as our Credit Facility. The private
      placements of our securities and the Standard Bank Credit Facility are discussed
      below.





-34-





**January
      2007 Private Placements & Warrant Exercises**





We
      closed
      two private placements in January 2007 pursuant to which we issued an aggregate
      of 12,561,667 units, each unit consisting of one share of our common stock
      and a
      warrant to purchase 1⁄4 of a share of our common stock for proceeds of
      approximately $3,486,000, net of commissions of approximately $283,000. During
      the three months ended January 31, 2007, and during February 2007, we also
      received proceeds of approximately $928,000 and $4,242,000, respectively, from
      the exercising of, respectively, an aggregate of 6,142,454 and 14,140,000
      warrants issued in past private placements discussed below. The Warrant issued
      to each purchaser in the January 2007 Private Placement is exercisable for
      one
      share of our common stock, at an exercise price equal to $0.40 per share. Each
      Warrant has a term of eighteen months and is fully exercisable from the date
      of
      issuance. We issued to the placement agents eighteen month warrants to purchase
      up to an aggregate of 942,125 shares of our common stock at an exercise price
      of
      $0.30 per share. Such placement agent warrants are valued at approximately
      $142,000 using the Black-Scholes option pricing method.





**February
      2006 Private Placements & Warrant Exercises**





We
      closed
      two private placements in 2006 pursuant to which we issued an aggregate of
      21,240,000 units, each unit consisting of one share of our common stock and
      a
      warrant to purchase 1⁄4 of a share of our common stock for net proceeds of
      $4,999,500, net of commissions of $310,500. We also received net proceeds of
      $2,373,570, net of commissions of $206,430, from the exercising of 8,600,000
      warrants in February 2006. The Warrant issued to each purchaser is exercisable
      for one share of our common stock, at an exercise price equal to $0.30 per
      share. Each Warrant has a term of eighteen months and is fully exercisable
      from
      the date of issuance. We issued to the placement agent in one of the placements
      eighteen month warrants to purchase up to 934,000 shares of our common stock
      at
      an exercise price of $0.25 per share. Such placement agent warrants are valued
      at approximately $189,000 using the Black-Scholes option pricing method.





**February
      2005 Private Placement**





In
      the
      private placement that closed in February 2005, we issued 27,200,004 units,
      each
      unit consisting of one shares of our common stock and one common stock Purchase
      Warrant for an aggregate gross purchase price of approximately $6,800,000 and
      we
      received approximately $6,200,000 in net proceeds. The Warrant issued to each
      purchaser was originally exercisable for one share of our common stock, at
      an
      exercise price equal to $0.30 per share. We temporarily lowered the exercise
      price of the Warrants to $0.20 per shares for the period commencing on November
      28, 2005 and ending on January 31, 2006, after which time the exercise price
      increased back to $0.30 per share   Each Warrant had a term of two years
      and was fully exercisable from the date of issuance. These warrants, to the
      extent that they were not exercised, expired in February 2007. We issued to
      the
      placement agent two year warrants to purchase up to 2,702,000 shares of our
      common stock at an exercise price of $0.25 per share. Such placement agent
      warrants are valued at approximately $414,000 using the Black-Scholes option
      pricing method.





**Registration
      of Shares**





Pursuant
      to our agreements with the purchasers in all of the above private placements
      we
      have registered the foregoing shares and shares issuable upon the exercise
      of
      the foregoing warrants (other than those issued in the January 2007 Private
      Placement) for public resale. We plan on filing a registration statement to
      register the shares issued in the January 2007 Private Placement and the shares
      issuable upon exercise of the warrants issued in that placement. We also agreed
      to prepare and file all amendments and supplements necessary to keep the
      registration statements effective until the earlier of the date on which the
      selling stockholders may resell all the registrable shares covered by the
      registration statements without volume restrictions pursuant to Rule 144(k)
      under the Securities Act or any successor rule of similar effect and the date
      on
      which the selling stockholders have sold all the shares covered by the
      registration statements. If, subject to certain exceptions, sales of all shares
      registered from the 2005 Private Placement **** cannot
      be
      made pursuant to the registration statement, we will be required to pay to
      these
      selling stockholders in cash or, at our option, in shares, their pro rata share
      of 0.0833% of the aggregate market value of the registrable shares held by
      these
      selling stockholders for each month thereafter until sales of the registrable
      shares can again be made pursuant to the registration statement. In this regard,
      we paid $7,100 to the purchasers representing liquidated damages incurred during
      a period when the registration statement was not current. The registration
      statement was subsequently declared effective on January 30, 2006.




-35-




In
      addition, we agreed to have our common stock listed for trading on the Toronto
      Stock Exchange. If our common stock was not listed for trading on the Toronto
      Stock Exchange within 180 days after February 8, 2005, we were required to
      issue
      to the selling stockholders from the 2005 Private Placement an additional number
      of shares of our common stock that is equal to 20% of the number of shares
      acquired by them in the private placement. We did not timely list our shares
      on
      the Toronto Stock Exchange and, in August 2005, we issued 5,440,000 shares
      to
      these selling stockholders. We subsequently registered these 5,440,000 shares
      for public resale.





