UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended April 30, 2009





OR





o  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period
from               to





Commission
File Number:  0-13078





CAPITAL GOLD CORPORATION





(Exact
name of registrant as specified in its charter)





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





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


(Address
of principal executive offices)





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







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





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes   x          No    ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes    ̈          No    ̈





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





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





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





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





Class
                      
                      Outstanding at June  1,
      2009Common
      Stock, par value $.0001 per share
                      
                      193,399,826










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
nine months ended April 30, 2009.





Moreover,
these financial statements do not purport to contain complete disclosure in
conformity with U.S. generally accepted accounting principles and should be read
in conjunction with our audited financial statements at, and for the fiscal year
ended July 31, 2008.





The
results reflected for the three and nine months ended April 30, 2009 are not
necessarily indicative of the results for the entire fiscal year ending July 31,
2009.


-2-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEET


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





April 30,
                    2009
                    (unaudited)
                  
                  
                  July 31,
                    2008ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                  
                  $
                  7,187
                  
                  
                  $
                  10,992Accounts
      Receivable
                  
                  
                  2,004
                  
                  
                  
                  1,477Stockpiles
      and Ore on Leach Pads (Note 4)
                  
                  
                  16,208
                  
                  
                  
                  12,176Material
      and Supply Inventories
                  
                  
                  1,326
                  
                  
                  
                  937Deposits
                  
                  
                  83
                  
                  
                  
                  9Marketable
      Securities  (Note 3)
                  
                  
                  70
                  
                  
                  
                  65Prepaid
      Expenses
                  
                  
                  312
                  
                  
                  
                  219Loans
      Receivable – Affiliate (Note 9 and13)
                  
                  
                  34
                  
                  
                  
                  39Other
      Current Assets (Note 5)
                  
                  
                  451
                  
                  
                  
                  490Total
      Current Assets
                  
                  
                  27,675
                  
                  
                  
                  26,404Mining
      Concessions (Note 8)
                  
                  
                  52
                  
                  
                  
                  59Property
      & Equipment – net (Note 6)
                  
                  
                  22,886
                  
                  
                  
                  20,918Intangible
      Assets – net (Note 7)
                  
                  
                  329
                  
                  
                  
                  181Other
      Assets:Deferred
      Financing Costs
                  
                  
                  470
                  
                  
                  
                  599Mining
      Reclamation Bonds
                  
                  
                  82
                  
                  
                  
                  82Deferred
      Tax Asset (Note 17)
                  
                  
                  797
                  
                  
                  
                  573Security
      Deposits
                  
                  
                  100
                  
                  
                  
                  63Total
      Other Assets
                  
                  
                  1,449
                  
                  
                  
                  1,317Total
      Assets
                  
                  $
                  52,391
                  
                  
                  $
                  48,879LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                  
                  $
                  969
                  
                  
                  $
                  789Accrued
      Expenses (Note 10)
                  
                  
                  3,869
                  
                  
                  
                  2,673Derivative
      Contracts (Note 16)
                  
                  
                  228
                  
                  
                  
                  930Deferred
      Tax Liability (Note 17)
                  
                  
                  2,586
                  
                  
                  
                  2,063Current
      Portion of Long-term Debt (Note 15)
                  
                  
                  3,825
                  
                  
                  
                  4,125Total
      Current Liabilities
                  
                  
                  11,477
                  
                  
                  
                  10,580Reclamation
      and Remediation Liabilities (Note 11)
                  
                  
                  1,268
                  
                  
                  
                  1,666Other
      liabilities
                  
                  
                  45
                  
                  
                  
                  62Long-term
      Debt (Note 15)
                  
                  
                  5,300
                  
                  
                  
                  8,375Total
      Long-term Liabilities
                  
                  
                  6,613
                  
                  
                  
                  10,103Commitments
      and Contingencies
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share; Authorized 300,000,000 shares; Issued
      and Outstanding 193,399,826 and 192,777,326 shares,
      respectively
                  
                  
                  19
                  
                  
                  
                  19Additional
      Paid-In Capital
                  
                  
                  63,844
                  
                  
                  
                  63,074Accumulated
      Deficit
                  
                  
                  (24,810
                  )
                  
                  
                  (32,497
                  )Deferred
      Financing Costs
                  
                  
                  (2,008
                  )
                  
                  
                  (2,611
                  )Deferred
      Compensation
                  
                  
                  (377
                  )
                  
                  
                  (549
                  )Accumulated
      Other Comprehensive Income (Note 12)
                  
                  
                  (2,367
                  )
                  
                  
                  760Total
      Stockholders’ Equity
                  
                  
                  34,301
                  
                  
                  
                  28,196Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  52,391
                  
                  
                  $
                  48,879





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


-3-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For The Three Months EndedApril 30,2009
                
                
                2008RevenuesSales
      – Gold, net
                
                $
                12,395
                
                
                $
                8,730Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                3,698
                
                
                
                2,717Depreciation
      and Amortization
                
                
                811
                
                
                
                800General
      and Administrative
                
                
                1,361
                
                
                
                1,086Exploration
                
                
                329
                
                
                
                19Total
      Costs and Expenses
                
                
                6,199
                
                
                
                4,622Income
      (Loss) from Operations
                
                
                6,196
                
                
                
                4,108Other
      Income (Expense):Interest
      Income
                
                
                7
                
                
                
                12Interest
      Expense
                
                
                (103
                )
                
                
                (377
                )Other
      Income (Expense)
                
                
                (40
                )
                
                
                (25
                )Loss
      on change in fair value of derivative
                
                
                (1,391
                )
                
                
                (337
                )Total
      Other Expense
                
                
                (1,527
                )
                
                
                (727
                )Income
      before Income Taxes
                
                
                4,669
                
                
                
                3,381Income
      Tax Expense
                
                
                (2,115
                )
                
                
                (641
                )Net
      Income
                
                $
                2,554
                
                
                $
                2,740Income
      Per Common ShareBasic
                
                $
                0.01
                
                
                $
                0.02Diluted
                
                $
                0.01
                
                
                $
                0.01Basic
      Weighted Average Common Shares Outstanding
                
                
                193,362,747
                
                
                
                175,645,465Diluted
      Weighted Average Common Shares Outstanding
                
                
                200,826,903
                
                
                
                197,238,688




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


-4-




CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For The Nine Months EndedApril 30,2009
                
                
                2008RevenuesSales
      – Gold, net
                
                $
                32,939
                
                
                $
                23,299Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                10,395
                
                
                
                7,343Depreciation
      and Amortization
                
                
                2,269
                
                
                
                2,630General
      and Administrative
                
                
                3,800
                
                
                
                3,308Exploration
                
                
                1,224
                
                
                
                650Total
      Costs and Expenses
                
                
                17,688
                
                
                
                13,931Income
      from Operations
                
                
                15,251
                
                
                
                9,368Other
      Income (Expense):Interest
      Income
                
                
                32
                
                
                
                63Interest
      Expense
                
                
                (530
                )
                
                
                (945
                )Other
      Expense
                
                
                (273
                )
                
                
                (30
                )Loss
      on change in fair value of derivative
                
                
                (1,969
                )
                
                
                (1,037
                )Total
      Other Expense
                
                
                (2,740
                )
                
                
                (1,949
                )Income
      before Income Taxes
                
                
                12,511
                
                
                
                7,419Income
      Tax Expense
                
                
                (4,824
                )
                
                
                (806
                )Net
      Income
                
                $
                7,687
                
                
                $
                6,613Income
      Per Common ShareBasic
                
                $
                0.04
                
                
                $
                0.04Diluted
                
                $
                0.04
                
                
                $
                0.03Basic
      Weighted Average Common Shares Outstanding
                
                
                193,131,703
                
                
                
                173,722,564Diluted
      Weighted Average Common Shares Outstanding
                
                
                199,207,507
                
                
                
                194,869,746




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


-5-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


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





AccumulatedAdditional
                    
                    
                    
                    
                    
                    Other
                    
                    
                    Deferred
                    
                    
                    
                    
                    
                    TotalCommon Stock
                    
                    
                    paid-in-
                    
                    
                    Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Financing
                    
                    
                    Deferred
                    
                    
                    Stockholders’Shares
                    
                    
                    Amount
                    
                    
                    capital
                    
                    
                    Deficit
                    
                    
                    Income/(Loss)
                    
                    
                    Costs
                    
                    
                    Compensation
                    
                    
                    EquityBalance
      at July 31, 2008
                    
                    
                    192,777,326
                    
                    
                    $
                    19
                    
                    
                    $
                    63,074
                    
                    
                    $
                    (32,497
                    )
                    
                    $
                    760
                    
                    
                    $
                    (2,611
                    )
                    
                    $
                    (549
                    )
                    
                    $
                    28,196Amortization
      of deferred finance costs
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    603
                    
                    
                    
                    -
                    
                    
                    
                    603Equity
      based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    512
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    172
                    
                    
                    
                    684Common
      stock issued upon the exercising of options and warrants
                    
                    
                    400,000
                    
                    
                    
                    -
                    
                    
                    
                    144
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    144Issuance
      of restricted common stock
                    