**Project
      Finance Credit Facility**





On
      August
      15, 2006, we entered into a credit facility (the “Credit Facility”) involving
      our wholly-owned subsidiaries MSR and Oro, as borrowers, us, as guarantor,
      and
      Standard Bank plc (“Standard Bank”), as the lender and the offshore account
      holder. Under the Credit Facility, MSR and Oro agreed to borrow money in an
      aggregate principal amount of up to US$12.5 million (the “Loan”) for the purpose
      of constructing, developing and operating our El Chanate Project (the “Mine”).
      We have guaranteed the repayment of the Loan and the performance of the
      obligations under the Credit Facility. The Loan is scheduled to be repaid in
      fourteen quarterly payments with the first principal payment due after certain
      Mine start-up production and performance criteria are satisfied, which we
      believe will occur in the first calendar quarter of 2008. The Loan bears
      interest at LIBOR plus 4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months
      and with interest payable at the end of the applicable interest
      period.




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on our property, disposing of any
      assets, merging with other companies and making any investments. We are required
      to meet and maintain certain financial covenants, including (i) a debt service
      coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt service
      coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage ratio
      of
      at least 1.6 to 1.0, (iv) a project life coverage ratio of at least 2.0 to
      1.0
      and (v) a minimum reserve tail. We are also required to maintain a certain
      minimum level of unrestricted cash, and upon meeting certain Mine start-up
      production and performance criteria, MSR and Oro will be required to maintain
      a
      specified amount of cash as a reserve for debt repayment.





The
      Loan
      is secured by all of the tangible and intangible assets and property owned
      by
      MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
      Pledge Agreement, an Account Pledge Agreement and certain other agreements
      entered into in Mexico (the “Mexican Collateral Documents”). As additional
      collateral for the Loan, we, together with our subsidiary, Leadville Mining
      & Milling Holding Corporation, have pledged all of our ownership interest in
      MSR and Oro. In addition to these collateral arrangements, MSR and Oro are
      required to deposit all proceeds of the Loan and all cash proceeds received
      from
      operations and other sources in an offshore, controlled account with Standard
      Bank. Absent a default under the loan documents, MSR and Oro may use the funds
      from this account for specific purposes such as approved project costs and
      operating costs.





As
      part
      of the fee for entering into and closing the Credit Facility, we issued to
      Standard Bank 1,150,000 shares of our restricted common stock and a warrant
      for
      the purchase of 12,600,000 shares of our common stock at an exercise price
      of
      $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. We recorded the
      issuance of the 1,150,000 shares of common stock and 12,600,000 warrants as
      deferred financing costs of approximately $351,000 and $3,314,000, respectively,
      as a reduction of stockholders' equity on our balance sheet. The issuance of
      1,150,000 shares was recorded at the fair market value of our common stock
      at
      the closing date or $0.305 per share. The warrants were valued at approximately
      $3,314,000 using the Black-Scholes option pricing model and were reflected
      as
      deferred financing costs as a reduction of stockholders' equity on our balance
      sheet.





Previously,
      pursuant to the mandate and commitment letter for the facility, we issued to
      Standard Bank 1,000,000 shares of our restricted common stock and a warrant
      for
      the purchase of 1,000,000 shares of our common stock at an exercise price of
      $0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
      date one year after the repayment of the Credit Facility. We recorded the
      issuance of the 1,000,000 shares of common stock as deferred financing costs
      of
      approximately $270,000 as a reduction of stockholders' equity on our balance
      sheet as of July 31, 2006. The issuance of these shares was recorded at the
      fair
      market value of our common stock at the commitment letter date or $0.27 per
      share. In addition, the warrants were valued at approximately $253,000 using
      again the Black-Scholes option pricing model and were reflected as deferred
      financing costs as a reduction of stockholders' equity on our balance sheet
      as
      of July 31, 2006. We have registered for public resale the 2,150,000 shares
      issued to Standard Bank and the 13,600,000 shares issuable upon exercise of
      warrants issued to Standard Bank. ****





-36-




In
      March
      2006, we entered into a gold price protection arrangement with Standard Bank
      to
      protect us against future fluctuations in the price of gold. We agreed to a
      series of gold forward sales and call option purchases in anticipation of
      entering into the Credit Facility. Under the price protection agreement, we
      have
      agreed to sell a total volume of 121,927 ounces of gold forward to Standard
      Bank
      at a price of $500 per ounce on a quarterly basis during the period from March
      2007 to September 2010. We will also purchase call options from Standard Bank
      on
      a quarterly basis during this same period covering a total volume of 121,927
      ounces of gold at a price of $535 per ounce. We paid a fee to Standard Bank
      in
      connection with the price protection agreement. In addition, we provided
      aggregate cash collateral of approximately $4.3 million to secure our
      obligations under this agreement. The cash collateral was returned to us after
      the Credit Facility was executed in August 2006.





Between
      October 11, 2006 and February 1, 2007, we drew down an aggregate of $12,000,000
      from the Credit Facility with Standard Bank. We used (and continue to use)
      these
      proceeds for the development of our El Chanate Project, including the purchase
      and installation of equipment at the site and finalization of the site for
      mining operations. We also used some of these funds to repurchase of the 5%
      net
      profits interest formerly held by FG.





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      commencing October 11, 2006 and a termination date of March 31, 2007 and the
      second covering the period from March 30, 2007 and a termination date of
      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.