                    
                    222,500
                    
                    
                    
                    -
                    
                    
                    
                    114
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    114Net
      income for the nine months ended April 30, 2009
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,687
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    7,687Change
      in fair value on interest rate swaps
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12
                    )Unrealized
      loss on marketable securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5Equity
      adjustment from foreign currency translation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,120
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,120
                    )Total
      comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,560Balance
      at April 30, 2009
                    
                    
                    193,399,826
                    
                    
                    $
                    19
                    
                    
                    $
                    63,844
                    
                    
                    $
                    (24,810
                    )
                    
                    $
                    (2,367
                    )
                    
                    $
                    (2,008
                    )
                    
                    $
                    (377
                    )
                    
                    $
                    34,301





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


-6-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


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





For TheNine Months EndedApril 30,2009
                  
                  
                  2008Cash
      Flow From Operating Activities:Net
      Income
                  
                  $
                  7,687
                  
                  
                  $
                  6,613Adjustments
      to Reconcile Net Income toNet
      Cash Provided by (Used in) Operating Activities:Depreciation
      and Amortization
                  
                  
                  2,269
                  
                  
                  
                  2,611Accretion
      of Reclamation and Remediation
                  
                  
                  113
                  
                  
                  
                  121Loss
      on change in fair value of derivative
                  
                  
                  1,969
                  
                  
                  
                  1,040Equity
      Based Compensation
                  
                  
                  798
                  
                  
                  
                  535Changes
      in Operating Assets and Liabilities:Increase
      in Accounts Receivable
                  
                  
                  (527
                  )
                  
                  
                  (1,143
                  )Increase
      in Prepaid Expenses
                  
                  
                  (93
                  )
                  
                  
                  (937
                  )Increase
      in Inventory
                  
                  
                  (3,298
                  )
                  
                  
                  (6,309
                  )Decrease
      in Other Current Assets
                  
                  
                  40
                  
                  
                  
                  434(Increase)
      Decrease in Other Deposits
                  
                  
                  (74
                  )
                  
                  
                  832Increase
      in Mining Reclamation Bond
                  
                  
                  -
                  
                  
                  
                  (46
                  )Increase
      in Security Deposits
                  
                  
                  (36
                  )
                  
                  
                  -Increase
      in Deferred Tax Asset
                  
                  
                  (224
                  )
                  
                  
                  -(Decrease)
      Increase in Accounts Payable
                  
                  
                  180
                  
                  
                  
                  (8
                  )Decrease
      in Derivative Liability
                  
                  
                  (2,684
                  )
                  
                  
                  (869
                  )Decrease
      in Other Liability
                  
                  
                  (17
                  )
                  
                  
                  -Decrease
      in Reclamation and Remediation
                  
                  
                  (511
                  )
                  
                  
                  -Increase
      in Deferred Tax Liability
                  
                  
                  523
                  
                  
                  
                  -Increase
      in Accrued Expenses
                  
                  
                  1,196
                  
                  
                  
                  1,944Net
      Cash Provided By Operating Activities
                  
                  
                  7,311
                  
                  
                  
                  4,818Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property and Equipment
                  
                  
                  (4,590
                  )
                  
                  
                  (4,601
                  )Purchase
      of Intangibles
                  
                  
                  (180
                  )
                  
                  
                  (90
                  )Net
      Cash Used in Investing Activities
                  
                  
                  (4,770
                  )
                  
                  
                  (4,691
                  )





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


7





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)


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





For TheNine Months EndedApril 30,2009
                
                
                2008Cash
      Flow From Financing Activities:Repayments
      from Affiliate, net
                
                
                5
                
                
                
                7Repayments
      on Notes Payable
                
                
                (3,375
                )
                
                
                -Proceeds
      From Issuance of Common Stock
                
                
                144
                
                
                
                2,277Net
      Cash (Used in) Provided By Financing Activities
                
                
                (3,226
                )
                
                
                2,284Effect
      of Exchange Rate Changes
                
                
                (3,120
                )
                
                
                300(Decrease)
      Increase In Cash and Cash Equivalents
                
                
                (3,805
                )
                
                
                2,711Cash
      and Cash Equivalents - Beginning
                
                
                10,992
                
                
                
                2,225Cash
      and Cash Equivalents – Ending
                
                $
                7,187
                
                
                $
                4,936Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                
                $
                465
                
                
                $
                973Cash
      Paid For Income Taxes
                
                $
                2,572
                
                
                $
                806Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
                
                $
                12
                
                
                $
                209





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





8





CAPITAL
GOLD CORPORATION


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


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





NOTE 1 -
Basis of Presentation





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





The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) for
interim financial information and with Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the condensed consolidated financial position and results of
operations and cash flows for the periods presented. They include the accounts
of Capital Gold Corporation and its wholly owned and majority owned
subsidiaries, Leadville Mining and Milling Holding Corporation, Minera Santa
Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as
well as the accounts within Caborca Industrial S.A. de C.V. (“Caborca
Industrial”), a Mexican corporation that is 100% owned by two of the Company’s
officers and directors for mining support services. These services include, but
are not limited to, the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at slightly above
cost.  This entity is considered a variable interest entity under
accounting rules provided under FIN 46, “Consolidation of Variable Interest
Entities”.





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





The notes to the consolidated financial
statements contained in the Annual Report on Form 10-K, as amended, for the year
ended July 31, 2008 should be read in conjunction with these consolidated
financial statements.  Results of operations for interim periods are
not necessarily indicative of the results of operations for a full
year.





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 at the discretion of the
Board of Directors.





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.35 to $0.85 per
share of common stock with certain of these grants becoming exercisable
immediately upon grant. Certain grants have vested or are vesting over a period
of five years.


9





The Company adopted the provisions of
Statement of Financial Accounting Standards No. 123(revised 2004) “Share Based
Payments” (“SFAS 123R”). Under SFAS 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 SFAS 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 123R, 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
SFAS 123R.





The cumulative effect of applying the
forfeiture rates is not material. SFAS 123R requires that excess tax benefits
related to stock option 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 nine months ended April 30, 2009 and 2008 were
$0.28 and $0.31, respectively. The fair values of the options and warrants
granted were estimated based on the following weighted average
assumptions:





Nine months ended April 30,2009
                  
                  
                  2008Expected
      volatility
                  
                  
                  69.98
      – 79.72%
                  
                  
                  
                  47.60
      – 58.69%Risk-free
      interest rate
                  
                  
                  0.86
      – 1.56%
                  
                  
                  
                  3.74%Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life
                  
                  2.0
      – 5.0 years
                  
                  
                  6.3
      years





Stock option activity for employees
during the year ended July 31, 2008, and nine months ended April 30, 2009 is as
follows (all tables in thousands, except for option, price and term
data):


10




Number of
                                  Options
                                
                                
                                Weighted
                                  Average
                                  exercise
                                  price
                                
                                
                                Weighted
                                  average
                                  remaining
                                  contracted
                                    term (years)
                                
                                
                                Aggregate
                                  intrinsic
                                  valueOptions
      outstanding at July 31, 2007
                                
                                
                                2,500,000
                                
                                
                                $
                                .34
                                
                                
                                
                                1.20
                                
                                
                                $
                                255Granted
                                
                                
                                2,500,000
                                
                                
                                
                                .63Exercised
                                
                                
                                (1,450,000
                                )
                                
                                
                                .32
                                
                                
                                
                                -
                                
                                
                                
                                -Expired
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Options
      outstanding at July 31, 2008
                                
                                
                                3,550,000
                                
                                
                                $
                                .55
                                
                                
                                
                                4.00
                                
                                
                                $
                                334Granted
                                
                                
                                1,000,000
                                
                                
                                $
                                .49
                                
                                
                                
                                -
                                
                                
                                
                                -Exercised
                                
                                
                                ( 250,000
                                )
                                
                                
                                .34
                                
                                
                                
                                -
                                
                                
                                
                                -Expired
                                
                                
                                ( 300,000
                                )
                                
                                
                                .35
                                
                                
                                
                                -
                                
                                
                                
                                -Options
      outstanding at April 30, 2009
                                
                                
                                4,000,000
                                
                                
                                $
                                .56
                                
                                
                                
                                4.90
                                
                                
                                $
                                -Options
      exercisable at April 30, 2009
                                
                                
                                2,041,630
                                
                                
                                $
                                .54
                                
                                
                                
                                2.20
                                
                                
                                $
                                -




Unvested
stock option balances for employees at April 30, 2009 are as
follows:





Number of
                    Options
                
                
                Weighted
                  Average
                  Exercise
                    price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic valueUnvested
      options outstanding at July 31, 2007
                
                
                150,000
                
                
                $
                .32
                
                
                
                0.67
                
                
                $
                18Granted
                
                
                2,500,000
                
                
                $
                .63
                
                
                
                -
                
                
                
                -Vested
                
                
                (900,000
                )
                
                $
                .58
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at July 31, 2008
                
                
                1,750,000
                
                
                $
                .63
                
                
                
                4.49
                
                
                $
                8Granted
                
                
                1,000,000
                
                
                $
                .49
                
                
                