Historically,
      we have not generated cash flow from operations. While we believe that we have
      adequate funds to cover our financial requirements until such time as mining
      operations at the El Chanate Project generate positive cash flow, if we
      encounter unexpected problems and we are unable to generate positive cash flow
      in a timely manner, we may need to raise additional capital. We also may need
      to
      raise additional capital for property acquisition and 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 . 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. Please see “ *We
      lack operating cash flow and, historically, have relied on external funding
      sources. While we anticipate revenues from mining operations at El Chanate
      and
      we believe that we have adequate funds to permit us to reach positive cash
      flow
      from such operations, if we encounter unexpected problems and we are unable
      to
      generate positive cash flow in a timely manner, 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.* ”
in
      “ *Risk
      Factors”* below.





**Environmental
      and Permitting Issues**





Management
      does not expect that environmental issues will have an adverse material effect
      on our liquidity or earnings. In Mexico, although we must continue to comply
      with laws, rules and regulations concerning mining, environmental, health,
      zoning and historical preservation issues, we are not aware of any significant
      environmental concerns or existing reclamation requirements at the El Chanate
      concessions. We received the required Mexican government permits for
      construction, mining and processing the El Chanate ores in January 2004. The
      permits were extended in June 2005. Pursuant to the extensions, once we file
      a
      notice that work has commenced, we have one year to prepare the site and
      construct the mine and seven years to mine and process ores from the site.
      We
      filed the notice on June 1, 2006. We received the explosive permit from the
      government in August 2006. This permit, as extended, expires on December 31,
      2007.




-37-




We
      own
      properties in Leadville, Colorado for which we have recorded an impairment
      loss.
      Part of the Leadville Mining District has been declared a federal Superfund
      site
      under the Comprehensive Environmental Response, Compensation and Liability
      Act
      of 1980, and the Superfund Amendments and Reauthorization Act of 1986. Several
      mining companies and one individual were declared defendants in a possible
      lawsuit. We were not named a defendant or Principal Responsible Party. We did
      respond in full detail to a lengthy questionnaire prepared by the Environmental
      Protection Agency ("EPA") regarding our proposed procedures and past activities
      in November 1990. To our knowledge, the EPA has initiated no further comments
      or
      questions.





We
      do
      include in all our internal revenue and cost projections a certain amount for
      environmental and reclamation costs on an ongoing basis. This amount is
      determined at a fixed amount of $0.13 per metric tonne of material to be milled
      on a continual, ongoing basis to provide primarily for reclaiming tailing
      disposal sites and other reclamation requirements. At this time, there do not
      appear to be any environmental costs to be incurred by us beyond those already
      addressed above. No assurance can be given that environmental regulations will
      not be changed in a manner that would adversely affect our planned operations.
      Although, we have not yet initiated production, we have estimated the
      reclamation costs for the El Chanate site to be approximately $2,100,000. These
      costs would be accrued proportionately over the estimated mine life of seven
      years.





**Equipment
      Disposition**





In
      June
      2005, we purchased used crushing equipment for approximately $325,500. We spent
      about $68,329 disassembling, transporting and inspecting the equipment. However,
      in late summer 2005, we determined to use new rather than used crushing
      equipment. In May 2006, we sold this crushing equipment held for resale and
      received proceeds, net of commissions, of $192,000. We recorded a loss on sale
      of this equipment of approximately $202,000 during the fiscal year ended July
      31, 2006.





**New
      Accounting Pronouncements**





On
      July
      13, 2006, the Financial Accounting Standards Board issued Interpretation No.
      48,
      "Accounting for Uncertainty in Income Taxes" ("FIN 48"). The requirements are
      effective for fiscal years beginning after December 15, 2006. The purpose of
      FIN
      48 is to clarify and set forth consistent rules for accounting for uncertain
      tax
      positions in accordance with Statement of Financial Accounting Standards No.
      109, "Accounting for Income Taxes". The cumulative effect of applying the
      provisions of this interpretation are required to be reported separately as
      an
      adjustment to the opening balance of retained earnings in the year of adoption.
      Management does not believe the adoption of this standard will have a material
      impact on the financial condition or the results of our operations.





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments" ("FAS 155") - an amendment of FASB Statements No. 133
      and
      140. FAS 155 amends SFAS No. 133, "Accounting for Derivative Instruments and
      Hedging Activities" ("FAS 133"), and SFAS No. 140 ("FAS 140"), "Accounting
      for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
      to permit fair value re-measurement of any hybrid financial instrument that
      contains an embedded derivative that would otherwise require bifurcation.
      Additionally, FAS 155 seeks to clarify which interest-only strips and
      principal-only strips are not subject to the requirements of FAS 133 and to
      clarify that concentrations of credit risk in the form of subordination are
      not
      embedded derivatives. This Statement is effective for all financial instruments
      acquired or issued after the beginning of an entity's first fiscal year that
      begins after September 15, 2006. Management does not believe the adoption of
      this standard will have a material impact on the financial condition or the
      results of our operations.





In
      September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,”
This new standard provides guidance for using fair value to measure assets
      and
      liabilities. The FASB believes the standard also responds to investors’ requests
      for expanded information about the extent to which companies measure assets
      and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. Statement 157 applies whenever
      other standards require (or permit) assets or liabilities to be measured at
      fair
      value but does not expand the use of fair value in any new circumstances.




-38-




Currently,
      over 40 accounting standards within GAAP require (or permit) entities to measure
      assets and liabilities at fair value. Prior to Statement 157, the methods for
      measuring fair value were diverse and inconsistent, especially for items that
      are not actively traded. The standard clarifies that for items that are not
      actively traded, such as certain kinds of derivatives, fair value should reflect
      the price in a transaction with a market participant, including an adjustment
      for risk, not just the our mark-to-model value. Statement 157 also requires
      expanded disclosure of the effect on earnings for items measured using
      unobservable data.





Under
      Statement 157, fair value refers to the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants in the market in which the reporting entity transacts. In this
      standard, the FASB clarifies the principle that fair value should be based
      on
      the assumptions market participants would use when pricing the asset or
      liability. In support of this principle, Statement 157 establishes a fair value
      hierarchy that prioritizes the information used to develop those assumptions.
      The fair value hierarchy gives the highest priority to quoted prices in active
      markets and the lowest priority to unobservable data, for example, the reporting
      entity’s own data. Under the standard, fair value measurements would be
      separately disclosed by level within the fair value hierarchy.





The
      provisions of Statement 157 are effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. Earlier application is encouraged, provided that the reporting
      entity has not yet issued financial statements for that fiscal year, including
      any financial statements for an interim period within that fiscal year.
      Management does not believe the adoption of this standard will have a material
      impact in the financial condition or results of our operations.





**Disclosure
      About Off-Balance Sheet Arrangements**





On
      October 11, 2006, prior to the initial draw on our Credit Facility, we
      entered into interest rate swap agreements with total notional amounts of
      $18,750,000 in accordance with the terms of the Credit Facility. There was
      one
      six month swap contract totaling $9,375,000 (75% of the outstanding debt) with
      an effective date of October 11, 2006 and a termination date of March 31, 2007
      and one three-year nine month swap contract totaling $9,375,000 (75% of the
      outstanding debt) with an effective date of March 30, 2007 and a termination
      date of December 31, 2010. These swaps were entered into for the purpose of
      hedging a portion of our variable interest expenses. Although we are required
      by
      our lenders to hedge at least 50% of the outstanding debt, we retain the
      authority to hedge a larger share of this exposure, and we will use discretion
      in managing this risk as market conditions vary over time. We only issue and/or
      hold derivative contracts for risk management purposes.





We
      do not
      have any other 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
      impairment of long-lived assets, accounting for stock-based compensation and
      environmental remediation costs.





Impairment
      of Long-Lived Assets





In
      accordance with SFAS 144, “Accounting for the Impairment and Disposal of
      Long-Lived Assets,” we review our long-lived assets for impairments. Impairment
      losses on long-lived assets are recognized when events or changes in
      circumstances indicate that the undiscounted cash flows estimated to be
      generated by such assets are less than their carrying value and, accordingly,
      all or a portion of such carrying value may not be recoverable. Impairment
      losses then are measured by comparing the fair value of assets to their carrying
      amounts.





-39-





Environmental
      Remediation Costs





Environmental
      remediation costs are accrued based on estimates of known environmental
      remediation exposure. Such accruals are recorded even if significant
      uncertainties exist over the ultimate cost of the remediation. It is reasonably
      possible that our estimates of reclamation liabilities, if any, could change
      as
      a result of changes in regulations, extent of environmental remediation
      required, means of reclamation or cost estimates. Ongoing environmental
      compliance costs, including maintenance and monitoring costs, are expensed
      as
      incurred. There were no environmental remediation costs incurred or accrued
      at
      January 31, 2007.





Stock
      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.





Effective
      February 1, 2006, we adopted the provisions of SFAS No. 123R. Under FAS 123R,
      share-based compensation cost is measured at the grant date, based on the
      estimated fair value of the award, and is recognized as expense over the
      requisite service period. We adopted the provisions of FAS 123R using a modified
      prospective application. Under this method, compensation cost is recognized
      for
      all share-based payments granted, modified or settled after the date of
      adoption, as well as for any unvested awards that were granted prior to the
      date
      of adoption. Prior periods are not revised for comparative purposes. Because
      we
      previously adopted only the pro forma disclosure provisions of SFAS 123, we
      will
      recognize compensation cost relating to the unvested portion of awards granted
      prior to the date of adoption, using the same estimate of the grant-date fair
      value and the same attribution method used to determine the pro forma
      disclosures under SFAS 123, except that forfeitures rates will be estimated
      for
      all options, as required by FAS 123R.





Accounting
      for Derivatives and Hedging Activities





We
      entered into two identically structured derivative contracts with Standard
      Bank
      in March 2006. Each derivative consisted of a series of forward sales of gold
      and a purchase gold cap. We agreed to sell a total volume of 121,927 ounces
      of
      gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
      during the period from March 2007 to September 2010. We also agreed to a
      purchase gold cap on a quarterly basis during this same period and at identical
      volumes covering a total volume of 121,927 ounces of gold at a price of $535
      per
      ounce. Although these contracts are not designated as hedging derivatives,
      they
      serve an economic purpose of protecting us from the effects of a decline in
      gold
      prices. Because they are not designated as hedges, however, special hedge
      accounting does not apply. Derivative results are simply marked to market
      through earnings, with these effects recorded in *other
      income* or *other
      expense* ,
      as
      appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“FAS 133”). ****





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      commencing October 11, 2006 and a termination date of March 31, 2007 and the
      second covering the period from March 30, 2007 and a termination date of
      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
      use
      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 will be 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.





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 SFAS 133.