                -
                
                
                
                -Vested
                
                
                (791,630
                )
                
                
                .56
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at April 30, 2009
                
                
                1,958,370
                
                
                $
                .59
                
                
                
                5.52
                
                
                $
                -




11




Stock
option and warrant activity for non-employees during the year ended July 31,
2008, and  nine months ended April 30, 2009 is as
follows:





Number of Options
                  
                  
                  Weighted
                    Average
                    Exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                      term (years)
                  
                  
                  Aggregate
                    Intrinsic
                      valueWarrants
      and options outstanding at July 31, 2007
                  
                  
                  22,535,542
                  
                  
                  $
                  .33
                  
                  
                  
                  1.48
                  
                  
                  $
                  2,578Granted
                  
                  
                  1,715,000
                  
                  
                  
                  .66
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (21,555,542
                  )
                  
                  
                  .33
                  
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  ( 680,000
                  )
                  
                  
                  .30
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants
      and options outstanding at July 31, 2008
                  
                  
                  2,015,000
                  
                  
                  $
                  .62
                  
                  
                  
                  3.54
                  
                  
                  $
                  54Granted
                  
                  
                  1,400,000
                  
                  
                  $
                  .50
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (150,000
                  )
                  
                  
                  .39
                  
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  (150,000
                  )
                  
                  
                  .39
                  
                  
                  
                  -Warrants
      and options outstanding at April 30, 2009
                  
                  
                  3,115,000
                  
                  
                  $
                  .59
                  
                  
                  
                  3.89
                  
                  
                  $
                  -Warrants
      and options exercisable at April 30, 2009
                  
                  
                  2,013,703
                  
                  
                  $
                  .61
                  
                  
                  
                  1.84
                  
                  
                  $
                  -




Unvested
stock option balances for non-employees at April 30, 2009 are as
follows:




Number of
                    Options
                
                
                Weighted
                  Average
                  Exercise
                    price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic
                    valueUnvested
      stock options outstanding at July 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Granted
                
                
                650,000
                
                
                $
                .63
                
                
                
                -
                
                
                
                -Vested
                
                
                (195,000
                )
                
                $
                .63
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at July 31, 2008
                
                
                455,000
                
                
                $
                .63
                
                
                
                4.49
                
                
                $
                3Options
      granted
                
                
                1,275,000
                
                
                $
                .49
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (628,703
                )
                
                
                .51
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at April 30, 2009
                
                
                1,101,297
                
                
                $
                .54
                
                
                
                5.13
                
                
                $
                5




12




The impact on the Company’s results of
operations of recording equity based compensation for the nine months ended
April 30, 2009 and 2008 for employees and non-employees was approximately $798
and $535 and reduced earnings per share by $0.00 and $0.00 per basic and diluted
share, respectively.




As of April 30, 2009, there was
approximately $830 of unrecognized equity based compensation cost related to
options granted to executives and employees which have not yet
vested.





NOTE 3 -
Marketable Securities





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





(in thousands)April 30,
                          2009
                        
                        
                        July 31,
                          2008Marketable equity securities, at
      cost
                        
                        $
                        50
                        
                        
                        $
                        50Marketable equity securities, at fair value(See Notes 9 & 13)
                        
                        $
                        70
                        
                        
                        $
                        65




NOTE 4 -
Ore on Leach Pads and Inventories (“In-Process Inventory”)





(in thousands)April 30,
                        2009
                      
                      
                      July 31,
                        2008Ore on leach pads
                      
                      $
                      16,208
                      
                      
                      $
                      12,176Total
                      
                      $
                      16,208
                      
                      
                      $
                      12,176




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





NOTE 5 –
Other Current Assets





Other
current assets consist of the following:





(in thousands)April 30,
                        2009
                      
                      
                      July 31,
                        2008Value added tax to be
      refunded
                      
                      $
                      449
                      
                      
                      $
                      425Other
                      
                      
                      2
                      
                      
                      
                      65Total Other Current Assets
                      
                      $
                      451
                      
                      
                      $
                      490




13


NOTE 6 –
Property and Equipment





Property
and Equipment consist of the following:





(in thousands)April 30,
                                                2009
                                              
                                              
                                              July 31,
                                                2008Process equipment and
      facilities
                                              
                                              $
                                              25,015
                                              
                                              
                                              $
                                              21,693Mining equipment
                                              
                                              
                                              2,248
                                              
                                              
                                              
                                              974Mineral properties
                                              
                                              
                                              141
                                              
                                              
                                              
                                              141Construction in progress
                                              
                                              
                                              1,193
                                              
                                              
                                              
                                              1,277Computer and office
    equipment
                                              
                                              
                                              355
                                              
                                              
                                              
                                              316Improvements
                                              
                                              
                                              16
                                              
                                              
                                              
                                              16Furniture
                                              
                                              
                                              47
                                              
                                              
                                              
                                              38Total
                                              
                                              
                                              29,015
                                              
                                              
                                              
                                              24,455Less: accumulated
    depreciation
                                              
                                              
                                              (6,129
                                              )
                                              
                                              
                                              (3,537
                                              )Property and equipment, net
                                              
                                              $
                                              22,886
                                              
                                              
                                              $
                                              20,918




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




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





The Company paid $674 towards the
procurement of new secondary crusher for the El Chanate mine.  The
total cost for this piece of equipment is approximately $1,012 (See Note
19).





Depreciation
expense for the nine months ended April 30, 2009 and 2008 was approximately
$2,269 and $2,630, respectively.





NOTE 7 -
Intangible Assets





Intangible
assets consist of the following:





(in thousands)April 30,
                              2009
                            
                            
                            July 31,
                              2008Repurchase of Net Profits
      Interest
                            
                            $
                            500
                            
                            
                            $
                            500Water Rights
                            
                            
                            241
                            
                            
                            
                            134Mobilization Payment to Mineral
      Contractor
                            
                            
                            70
                            
                            
                            
                            70Reforestation fee
                            
                            
                            73
                            
                            
                            
                            -Investment in Right of Way
                            
                            
                            18
                            
                            
                            
                            18Total
                            
                            
                            902
                            
                            
                            
                            722Accumulated Amortization
                            
                            
                            (573
                            )
                            
                            
                            (541
                            )Intangible assets, net
                            
                            $
                            329
                            
                            
                            $
                            181




14





Purchased
intangible assets consisting of rights of way, water rights, easements and net
profit interests are carried at cost less accumulated
amortization.  Amortization is computed using the straight-line method
over the economic lives of the respective assets, generally five years or using
the UOP method.  It is the Company’s policy to assess periodically the
carrying amount of its purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with SFAS 144.  There was no
impairment at April 30, 2009.





Amortization expense for the nine
months ended April 30, 2009 and 2008 was approximately $33 and $521,
respectively.  The Repurchase of Net Profits Interest was fully
amortized as of April 30, 2008.





NOTE 8 -
Mining Concessions





Mining
concessions consist of the following:





(in thousands)April 30,
                              2009
                            
                            
                            July 31,
                              2008El Chanate
                            
                            $
                            45
                            
                            
                            $
                            45El
      Charro
                            
                            
                            25
                            
                            
                            
                            25Total
                            
                            
                            70
                            
                            
                            
                            70Less: accumulated
    amortization
                            
                            
                            (18
                            )
                            
                            
                            (11
                            )Total
                            
                            $
                            52
                            
                            
                            $
                            59





The El Chanate concessions are carried
at historical cost and are being amortized using the UOP method. They were
acquired in connection with the purchase of the stock of Minera
Chanate.





MSR acquired an additional mining
concession, El Charro, in 2005. El Charro lies within the current El Chanate
property boundaries. MSR is required to pay 1.5% net smelter royalty in
connection with the El Charro concession.





Amortization expense for the nine
months ended April 30, 2009 and 2008 was approximately $6 and $6,
respectively.





NOTE 9 -
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 was an officer and director of that corporation until
March 10, 2008.  These loans are non-interest bearing and due on
demand (see Notes 3 & 13).


15




NOTE 10 –
Accrued Expenses





Accrued
expenses consist of the following:





(in thousands)April 30,
                  2009
                
                
                July 31,
                  2008Net
      profit interest
                
                $
                -
                
                
                $
                753Net
      smelter return
                
                
                240
                
                
                
                189Mining
      contractor
                
                
                183
                
                
                
                193Income
      tax payable
                
                
                2,246
                
                
                
                777Utilities
                
                
                102
                
                
                
                110Interest
                
                
                28
                
                
                
                72Salaries,
      wages and employee benefits
                
                
                907
                
                
                
                334Other
      liabilities
                
                
                163
                
                
                
                245$
                3,869
                
                
                $
                2,673




NOTE 11 -
Reclamations and Remediation Liabilities (“Asset Retirement
Obligations”)




Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs.  The Asset
Retirement Obligation is based on when the spending for the reclamation for an
existing environmental disturbance and activity to date will occur. The Company
reviews, on an annual basis, unless otherwise deemed necessary, the Asset
Retirement Obligation at each mine site.  The Company reviewed the
estimated present value of the El Chanate mine reclamation and closure costs as
of July 31, 2008.  This review resulted in an increase in the Asset
Retirement Obligation by approximately $293.  As of April 30, 2009,
approximately $1,331 was accrued for reclamation obligations relating to mineral
properties in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations.” For the nine months ended April 30, 2009, the Company
reclaimed certain areas at its El Chanate mine representing approximately
$54.  Accretion expense for the nine months ended April 30, 2009 and
2008 was approximately $113 and $121, respectively.