**Risk
      Factors**





We
      are
      subject to various risks that may materially harm our business, financial
      condition and results of operations. If any of these risks or uncertainties
      actually occur, our business, financial condition or operating results could
      be
      materially harmed. In that case, the trading price of our common stock could
      decline and you could lose all or part of your investment.





**Risks
      related to our business and operations**





***We
      have not generated any operating revenues. If we are unable to commercially
      develop our mineral properties, we will not be able to generate profits and
      our
      business may fail.***





To
      date,
      we have no producing properties. As a result, we have historically operated
      and
      continue to operate at a loss. Our ultimate success will depend on our ability
      to generate profits from our properties. Our viability is largely dependent
      on
      the successful commercial development of our El Chanate gold mining project
      in
      Sonora, Mexico. While we anticipate that mining operations will commence in
      March 2007 with revenues anticipated to begin by the end of the second calendar
      quarter 2007, we cannot assure if or when revenues will cover cash flow or
      generate profits.





***We
      lack operating cash flow and, historically, have relied on external funding
      sources. While we anticipate revenues from mining operations at El Chanate
      and
      we believe that we have adequate funds to permit us to reach positive cash
      flow
      from such operations, if we encounter unexpected problems and we are unable
      to
      generate positive cash flow in a timely manner, 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.***





Historically,
      we have not generated cash flow from operations. We believe that we have
      adequate funds to cover our financial requirements until such time as mining
      operations at the El Chanate Project generate positive cash flow. In this
      regard, between December 2006 and February 2007, we received gross proceeds
      of
      approximately $8,939,000 from a private placement and from warrant exercises.
      However, if we encounter unexpected problems and we are unable to generate
      positive cash flow in a timely manner, 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 . 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.





-41-


***Our
      year end audited financial statements contain a “going concern” explanatory
      paragraph.*** ***Our
      inability to continue as a going concern would require a restatement of assets
      and liabilities on a liquidation basis, which would differ materially and
      adversely from the going concern basis on which our financial statements
      included in this report have been prepared.***





Our
      consolidated financial statements for the year ended July 31, 2006 included
      in
      our annual report on form 10-KSB for the fiscal year then ended have been
      prepared on the basis of accounting principles applicable to a going concern.
      Our auditors’ report on the consolidated financial statements contained therein
      includes an additional explanatory paragraph following the opinion paragraph
      on
      our ability to continue as a going concern. A note to these consolidated
      financial statements describes the reasons why there is substantial doubt about
      our ability to continue as a going concern and our plans to address this issue.
      Our July 31, 2006 and January 31, 2007 consolidated financial statements do
      not
      include any adjustments that might result from the outcome of this uncertainty.
      Our inability to continue as a going concern would require a restatement of
      assets and liabilities on a liquidation basis, which would differ materially
      and
      adversely from the going concern basis on which our consolidated financial
      statements have been prepared. See, “ *Management's
      Discussion and Analysis of Financial Condition and Results of Operations;
      Liquidity and Capital Resources; Plan of Operations.”*





***Our
      Credit Facility with Standard Bank plc imposes restrictive covenants on us.***





Our
      Credit Facility with Standard Bank requires us, among other obligations, to
      meet
      certain financial covenants including (i) a debt service coverage ratio of
      not
      less than 1.2 to 1.0, (ii) a projected debt service coverage ratio of not less
      than 1.2 to 1.0, (iii) a loan life coverage ratio of at least 1.6 to 1.0, (iv)
      a
      project life coverage ratio of at least 2.0 to 1.0 and (v) a minimum reserve
      tail. We are also required to maintain a certain minimum level of unrestricted
      cash. In addition, the Credit Facility restricts, among other things, our
      ability to incur additional debt, create liens on our property, dispose of
      any
      assets, merge with other companies or make any investments. A failure to comply
      with the restrictions contained in the Credit Facility could lead to an event
      of
      default thereunder which could result in an acceleration of such indebtedness.





***We
      will be using reconditioned and used equipment which could adversely affect
      our
      cost assumptions and our ability to economically and successfully mine the
      project.***





We
      will
      be using reconditioned and used carbon column collection equipment to recover
      gold. Such equipment is subject to the risk of more frequent breakdowns and
      need
      for repair than new equipment. If the equipment that we use 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 project may be hampered, resulting in
      decreased revenues and, possibly, a loss from operations.





***As
      a result of the projected short mine life of seven years, if major problems
      develop, we will have limited time to correct these problems and we may have
      to
      cease operations earlier than planned.***





Pursuant
      to the 2005 Study as updated by the 2006 Update, the mine life will be only
      approximately seven years. If major problems develop in the project, or we
      fail
      to achieve the operating efficiencies or costs projected in the feasibility
      study, we will have limited time to find ways to correct these problems and
      we
      may have to cease operations earlier than planned.





***The
      gold deposit we have identified at El Chanate is relatively small and 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 have identified at our El Chanate Project is relatively small and
      low-grade. If the estimates of ore grade or recovery rates contained in the
      feasibility study turn out to be higher 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 El Chanate
      Project, 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. It is not unusual in
      the
      mining industry for new mining operations to experience unexpected problems
      during the start-up phase and to require more capital than anticipated. There
      can be no assurance that our operations at El Chanate will be
      profitable.