(in
      thousands)Balance
      as of July 31, 2008
                    
                    $
                    1,666Additions,
      changes in estimates and other (foreign currency translation
      adjustment)
                    
                    
                    (457
                    )Liabilities
      settled
                    
                    
                    (54
                    )Accretion
      expense
                    
                    
                    113Balance
      as of April 30, 2009
                    
                    $
                    1,268




16


NOTE 12 –
Accumulated Other Comprehensive Income





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





Foreign
                        currency items
                      
                      
                      Unrealized gain
                        (loss) on securities
                      
                      
                      Change in fair
                        value on interest
                        rate swaps
                      
                      
                      Accumulated other
                        comprehensive
                        incomeBalance
      as of July 31, 2008
                      
                      $
                      681
                      
                      
                      $
                      15
                      
                      
                      $
                      64
                      
                      
                      $
                      760Income
      (loss)
                      
                      
                      (3,120
                      )
                      
                      
                      5
                      
                      
                      
                      (12
                      )
                      
                      
                      (3,127
                      )Balance
      as of April 30, 2009
                      
                      $
                      (2,439
                      )
                      
                      $
                      20
                      
                      
                      $
                      52
                      
                      
                      $
                      (2,367
                      )





The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the year ended July 31, 2008 and the nine months ended April 30,
2009.





NOTE 13 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company also recorded
approximately $5 and $5 in net expense reimbursements including office rent from
this entity for the nine months ended April 30, 2009 and 2008, respectively (see
Notes 3 and 9).





The
Company utilizes Caborca Industrial, a Mexican corporation that is 100% owned by
Gifford A. Dieterle, the Company’s Chief Executive Officer, and Jeffrey W.
Pritchard, the Company’s Executive Vice President, for mining support services.
These services include but are not limited to the payment of mining salaries and
related costs. Caborca Industrial bills the Company for these services at
slightly above cost. Mining expenses charged by Caborca Industrial and
eliminated upon consolidation amounted to approximately $3,561 and $2,525 for
the nine months ended April 30, 2009 and 2008, respectively.





The
Company incurred approximately $15 during the nine months ended April 30, 2009,
for services provided related to marketing materials.  The firm
providing the services is owned and operated by relatives of the Company’s Chief
Operating Officer, John Brownlie.





At the
recommendation of the Compensation Committee and upon approval by the Board of
Directors, on January 20, 2009, effective as of January 1, 2009, the Company
entered into (i) amended and restated employment agreements with Gifford
Dieterle, President and Treasurer, and Jeffrey Pritchard, Executive Vice
President and (ii) amended and restated engagement agreements with
Christopher Chipman, Chief Financial Officer, John Brownlie, Chief Operating
Officer, and Scott Hazlitt, Vice President of Mine Development (collectively,
the “Amended Agreements”).





Each of
the Amended Agreements modify the previous employment agreement or engagement
agreement in three ways.  First, the Company removed a provision from
the Agreement Regarding Change in Control, which is attached as an exhibit to
each of the Amended Agreements, that provided that, upon a change in control of
the Company, the exercise price of all issued and outstanding options would
decrease to $0.01. Second, the Company made the terms of each of the Amended
Agreements consistent so that each Amended Agreement expires on December 31,
2011.  Finally, the Amended Agreements incorporate amendments made in
December 2008 to the employment agreements and engagement agreements to bring
such agreements into documentary compliance with Section 409A of the Internal
Revenue Code of 1986, as amended, and the rules and regulations promulgated
thereunder.




17




NOTE 14 -
Stockholders' Equity





Common
Stock





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





During the nine months ended April 30,
2009, the Company issued 222,500 restricted shares to employees  under
its 2006 Equity Incentive Plan. The restricted shares granted vested
immediately.  The fair value of the Company’s stock ranged from $0.34
to $0.52 on the date of grant resulting in the Company recording approximately
$113 in equity compensation expense.





The Company received proceeds of
approximately $144 during the nine months ended April 30, 2009 from the
exercising of an aggregate of 400,000 options issued to officers and
directors.





During the nine months ended April 30,
2009 and 2008, the Company recorded approximately $675 and $569 in equity
compensation expense related to the vesting of restricted stock grants and stock
options, respectively.





2006 Equity Incentive
Plan





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





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





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





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





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.




18




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 Securities Exchange Act of 1934, as
amended or any applicable stock exchange listing requirements. The Board may
amend the Plan in any respect it deems necessary or advisable to provide
eligible employees with the maximum benefits provided or to be provided under
the provisions of the Code and the regulations promulgated thereunder relating
to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
Options granted under it into compliance therewith.  Rights under any
Award granted before amendment of the Plan cannot be impaired by any amendment
of the Plan unless the Participant consents in writing.  The Board is
empowered to amend the terms of any one or more Awards; provided, however, that
the rights under any Award shall not be impaired by any such amendment unless
the applicable Participant consents in writing and further provided that the
Board cannot amend the exercise price of an option, the Fair Market Value of an
Award or extend the term of an option or Award without obtaining the approval of
the stockholders if required by the rules of the TSX or any stock exchange upon
which the common stock is listed.





On November 1, 2008, the Company issued
stock options with a two year term to purchase the Company’s common stock at an
exercise price of $0.65 per share to an investor relations firm for services
provided.  These options are for the purchase of 100,000
shares.  The Company utilized the Black-Scholes Method to fair value
the 100,000 options received by this firm and recorded approximately $6 as
equity based compensation expense.  The grant date fair value of each
stock option was $0.06.





On December 3, 2008, the Company issued
stock options with a two year term to purchase the Company’s common stock at an
exercise price of $0.35 per share to its then SEC counsel.  These
options are for the purchase of 25,000 shares.  The Company utilized
the Black-Scholes Method to fair value the 25,000 options received by these
individuals and recorded approximately $4 as equity based compensation
expense.  The grant date fair value of each stock option was
$0.16.





On January 20, 2009, at the
recommendation of the Compensation Committee and on the approval by the Board of
Directors, the Company’s executive officers and directors were granted 2,275,000
stock options under our 2006 Equity Incentive Plan as incentive compensation.
The stock options were awarded as follows:  Gifford Dieterle – 500,000,
John Brownlie – 500,000, Jeffrey Pritchard – 500,000, Christopher Chipman –
250,000, Scott Hazlitt – 250,000, Ian Shaw – 75,000, John Postle – 50,000, Mark
T. Nesbitt – 50,000, Roger Newell -50,000 and Robert Roningen – 50,000. The stock options
have a term of five years and vest as follows: one-third vested upon issuance
and the balance vest on a one-third basis annually thereafter. The exercise
price of the stock options is $0.49 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a termination of
continuous service (other than as a result of a change of control, as defined in
the Plan, unvested stock options shall terminate and, with regard to vested
stock options, the exercise period shall be the lesser of the original
expiration date or one year from the date continuous service terminates. Upon
the happening of a change of control, all unvested stock options and unvested
restricted stock grants immediately vest.  The Company utilized the
Black-Scholes method to fair value the 2,275,000 options received by these
individuals totaling $647.  The grant date fair value of each stock
option was $0.29.





19





NOTE 15 -
Debt





Long
      term debt consists of the following:
                            
                            (in
      thousands)April
      30,
                              2009
                            
                            
                            July
      31,
                              2008Total
      debt
                            
                            $
                            9,125
                            
                            
                            $
                            12,500Less
      current portion
                            
                            
                            3,825
                            
                            
                            
                            4,125Long-term
      debt
                            
                            $
                            5,300
                            
                            
                            $
                            8,375





In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender. The Credit Agreement amends and restates the prior credit agreement
between the parties dated August 15, 2006 (the “Original
Agreement”).  Under the Original Agreement, MSR and Oro borrowed money
in an aggregate principal amount of up to US$12,500 (the “Term Loan”) for the
purpose of constructing, developing and operating the El Chanate gold mining
project in Sonora State, Mexico.  The Company guaranteed the repayment
of the Term Loan and the performance of the obligations under the Credit
Agreement.  As of April 30, 2009, the outstanding amount on the term
note was $9,125 and accrued interest on this facility was approximately
$28.





The Credit Agreement also established a
new senior secured revolving credit facility that permits the Borrowers to
borrow up to $5,000 during the one year period after the closing of the Credit
Agreement.  Term Loan principal shall be repaid quarterly commencing
on September 30, 2008 and consists of four payments in the amount of $1,125,
followed by eight payments in the amount of $900 and two final payments in the
amount of $400.  There is no prepayment fee.  There was no
amount outstanding on the revolving credit facility as of April 30,
2009.  Principal under the Term Loan and the credit facility shall
bear interest at a rate per annum equal to the LIBO Rate plus 2.5% and 2.0% per
annum, respectively.





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





In connection with the amendment of
the Company’s credit arrangement proceedings in September 2008, MSR, as a
condition precedent to closing, obtained a six month waiver letter from the
Lender of any default or event of default as a result of not being in compliance
with regulations of Mexican federal law with regard to certain filing and
environmental bonding issues in connection with the operation of mining the El
Chanate concessions as well as certain insurance requirements.  MSR is
currently compliant with these regulations.





As of
April 30, 2009, the Company and its related entities were in compliance with all
debt covenants and default provisions.





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




20




In March 2006, the Company entered into
a gold price protection arrangement to protect it against future fluctuations in
the price of gold and interest rate swap agreements in October 2006 in
accordance with the terms of the credit arrangements with Standard Bank (See
Note 16 for more details on these transactions).




NOTE 16 -
Sales Contracts, Commodity and Financial Instruments





Gold Price Protection
Agreement





In March 2006, in conjunction with the
Company’s credit facility, the Company entered into two identically structured
derivative contracts with Standard Bank (See Note 15).  Both
derivatives consisted of a series of forward sales of gold and a purchase gold
cap.  Under these contracts, 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 purchase gold caps.  The
caps allow the Company to buy gold at a price of $535 per ounce covering the
same volume and horizon as the forward sales.  This combination of
forward sales with purchased call options synthesizes a put position, which, in
turn, serves to put a floor on the Company’s sales price.





On
February 24, 2009, the Company settled with Standard Bank, Plc., the remaining
58,233 ounces of gold under the original Gold Price Protection arrangements
entered into in March 2006. The purpose of these arrangements at the time was to
protect the Company in the event the gold price dropped below $500 per ounce.
Total remuneration to unwind these arrangements was approximately $1,906. In
conjunction with the settlement of the gold price protection agreement, the
Company incurred an Other
Expense of approximately $1,391 during the fiscal quarter ended April 30,
2009.





The volume of these derivative
positions represented about 66% and 90% of sales during the nine months ended
April 30, 2009 and 2008, respectively, such that these derivative positions
mitigate the Company’s gold price risk, rather than eliminate or reverse the
natural exposure of the Company.





Under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
these contracts must be carried on the balance sheet at their fair
value.  The Company records these changes in fair value and any cash
settlements within Other Income or Expense. The contracts were not designated as
hedging derivatives, and therefore special hedge accounting is not
applied.





Since inception, the Company has paid
Standard Bank an aggregate of approximately $4,135 on the full settlement
of 121,927 ounces.  These expenses were incurred concurrently with
sales revenues that reflected actual sales of physical gold at market prices
well above the option strike price of $535 per ounce.





Rather than modifying the original Gold
Price Protection agreement with Standard Bank to satisfy these forward sale
obligations, the Company opted for a net cash settlement between the call option
purchase price of $535 and the forward sale price of $500, or $35.00 per oz.




21





Interest Rate Swap
Agreement





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




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




The interest rate swap agreements are
accounted for as cash flow hedges, whereby “effective” hedge gains or losses are
initially recorded in other comprehensive income (“OCI”) and later reclassified
to the interest expense component of earnings coincidently with the earnings
impact of the interest expenses being hedged.  “Ineffective” hedge
results are immediately recorded in earnings also under interest
expense.  No component of hedge results will be excluded from the
assessment of hedge effectiveness.  The amount expected to be
reclassified from other comprehensive income to earnings during the year ending
July 31, 2009 from these two swaps was determined to be immaterial.





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




(in
      thousands)Liability
      balance as of July 31, 2008
                      
                      $
                      192Change
      in fair value of derivative
                      
                      
                      111Interest
      expense (income)
                      
                      
                      50Net
      cash settlements
                      
                      
                      (125
                      )Liability
      balance as of April 30, 2009
                      
                      $
                      228




The Company is exposed to credit losses
in the event of non-performance by counterparties to these interest rate swap
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position with
each counterparty as required by SFAS 133.




22




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




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




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




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





23




NOTE 17 –
Income Taxes





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





(in
      thousands)April
      30,
                    2009
                  
                  
                  April
      30,
                    2008Current:United
      States
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  (4,078
                  )
                  
                  
                  (806
                  )(4,078
                  )
                  
                  
                  (806
                  )Deferred:United
      States
                  
                  
                  -
                  
                  
                  
                  -Foreign
                  
                  
                  (746
                  )
                  
                  
                  -(746
                  )
                  
                  
                  -Total
                  
                  $
                  (4,824
                  )
                  
                  $
                  (806
                  )





The
Company’s Income (loss) from operations before income tax for the nine months
ended consisted of the following:





(in
      thousands)April
      30,
                        2009
                      
                      
                      April
      30,
                        2008United
      States
                      
                      $
                      (4,602
                      )
                      
                      $
                      (3,790
                      )Foreign
                      
                      
                      17,113
                      
                      
                      
                      11,209Total
                      
                      $
                      12,511
                      
                      
                      $
                      7,419





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





The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1,
2007.  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.  The
adoption of this standard did not have an impact on the financial condition or
the results of the Company’s operations.




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




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




24




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





NOTE 18 –
Recently Issued Accounting Pronouncements





Fair
Value Accounting





In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of
FAS 157 were adopted January 1, 2009. In February 2008, the FASB staff
issued FSP No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The provisions of FSP FAS 157-2 are effective
for Companies beginning January 1, 2009, and are not expected to have a
significant impact on the Company.





In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”), which clarifies the application of FAS 157 in an inactive
market. The intent of this FSP is to provide guidance on how the fair value of a
financial asset is to be determined when the market for that financial asset is
inactive. FSP FAS 157-3 states that determining fair value in an
inactive market depends on the facts and circumstances, requires the use of
significant judgment and in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. FSP FAS 157-3 was effective
upon issuance. The Company has incorporated the principles of FSP FAS 157-3
in determining the fair value of financial assets when the market for those
assets is not active.





FAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:




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




25




The
following table sets forth the Company’s financial assets and liabilities
measured at fair value by level within the fair value hierarchy. As required by
FAS 157, assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.





Fair Value at April 30, 2009
                                        (in thousands)Total
                                      
                                      
                                      Level
      1
                                      
                                      
                                      Level
      2
                                      
                                      
                                      Level
      3Assets:Cash
      equivalents
                                      
                                      $
                                      3,838
                                      
                                      
                                      $
                                      3,838
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Marketable
      securities
                                      
                                      
                                      70
                                      
                                      
                                      
                                      70
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -$
                                      3,908
                                      
                                      
                                      $
                                      3,908
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -Liabilities:Interest
      rate swap
                                      
                                      
                                      228
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      228
                                      
                                      
                                      
                                      -$
                                      228
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      228
                                      
                                      
                                      $
                                      -




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




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





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





In
April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which provides additional guidance on determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. In April 2009, the FASB issued Staff Position
No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which: 1)
clarifies the interaction of the factors that should be considered when
determining whether a debt security is other than temporarily impaired, 2)
provides guidance on the amount of an other-than-temporary impairment recognized
in earnings and other comprehensive income and 3) expands the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the FASB issued Staff Position No. 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), which requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Adoption of these Staff Positions is
required for the Company’s interim reporting period beginning April 1, 2009
with early adoption permitted. The Company adopted the provisions of FSP FAS
157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 for the
interim period ended April 30, 2009. The adoption of this standard did not have
a material impact on the financial condition or the results of the Company’s
operations.




26




Fair
Value Option





In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“FAS 159”).
FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value, with the objective of improving financial
reporting by mitigating volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of FAS 159 were adopted
January 1, 2009. The Company did not elect the Fair Value Option for any of
its financial assets or liabilities, and therefore, the adoption of FAS 159
had no impact on the Company’s consolidated financial position, results of
operations or cash flows.





Derivative
Instruments





In March
2008, the FASB issued FASB Statement No. 161, “Disclosure about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“FAS 161”) which provides revised guidance for enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and the related hedged items are accounted for under FAS
133, and how derivative instruments and the related hedged items affect an
entity’s financial position, financial performance and cash flows. FAS 161 is
effective and was adopted for the Company’s fiscal year ended July 31,
2008.





Accounting
for the Useful Life of Intangibles




In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”) which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets” (“FAS 142”).  The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under FAS 142 and the period of expected cash flows used to
measure the fair value of the asset under FASB Statement No. 141, “Business
Combinations” (“FAS 141”). FSP 142-3 is effective for the Company’s fiscal year
beginning August 1, 2009 and will be applied prospectively to intangible assets
acquired after the effective date. The Company does not expect the adoption of
FSP 142-3 to have a material impact on the Company’s consolidated financial
position, results of operations or cash flows.




Business
Combinations





In
April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (“FSP FAS 141(R)-1”), which amends and clarifies FAS 141(R).
The intent of FSP FAS 141(R)-1 is to address application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. This FSP is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after January 1, 2009. The Company will apply the provisions of FSP FAS
141(R)-1 to all future business combinations.