-42-




***Our
      currently permitted water rights may not be adequate for all of our total
      project needs over the entire course of our anticipated mining operations.
      If we
      need to obtain additional rights, but are unable to procure them our planned
      operations may be adversely affected.***





The
      2005
      feasibility study indicates our average life of mine water requirements, for
      ore
      processing only, will be about 94.6 million gallons per year (11.4 liters per
      second). The amount of water we are currently permitted to pump for our
      operations is approximately 71.3 million gallons per year (8.6 liters per
      second). Our currently permitted water rights may not be adequate for all of
      our
      total project needs over the entire course of our anticipated mining operations.
      We are looking into ways to rectify this issue and anticipate, but cannot
      assure, that  additional
      water may be acquired by purchasing a third party’s allocation and/or water
      conservation through good operational practice. If we need to obtain additional
      rights, but are unable to procure them our planned operations may be adversely
      affected.





***We
      have a limited number of prospects. As a result, our chances of commencing
      viable mining operations are dependent upon the success of one
      project.***





Our
      only
      current properties are the El Chanate concessions and our Leadville properties.
      At present, we are not doing any substantive work at our Leadville properties
      and, in fact, have written these properties off. Accordingly, we are dependent
      upon the success of the El Chanate concessions.





***Gold
      prices can fluctuate on a material and frequent basis due to numerous factors
      beyond our control. If and when we commence production, 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 2006, the spot price for gold on the London
      Exchange fluctuated between $524.75 and $725.00 per ounce. Gold prices are
      affected by numerous factors beyond our control, including:




·
            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 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 gold price and interest rate
      fluctuations and may incur mark to market losses and lose money through our
      hedging programs.*********





We
      have entered into metals trading transactions to hedge against fluctuations
      in
      gold prices, using call option purchases and forward sales, and have entered
      into various interest rate swap agreements. The terms of our Credit Facility
      with Standard Bank require that we utilize various price hedging techniques
      to
      hedge a portion of the gold we plan to produce at the El Chanate Project and
      hedge at least 50% of our outstanding loan balance. There can be no assurance
      that we will be able to successfully hedge against gold price and interest
      rate
      fluctuations.




-43-




Further,
      there can be no assurance that the use of hedging techniques will always be
      to
      our benefit. Hedging instruments that protect against metals market price
      volatility 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, decreasing our revenues and 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.





In
      addition, we expect to settle our forward sales at a time when the El Chanate
      Project is in production. If we are unable for any reason to deliver the
      quantity of gold required by our forward sales, we may need to settle the
      forward sales by purchasing gold at spot prices. Depending on the price of
      gold
      at that time, the financial settlement of the forward sales 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
      anticipate selling gold in U.S. dollars; however, we incur a significant amount
      of our expenses in Mexican pesos. If and when we sell gold, if applicable
      currency exchange rates fluctuate our revenues and results of operations may
      be
      materially and adversely affected.***





If
      and
      when we commence sales of gold, such sales will be made 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,




-44-




·
            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.





***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 with the exception of our processing plant which is currently under
      construction. We will obtain this insurance when required. If we incur material
      losses or liabilities in excess of our insurance coverage, our financial
      position could be materially and adversely affected.***





We
      anticipate that we will be commencing mining operations shortly. When we
      commence mining operations, such operations will 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.




-45-




Industrial
      accidents could have a material adverse effect on our future business and
      operations. We currently maintain general liability, auto and property insurance
      coverage. While we do not have insurance coverage on our processing plant,
      we
      anticipate obtaining such coverage when this plant is fully constructed and
      commissioned. We cannot be certain that the insurance we have (and will 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 we may need to retain
      additional personnel and/or contractors to develop our El Chanate Project.
      If we
      lose the services of these personnel or we are unable to retain additional
      personnel and/or contractors, our ability to complete development and operate
      our El Chanate Project may be delayed and our planned operations may be
      materially adverse affected.***





We
      are
      dependent on a relatively small number of key personnel, including but not
      limited to John Brownlie, Chief Operating Officer, who oversees the El Chanate
      Project, the loss of any one of whom could have an adverse effect on us. In
      addition, while certain of our officers and directors have experience in the
      exploration and operation of gold producing properties, we may need to retain
      additional personnel and/or contractors to develop and operate our El Chanate
      Project. Certain of these personnel and consultants, including Mr. Brownlie,
      have already been engaged. There can be no guarantee that any additional needed
      personnel or contractors will be available to carry out necessary activities
      on
      our behalf or be available upon commercially acceptable terms. If we lose the
      services of our key personnel or we are unable to retain additional needed
      personnel and/or contractors, our ability to operate our El Chanate Project
      may
      be delayed and our planned operations may be 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 planned
      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
      or impugned 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.





***Should
      we successfully commence mining operations in Mexico, our ability to remain
      profitable long term, should we become profitable, eventually will depend on
      our
      ability to find, explore and develop additional properties. Our ability to
      acquire such additional properties will 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
      properties are wasting assets. They eventually become depleted or uneconomical
      to continue mining. The acquisition of gold properties and their exploration
      and
      development are subject to intense competition. Companies with greater financial
      resources, larger staffs, more experience and more equipment 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.




-46-




***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





·
            size,





·
            grade
                and





·
            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**





***There
      is a limited market for our common stock. If a substantial and sustained market
      for our common stock does not develop, our stockholders may have difficulty
      selling, or be unable to sell, their shares.***





Our
      common stock is tradable in the United States in the over-the-counter market
      and
      is quoted on the Over-The-Counter Bulletin Board and our shares of common stock
      trade on the Toronto Stock Exchange. There is only a limited market for our
      common stock and there can be no assurance that this market will be maintained
      or broadened. If a substantial and sustained market for our common stock does
      not develop, our stockholders may have difficulty selling, or be unable to
      sell,
      their shares.