Equity
Method Investment




In
November 2008, the Emerging Issues Task Force (“EITF”) reached consensus on
Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF
08-6”), which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. The intent of EITF 08-6 is
to provide guidance on (i) determining the initial measurement of an equity
method investment, (ii) recognizing other-than-temporary impairments of an
equity method investment and (iii) accounting for an equity method
investee’s issuance of shares. EITF 08-6 was effective for the Company’s fiscal
year beginning August 1, 2009 and has been applied prospectively. The
adoption of EITF 08-6 had no impact on the Company’s consolidated financial
position or results of operations.




27




Equity-linked
Financial Instruments




In
June 2008, the EITF reached consensus on Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 clarifies the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which would
qualify as a scope exception under FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“FAS 133”). EITF 07-5 was
effective for the Company’s fiscal year beginning August 1, 2009. The adoption
of EITF 07-5 had no impact on the Company’s consolidated financial position or
results of operations.





NOTE 19 –
Subsequent Events





The
Company completed the procurement and installation of its new secondary crusher
and tunnel conveyor in May 2009.  The total capital expenditure for
this equipment was approximately $1,012.





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


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





Cautionary Statement on
Forward-Looking Statements





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





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




28




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





General





Through
wholly owned subsidiaries, Capital Gold Corporation (the “Company” or “we”) 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 commenced mining operations on two of these
concessions in late March 2007 and achieved gold production and revenue from
operations in early August 2007.  We sometimes refer to the operations
on these two concessions as the El Chanate Project.





On August
30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered
to us an updated resource block model and an updated mine plan and mine
production schedule (the “2007 Report”).  According to the 2007
Report, our proven and probable reserve tonnage increased by approximately 98%
from 19.9 million to 39.5 million metric tonnes with a gold grade of 0.66 grams
per tonne (43.5 million US short tons at 0.019 ounces per ton).  The
open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one tonne of
ore).  The updated pit design for the revised plan in the 2007 Report
is based on a plant recovery of gold that varies by rock types, but is expected
to average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
as determined by IMC) per ounce was used to re-estimate the reserves compared
with a gold price of $450 per ounce used in the previous estimate.





The
following production summary estimate has been extracted from the 2007
Report.  Please note that the reserves as stated are an estimate of
what can be economically and legally recovered from the mine and, as such,
incorporate losses for dilution and mining recovery.  The 832,280
ounces of contained gold represent ounces of gold contained in ore in the
ground, and therefore do not reflect losses in the recovery
process.  Total gold produced is estimated to be 555,960 ounces, or
approximately 66.8% of the contained gold.  The gold recovery rate is
expected to average approximately 66.8% 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%; siltstone ore type recoveries may be about 48% and latite
intrusive ore type recoveries may be about 50%.




29




Metric
                                              
                                              U.S.MaterialsReservesProven
                                              
                                              26.7
      Million Tonnes
    @   0.68   g/t*
                                              
                                              29.4
      Million Tons @ 0.0198 opt*Probable
                                              
                                              12.8 Million
      Tonnes  @  0.61 g/t*
                                              
                                              14.1 Million Tons @ 0.0179 opt*Total
      Reserves
                                              
                                              39.5
      Million
      Tonnes  @  0.66   g/t*
                                              
                                              43.5
      Million Tons @ 0.0192 opt*Waste
                                              
                                              24.1 Million Tonnes
                                              
                                              26.6 Million TonsTotal
                                              
                                              63.6
      Million Tonnes
                                              
                                              70.1
      Million tonsContained
      Gold
                                              
                                              25.89
      Million grams
                                              
                                              832,280 OzProductionOre
      Crushed**
                                              
                                              2.6
      Million Tonnes /Year
                                              
                                              2.87
      Million Tons/Year7,500
      Mt/d
                                              
                                              8,267
      t/dOperating
      Days/Year
                                              
                                              365
      Days per year
                                              
                                              365
      Days per yearGold
      Plant Average Recovery
                                              
                                              66.8
      %
                                              
                                              66.8%Average
      Annual Production**
                                              
                                              1.35  Million
      grams
                                              
                                              43,414 OzTotal
      Gold Produced
                                              
                                              17.29
      Million grams
                                              
                                              555,960 Oz





* “g/t”
means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means metric
tonnes per day and “t/d” means tons per day.  The reserve estimates
are based on a recovered gold cutoff grade of 0.17 to 0.21 grams per metric
tonne, depending on the operating year, and as described below.





**  Based
on mining rate of 7,500 metric tonnes per day of ore.  It does not
take into account the anticipated increase of 10,000 metric tonnes per day or
more.





El Chanate
Project





Production
Summary





In the
mineral resource block model developed, with blocks 6m (meters) x 6m x 6m 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 2 or more drill holes within a search radius of 80m x 70m x 40m and
      with a relative kriging (a geostatistical calculation technique) standard
      deviation less than or equal to 0.45 were classified as Measured
      (corresponding to Proven);




·
            Blocks
      with 1 hole within the search radius of 80m x 70m x 40m and with a
      relative kriging standard deviation of 0.60 or less, blocks with 2 holes
      and a kriging standard deviation of 0.70 or less, blocks with 3 holes and
      a kriging standard deviation of 0.80 or less, blocks with 4 holes and a
      relative kriging standard deviation of 0.90 or less and all blocks with 5
      or more holes within the search radius were classified as Indicated
      (corresponding to Probable), unless they met the above criterion for
      Proven;




·
            Blocks
      with a grade estimate that did not meet the above criteria  were
      classified as Inferred (and were classified as waste material in the
      mining reserves estimate);




30




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





The
Proven and Probable reserve estimates are based on a recovered gold cutoff grade
of 0.17 to 0.21 grams/tonne, depending on the operating year.  The
variation is due to balancing the mine and plant production capacities on a year
by year basis for the plan.  (A 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) and break even cutoff grade calculations are as follows:





Cutoff Grade Calculation
                          
                          Internal Cutoff Grade
                          
                          Break Even Cutoff GradeBasic
      ParametersGold
      Price
                          
                          US$550/oz
                          
                          US$550/ozShipping
      and Refining
                          
                          US$
      4.14/oz
                          
                          US$
      4.14/ozGold
      Recovery
                          
                          66.8%
                          
                          66.8%Royalty
                          
                          4%
      of NSR
                          
                          4%
      of NSROperating
      Costs per Tonne of Ore
                          
                          $
      per Tonne of Ore
                          
                          $
      per Tonne of OreMining
      *
                          
                          0.070
                          
                          1.360Processing/Leach
      Pad
                          
                          1.980
                          
                          1.980G&A
                          
                          0.800
                          
                          0.800Total
                          
                          2.850
                          
                          4.140Internal
      Cutoff Grade
                          
                          Grams
      per Tonne
                          
                          Grams
      per TonneHead
      Grade Cutoff (66.8% recov.)
                          
                          0.25
                          
                          0.37Recovered
      Gold Grade Cutoff
                          
                          0.17
                          
                          0.25





* 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.





We
commenced production at the El Chanate property on July 31, 2007.  For
the nine months ended April 30, 2009 and 2008, we sold 38,037 and 28,210 ounces
of gold, respectively, an increase of 35%.  Gold production at El
Chanate is currently at a level of approximately 5,000 ounces of gold per month.
We completed the procurement and installation of our new secondary crusher and
tunnel conveyor in May 2009.  The total capital expenditure for this
equipment was approximately $1,012.  We completed the leach pad
expansion and ADR plant improvements in January 2009.  We believe that
these steps that we initiated and completed during this fiscal year will
effectively increase annualized production rates to approximately 70,000 ounces
per year in 2009.  Management has been able and anticipates that it
will continue to, fund expansion costs with its cash on hand as well as through
revenues from gold sales.




31





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





Proven and probable mineral reserve (Ktonnes of ore)
                      
                      April 30,
                        2009
                      
                      
                      July 31,
                        2008Ore
                      
                      
                      -
                      
                      
                      
                      -Beginning
      balance (Ktonnes)
                      
                      
                      35,286
                      
                      
                      
                      38,785Additions
                      
                      
                      -
                      
                      
                      
                      -Reductions
                      
                      
                      (2,771
                      )
                      
                      
                      (3,499
                      )Ending
      Balance
                      
                      
                      32,515
                      
                      
                      
                      35,286Contained
      goldBeginning
      balance (thousand of ounces)
                      
                      
                      719
                      
                      
                      
                      814Additions
                      
                      
                      -
                      
                      
                      
                      -Reductions
                      
                      
                      (75
                      )
                      
                      
                      (95
                      )Ending
      Balance
                      
                      
                      644
                      
                      
                      
                      719





In
September 2008, we initiated a 10 hole, deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters, which targeted the southern extremity
of the main pit.  Once this data has been compiled and analyzed, it
will be combined with results from a previous drilling campaign initiated in
December 2007 which consisted of 26 reverse circulation holes amounting to 4,912
meters.  These drill holes were mainly positioned to test the outer
limits of the currently known ore zones within the main pit.


All data
will be combined with the intention of increasing proven and probable
reserves.