***Our
      stock price may be adversely affected if a significant amount of shares are
      sold
      in the public market.***





As
      of
      March 14, 2006, approximately 68,630,292 shares of our common stock, constituted
      "restricted securities" as defined in Rule 144 under the Securities Act of
      1933.
      We have registered more than half of these shares for public resale. In
      addition, we have registered 19,524,000 shares
      of common stock issuable upon the exercise of outstanding warrants and options.
      We also have agreed to register the shares issued in the January 2007 Private
      Placements and the shares issuable upon exercise of warrants issued pursuant
      to
      these placements. All of the foregoing shares, assuming exercise of all of
      the
      above options and warrants, would represent in excess of 50% of the then
      outstanding shares of our common stock. Registration
      of the shares permits the sale of the shares in the open market or in privately
      negotiated transactions without compliance with the requirements of Rule 144.
      To
      the extent the exercise price of the warrants or options is less than the market
      price of the common stock, the holders of the warrants are likely to exercise
      them and sell the underlying shares of common stock and to the extent that
      the
      exercise prices of these securities are adjusted pursuant to anti-dilution
      protection, the securities could be exercisable or convertible for even more
      shares of common stock.  We
      also may
      issue shares
      to be used to meet our capital requirements or use shares to compensate
      employees, consultants and/or directors. We are unable to estimate the amount,
      timing or nature of future sales of outstanding common stock. Sales of
      substantial amounts of our common stock in the public market could cause the
      market price for our common stock to decrease. Furthermore, a decline in the
      price of our common stock would likely impede our ability to raise capital
      through the issuance of additional shares of common stock or other equity
      securities.




-47-




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





Our
      board
      of directors determines whether to pay cash dividends on our issued and
      outstanding shares. The declaration of dividends will 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.





***If
      our common stock is deemed to be a "penny stock," trading of our shares would
      be
      subject to special requirements that could impede our stockholders' ability
      to
      resell their shares.***





"Penny
      stocks" as that term is defined in Rule 3a51-1 of the Securities and Exchange
      Commission are stocks:





i.
            with
                a price of less than five dollars per share;





ii.
            that
                are not traded on a recognized national
                exchange;





·
            whose
                prices are not quoted on the NASDAQ automated quotation system;
                or





iii.
            of
                issuers with net tangible assets equal to or less than





·
            -$2,000,000
                if the issuer has been in continuous operation for at least three
                years;
                or





·
            -$5,000,000
                if in continuous operation for less than three years,
                or





·
            of
                issuers with average revenues of less than $6,000,000 for the last
                three
                years.





Our
      common stock is not currently a penny stock because we have net tangible assets
      of more than $2,000,000. Should our net tangible assets drop below $2,000,000
      and we do not meet any of the other criteria for exclusion of our common stock
      from the definition of penny stock, our common stock will be a penny
      stock.





Section
      15(g) of the Exchange Act, and Rule 15g-2 of the Securities and Exchange
      Commission, require broker-dealers dealing in penny stocks to provide potential
      investors with a document disclosing the risks of penny stocks and to obtain
      a
      manually signed and dated written receipt of the document before effecting
      any
      transaction in a penny stock for the investor's account. Moreover, Rule 15g-9
      of
      the Securities and Exchange Commission requires broker-dealers in penny stocks
      to approve the account of any investor for transactions in such stocks before
      selling any penny stock to that investor. This procedure requires the
      broker-dealer:




-48-




i.
            to
                obtain from the investor information concerning his or her financial
                situation, investment experience and investment objectives;





ii.
            to
                determine reasonably, based on that information, that transactions
                in
                penny stocks are suitable for the investor and that the investor
                has
                sufficient knowledge and experience as to be reasonably capable of
                evaluating the risks of penny stock transactions;





iii.
            to
                provide the investor with a written statement setting forth the basis
                on
                which the broker-dealer made the determination in (ii) above; and





iv.
            to
                receive a signed and dated copy of such statement from the investor,
                confirming that it accurately reflects the investor's financial situation,
                investment experience and investment objectives.





Should
      our common stock be deemed to be a penny stock, compliance with the above
      requirements may make it more difficult for holders of our common stock to
      resell their shares to third parties or to otherwise dispose of
      them.




**Item
      3.** **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. 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.





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.




-49-


**PART
      II - OTHER INFORMATION**





**Item
      1.**   **Legal
      Proceedings.**





None.





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





As
      previously disclosed in our quarterly report on form 10-QSB for the quarter
      ended October 31, 2006, we issued 275,000 shares of our common stock upon the
      exercise of outstanding options at an exercise price of $.05 per share for
      proceeds of $13,750, including 25,000 options exercised by J. Scott Hazlitt,
      our
      V.P. Mine Development. In addition, on December 13, 2006, we issued two year
      options to purchase our common stock at an exercise price of $0.36 per share
      to
      John Brownlie and Christopher Chipman and our Canadian counsel. These options
      are for the purchase of 250,000 shares, 100,000 shares and 100,000 shares,
      respectively.





As
      previously disclosed in our current report on form 8-K filed with the SEC on
      December 5, 2006, and on November 30, 2006, our board of directors granted
      100,000 common stock options to each of John Postle, Ian A. Shaw and Mark T.
      Nesbitt, our independent directors. The options are to purchase shares of our
      common stock at an exercise price of $0.33 per share (the closing price of
      our
      common stock on that date) for a period of two years.





As
      previously disclosed in our current report on form 8-K filed with the SEC on
      January 29, 2007, between January 23, 2006 and January 29, 2007, we issued
      an
      aggregate of 12,561,667 shares of our Common Stock and warrants to purchase
      an
      aggregate of up to 3,140,417 shares of our Common Stock in a private placement
      to nine investors. The aggregate offering price was approximately $3,769,000.
      Broadband Capital Management LLC acted as placement agent for the shares sold
      in
      the United States and Paul Ensor acted as the placement agent for the sales
      sold
      outside of the United States. We paid a 7.5% cash fee to the placement agents
      and issued to the placement agents warrants to purchase up to 942,125 shares
      of
      our Common Stock in the aggregate. The Warrant issued to each purchaser is
      exercisable for one share of our Common Stock, at an exercise price equal to
      $0.40 per share. Each Warrant has a term of eighteen months and is fully
      exercisable from the date of issuance. We have agreed to file with the
      Securities and Exchange Commission a registration statement covering resales
      of
      the foregoing shares and shares issuable upon the exercise of the foregoing
      Warrants.





As
      previously disclosed in our current report on Form 8-K filed with the SEC on
      February 9, 2007, between December 27, 2006 and February 8, 2007, we issued
      an
      aggregate of 16,662,000 shares of our Common Stock pursuant to the exercise
      of
      two year warrants issued in February 2005 and 2006 for aggregate gross proceeds
      of approximately $4,864,000. The balance of the warrants issued on February
      8,
      2005 expired on February 8, 2007.





In
      addition, on February 12, 2007, we issued 500,000 shares of our common stock
      upon the exercise of outstanding warrants at an exercise price of $0.30 per
      share for proceeds of $150,000.





All
      of
      the foregoing securities were issued pursuant to exemptions from registration
      provided by Section 4(2) of the Securities Act of 1933.





**Item
      3.**   **Defaults
      Upon Senior Securities.**





None.




-50-




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





As
      noted
      in our Current Report on Form 8-K filed with the SEC on February 26, 2007,
      at
      our Annual Meeting of Stockholders on February 21, 2007, stockholders approved
      the following:





1.  The
      following eight persons as directors:


Nominees
              
              Votes
                  in Favor
                of
                  Nominee
              
              Votes
                  Withheld
                for
                  NomineeGifford
                  A. Dieterle
              
              
              86,592,223
              
              
              288,130Jack
                  V. Everett
              
              
              84,246,082
              
              
              2,634,271Roger
                  A. Newel
              
              
              86,623,059
              
              
              257,294Jeffrey
                  W. Pritchard
              
              
              86,637,559
              
              
              242,794Robert
                  Roningen
              
              
              84,058,271
              
              
              2,822,082Ian
                  A. Shaw
              
              
              86,269,310
              
              
              611,043John
                  Postle
              
              
              86,668,809
              
              
              211,544Mark
                  T. Nesbitt
              
              
              86,645,309
              
              
              235,044




2.  Ratification
      of the selection of Wolinetz, Lafazan & Company, P.C., as our independent
      auditors for the year ending July 31, 2007:





For:
      86,570,147  Against:
      121,156  Abstain:189,000  Broker
      Non-Votes: 0





3.  Amendment
      of our Certificate of Incorporation to increase the authorized number of shares
      of common stock from 200,000,000 shares to 250,000,000 shares:





For:
      82,251,675  Against:
      4,171,573  Abstain:
      457,105  Broker
      Non-Votes: 0





4.  Ratification
      of the Capital Gold Corporation 2006 Equity Incentive Plan:





For:
      57,301,038 Against:
      1,644,129 Abstain:
      1,582,360  Broker
      Non-Votes: 26,352,826





5.  Ratification
      and approval of the issuance of certain outstanding options that require
      stockholder approval pursuant to the rules of the Toronto Stock
      Exchange:





For:
      57,767,553 Against:
      1,443,285 Abstain:
      1,316,689  Broker
      Non-Votes: 26,352,826





The
      proposal to amend our certificate of incorporation to authorize 1,000,000 shares
      of preferred stock did not pass. It received the following votes:





For:
      39,669,664 Against:
      19,124,679 Abstain:
      1,733,134  Broker
      Non-Votes: 26,352,826





Total
      shares voted at the meeting: 86,880,353 out of 134,085,854 eligible to
      vote.





-51-


**Item
      5.**   **Other
      Information.**





In
      March
      2007, our subsidiary, Minera Santa Rita S. de R.L. de C.V., entered into a
      supply agreement for the purchase of sodium cyanide solid, one of the primary
      chemicals required for the heap leaching process at the El Chanate project.





**Item
      6.**   **Exhibits.**





3.1
            Amendments
                to Certificate of Incorporation of
                Company.





10.1
            Sodium
                Cyanide purchase agreement.





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.





-52-





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereto
      duly authorized.




**CAPITAL
              GOLD CORPORATION**RegistrantBy:
            /s/ G ifford A. DieterleGifford
              A. DieterlePresident/Treasurer  Date:
      March 16, 2007





-53-