During 2007 and 2008, we conducted
exploration activities in the El Chanate pit area including, a ground magnetic
survey and two drilling campaigns totaling 4,912 meters of reverse circulation
drilling and 2,891 meters of core drilling, to evaluate the ongoing potential
for expanding its reserves.  The knowledge obtained about the geology
of the deposit during mining, combined with the assays from the samples from
this exploration drilling, was used to expand the information in our mine
database.  We have used this data to re-estimate El Chanate’s mineral
reserves. The table below shows the updated Proven and Probable reserves at El
Chanate as of May 2009:





Mineral Reserve Class
                          
                          Ore (tonnes)
                          
                          
                          Grade (g/t)
                          
                          
                          Contained Gold (oz.)Proven
      Mineral Reserve
                          
                          
                          20,896,000
                          
                          
                          
                          0.772
                          
                          
                          
                          519,000Probable
      Mineral Reserve
                          
                          
                          14,926,000
                          
                          
                          
                          0.702
                          
                          
                          
                          337,000Low
      Grade Stockpile (Probable)
                          
                          
                          7,318,000
                          
                          
                          
                          0.246
                          
                          
                          
                          58,000Proven
      and Probable Mineral Reserve
                          
                          
                          43,140,000
                          
                          
                          
                          0.659
                          
                          
                          
                          913,000





The new
mineral reserves are based on an updated resource block model and an updated
mine plan and mine production schedule developed by Independent Mining
Consultants, Inc. (IMC) of Tucson, Arizona, an independent consulting firm. The
updated pit design for the revised plan is based on a plant recovery of gold
that varies by rock types, but is expected to average 64.2%.  A gold
price of $750 (SEC three year average as of March 20, 2009) per ounce was used
to estimate the reserves.  The stated proven and probable mineral
reserves have been prepared in accordance with CIM Definitions.  A
technical report supporting this estimate is being finalized that complies with
Canada’s National Instrument 43-101 Standards of Disclosure for Mineral Projects
and will be filed on SEDAR shortly. These reserves are equivalent to proven and
probable reserves as defined by the United States Securities and Exchange
Commission (SEC) Industry Guide 7.


32


We
recently leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,200 additional
hectares adjacent to this property. These concessions and this claim are about
60 miles northeast of the El Chanate project. Mineralization is evident
throughout and is hosted by shear zones and quartz veins in granite intrusive. A
short drill program, along with geochemical work, remains underway.





We
continue to actively investigate other exploration projects in northern
Mexico.





Results of
Operations





You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our unaudited interim financial
statements and related notes included elsewhere in this report.





Three months ended April 30,
2009 compared to three months ended April 30, 2008





Net
income for the three months ended April 30, 2009 and 2008 was approximately
$2,554 and $2,740, respectively, representing a decrease of approximately 7%
over the prior period. Net income decreased primarily as a result of the
settlement, on February 24, 2009, with Standard Bank, Plc., the remaining 58,233
ounces of gold under the original Gold Price Protection arrangements entered
into in March 2006. The purpose of these arrangements at the time was to protect
the Company in the event the gold price dropped below $500 per ounce. Total
remuneration to unwind these arrangements was approximately $1,906. In
conjunction with the settlement of the gold price protection agreement, we
incurred an Other
Expense of approximately $1,391 during the fiscal quarter ended April 30,
2009.





Net
income per common share was $0.01 for the three months ended April 30, 2009 on
both a basic and diluted basis and $0.02 and $0.01 for the three months ended
April 30, 2008 on a basic and diluted basis, respectively.





Revenues & Costs
Applicable to Sales





Gold
sales in the current period totaled approximately $12,395 as compared to $8,730
in the prior period representing an increase of approximately $3,665 or
42%.  We sold 13,347 ounces at an average realizable price per ounce
of approximately $929 in the current period.  We sold 9,466 ounces at
an average realizable price per ounce of $922 during the same period last
year.





Costs
applicable to sales were approximately $3,698 and $2,717, respectively, for the
three months ended April 30, 2009 and 2008, an increase of approximately $981 or
36%, which increased in conjunction with our increase in
revenues.    Cash costs of $263 per ounce of gold sold for
the three months ended April 30, 2009 was 7% below the $283 reported in the same
period in fiscal 2008. Total costs of $305 per ounce of gold sold for
the three months ended April 30, 2009, was 9% lower than the $337 in our
fiscal third quarter of 2008.  Our increased production and cost
efficiencies contributed to a lower cash and total cost per ounce sold during
the current period.





Revenues
from by-product sales (silver) are credited to Costs applicable to sales as
a by-product credit.  Silver sales totaled 22,991 ounces at an average
price of $12.94 amounting to approximately $298 during the three months ended
April 30, 2009.   Silver sales totaled 10,190 ounces at a price
of $19.73 amounting to approximately $201 for the three months ended April 30,
2008.


33





Depreciation and
Amortization





Depreciation
and amortization expense during the three months ended April 30, 2009 and 2008
was approximately $811 and $800, respectively, an increase of $11 or 1% over the
prior period.  The primary reason for the increase in
units-of-production depreciation and amortization was mainly attributable to
additional ounces being produced in the current period versus the same period in
the prior year of approximately $183.  This was offset by amortization
charges incurred in the prior year of approximately $122 related to the
repurchase of the 5% net profit interest acquired in 2006 for
$500.  This was fully amortized during the quarterly period ended
April 30, 2008.  Depreciation and amortization also includes deferred
financing costs resulting from the credit arrangements entered into with
Standard Bank Plc.  This accounted for approximately $233 and $272 of
depreciation and amortization expense during the three months ended April 30,
2009 and 2008, respectively.





General and Administration
Expense





General and administrative expenses
during the three months ended April 30, 2009 were approximately $1,361, an
increase of approximately $275 or 25% from the three months ended April 30,
2008. The increase in general and administrative expenses for the current period
was primarily due to: 1) higher legal and financial advisor fees incurred as a
result of the proposed transaction with Gammon Gold of approximately $380,
and  2) higher audit  fees of approximately $92 associated
with the  attestation report issued on the effectiveness of our
internal controls as well as fees incurred with the response to our periodic
Securities and Exchange Commission comment letter received during the current
period.  These increases were slightly offset by reductions in
consulting and professional fees of approximately $175 as compared to the three
months ended April 30, 2008.





Exploration
Expense





Exploration
expense during the three months ended April 30, 2009 and 2008 was approximately
$329 and $19, respectively, or an increase of $310.  Exploration costs
during the current period mainly consisted of on-going exploration, drilling and
geochemical work being conducted on our leased concessions located northwest of
Saric, Sonora.  Exploration expense in the prior period was minimal as
the drilling campaign which consisted of 26 reverse circulation holes amounting
to 4,912 meters concluded during the second fiscal quarter ended January 31,
2008.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended April 30, 2009 and 2008, was approximately $1,391 and $337, respectively,
and was reflected as Other Expense.The primary reason for
the increase can be attributed to the settlement, on February 24, 2009, with
Standard Bank, Plc., the remaining 58,233 ounces of gold under the original Gold
Price Protection arrangements entered into in March 2006. The purpose of these
arrangements at the time was to protect the Company in the event the gold price
dropped below $500 per ounce. Total remuneration to unwind these arrangements
was approximately $1,906. In conjunction with the settlement of the gold price
protection agreement, we incurred an Other Expense of
approximately $1,391 during the fiscal quarter ended April 30,
2009.  These contracts were not designated as hedging derivatives; and
therefore, special hedge accounting does not apply.


34





Interest expense was approximately
$103 for the three months ended April 30, 2009 compared to approximately $377
for the same period a year earlier.  This decrease was mainly due to
lower interest charges incurred during the current period related to our credit
arrangements with Standard Bank.  As of April 30, 2009, there was
$9,125 outstanding on our term note.





Nine months ended April 30,
2009 compared to nine months ended April 30, 2008





Net
income for the nine months ended April 30, 2009 and 2008 was approximately
$7,687 and $6,613, respectively, representing an increase of approximately 16%
over the prior period.  Net income before income taxes was $12,511 and
$7,419 for the nine months ended April 30, 2009 and 2008, respectively, which
represented an increase of 69%.  Net income and net income before tax
increased primarily as a result of higher revenues from more ounces being sold
during the nine months ended April 30, 2009, as compared to the same period a
year ago. Income tax expense in the prior period was lower due to two
factors:  1) net income before tax was below that of the current
period due to lower ounces being sold and, 2) a net operating loss carryforward
within our wholly-owned subsidiary, MSR, that offset tax that would otherwise
have been due in the prior period.  This loss carry-forward was fully
utilized as of December 31, 2007.





Net
income per common share was $0.04 for the nine months ended April 30, 2009 on
both a basic and diluted basis and $0.04 and $0.03 for the nine months ended
April 30, 2008 on a basic and diluted basis, respectively.





Revenues & Costs
Applicable to Sales





Gold
sales in the current period totaled approximately $32,939 as compared to $23,299
in the prior period representing an increase of approximately $9,640 or
41%.  We sold 38,037 ounces at an average realizable price per ounce
of approximately $866 in the current period.  We sold 28,210 ounces at
an average realizable price per ounce of $826 during the same period last
year.





Costs
applicable to sales were approximately $10,395 and $7,343, respectively, for the
nine months ended April 30, 2009 and 2008, an increase of approximately $3,052
or 42%, which increased in conjunction with our increase in
revenues.  Cash costs of $261 per ounce of gold sold for the nine
months ended April 30, 2009 was 1% higher than the $258 for the nine months
ended April 30, 2008. We have been able to maintain our cash costs as we have
increased production.  Total costs of $301 per ounce of gold sold for
the nine months ended April 30, 2009, was 6% lower than the $321.  The
primary reason for this decrease in total costs was attributed to higher
amortization charges recorded in the prior period related to the repurchase of
the 5% net profit interest acquired in 2006 for $500.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $809 and $347 for the
nine months ended April 30, 2009 and 2008, on silver ounces sold of 68,325 and
20,190, respectively.





Depreciation and
Amortization





Depreciation
and amortization expense during the nine months ended April 30, 2009 and 2008
was approximately $2,269 and $2,630, respectively.  The primary reason
for the decrease of approximately $361, or 14%, was due to amortization charges
recorded in the prior period related to the repurchase of the 5% net profit
interest acquired in 2006 for $500.  The $500 was fully amortized
during the quarterly period ended April 30, 2008.  This was slightly
offset by an increase in Units-of-Production depreciation and amortization
mainly attributable to additional ounces being produced in the current period
versus the same period in the prior year.  Depreciation and
amortization also includes deferred financing costs resulting from the credit
arrangements entered into with Standard Bank Plc.  This accounted for
approximately $700 and $816 of depreciation and amortization expense during the
nine months ended April 30, 2009 and 2008, respectively.


35





General and Administration
Expense





General and administrative expenses
during the nine months ended April 30, 2009 were approximately $3,800, an
increase of approximately $492, or 15%, from the nine months ended April 30,
2008. The increase in general and administrative expenses for the current period
was primarily due to: 1) higher legal and financial advisor fees incurred as a
result of the proposed transaction with Gammon Gold of approximately $380,
and  2) higher audit  fees of approximately $92 associated
with the  attestation report issued on the effectiveness of our
internal controls as well as fees incurred with the response to our periodic
Securities and Exchange Commission comment letter received during the current
period.





Exploration
Expense





Exploration
expense during the nine months ended April 30, 2009 and 2008 was approximately
$1,224 and $650, respectively, or an increase of $574, or 88%.  The
primary reason for the increase can be attributed to increased activity during
the current period associated with on-going exploration, drilling and
geochemical work being conducted on our leased concessions located northwest of
Saric, Sonora.  Exploration expense for the current period also
included costs incurred from a 10 hole, deep core drilling campaign at our El
Chanate mine totaling 2,500 meters, which targeted the southern extremity of the
main pit.  Exploration expense in the prior period included a drilling
campaign initiated in December 2007 which consisted of 26 reverse circulation
holes amounting to 4,912 meters.  These drill holes were mainly
positioned to test the outer limits of the currently known ore zones within the
main pit.  All data was combined with the intention of increasing
proven and probable reserves.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the nine months
ended April 30, 2009 and 2008, was approximately $1,969 and $1,037,
respectively, and was reflected as Other
Expense.The
primary reason for the increase can be attributed to the settlement, on February
24, 2009, with Standard Bank, Plc., the remaining 58,233 ounces of gold under
the original Gold Price Protection arrangements entered into in March 2006. The
purpose of these arrangements at the time was to protect the Company in the
event the gold price dropped below $500 per ounce. Total remuneration to unwind
these arrangements was approximately $1,906. In conjunction with the settlement
of the gold price protection agreement, we incurred an Other Expense of
approximately $1,391 during the nine months ended April 30,
2009.  These contracts were not designated as hedging derivatives; and
therefore, special hedge accounting does not apply.





Interest expense was approximately
$530 for the nine months ended April 30, 2009 compared to approximately $945 for
the same period a year earlier.  This decrease was mainly due to lower
interest charges incurred during the current period related to our credit
arrangements with Standard Bank.  As of April 30, 2009, there was
$9,125 outstanding on our term note.




Changes in Foreign Exchange
Rates




During
the nine months ended April 30, 2009 and 2008, we recorded equity adjustments
from foreign currency translations of approximately $3,120 and $300,
respectively.  These translation adjustments are related to changes in
the rates of exchange between the Mexican Peso and the U.S. dollar and are
included as a component of other comprehensive income.  The Mexican
Peso and the U.S. dollar exchange rate as of April 30, 2009 was
13.7645.  As of July 31, 2008, such exchange rate was
10.0483.


36





Summary of Quarterly
Results


(000’s except per share
Data)





For the three
                    
                    
                    For the three
                    
                    
                    For the nine
                    
                    
                    For the ninemonths ended
                    
                    
                    months ended
                    
                    
                    months ended
                    
                    
                    months endedApril 30,
                      2009
                    
                    
                    April 30,
                      2008
                    
                    
                    April 30,
                      2009
                    
                    
                    April 30,
                      2008Revenues
                    
                    
                    12,395
                    
                    
                    
                    8,730
                    
                    
                    
                    32,939
                    
                    
                    
                    23,299Net
      Income
                    
                    
                    2,554
                    
                    
                    
                    2,740
                    
                    
                    
                    7,687
                    
                    
                    
                    6,613Basic
      net income per share
                    
                    
                    0.01
                    
                    
                    
                    0.02
                    
                    
                    
                    0.04
                    
                    
                    
                    0.04Diluted
      net income per share
                    
                    
                    0.01
                    
                    
                    
                    0.01
                    
                    
                    
                    0.04
                    
                    
                    
                    0.03Gold
      ounces sold
                    
                    
                    13,347
                    
                    
                    
                    9,466
                    
                    
                    
                    38,037
                    
                    
                    
                    28,210Average
      price received
                    
                    $
                    929
                    
                    
                    $
                    922
                    
                    
                    $
                    866
                    
                    
                    $
                    826Cash
      cost per ounce sold(1)
                    
                    $
                    263
                    
                    
                    $
                    283
                    
                    
                    $
                    261
                    
                    
                    $
                    258Total
      cost per ounce sold(1)
                    
                    $
                    305
                    
                    
                    $
                    337
                    
                    
                    $
                    301
                    
                    
                    $
                    321


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





Summary of Results of
Operations





For the three
                    
                    
                    For the three
                    
                    
                    For the nine
                    
                    
                    For the ninemonths ended
                    
                    
                    months ended
                    
                    
                    months ended
                    
                    
                    months endedApril 30,
                      2009
                    
                    
                    April 30,
                      2008
                    
                    
                    April 30,
                      2009
                    
                    
                    April 30,
                      2008Tonnes
      of ore mined
                    
                    
                    866,604
                    
                    
                    
                    979,370
                    
                    
                    
                    2,771,284
                    
                    
                    
                    2,796,210Tonnes
      of waste removed
                    
                    
                    890,241
                    
                    
                    
                    748,510
                    
                    
                    
                    3,144,623
                    
                    
                    
                    1,656,115Ratio
      of waste to ore
                    
                    
                    1.03
                    
                    
                    
                    0.76
                    
                    
                    
                    1.13
                    
                    
                    
                    0.59Tonnes
      of ore processed
                    
                    
                    938,469
                    
                    
                    
                    1,060,428
                    
                    
                    
                    2,892,595
                    
                    
                    
                    2,800,859Grade
      (grams/tonne)
                    
                    
                    0.68
                    
                    
                    
                    0.91
                    
                    
                    
                    0.82
                    
                    
                    
                    0.82Gold
      (ounces)-  Produced(1)
                    
                    
                    13,460
                    
                    
                    
                    9,341
                    
                    
                    
                    38,994
                    
                    
                    
                    28,196-  Sold
                    
                    
                    13,347
                    
                    
                    
                    9,466
                    
                    
                    
                    38,037
                    
                    
                    
                    28,210


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





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the nine months ended April 30, 2009 was $7,311 as
compared to Cash provided by
operating activities of $4,818 during the nine months ended April 30,
2008.   The increase period-to-period was mainly due to higher
net income during the nine months ended April 30, 2009, as well as deductions to
in-process inventory offset by the payment to Standard Bank for the close out of
the Gold Price Protection Agreement.


37




Investing
Activities




Cash used in investing
activities during the nine months ended April 30, 2009, amounted to
approximately $4,770, primarily from the acquisition of an additional secondary
crusher and tunnel conveyor, mobile equipment, conveyors, ADR plant equipment,
and a carbon regeneration kiln.  Cash used in investing activitiesfor the same period a year ago was approximately $4,691 which was due to
costs incurred for leach pad expansion, conveyors, additional water rights, and
original ADR plant equipment for the El Chanate mine.




Financing
Activities




Cash used in financing
activities during the nine months ended April 30, 2009 amounted to
approximately $3,226, primarily from the repayment of the note payable in the
amount of $3,375.  Cash provided by financing
activities for the same period a year ago was approximately $2,284 which
mostly was comprised of proceeds received of approximately $2,277 from the
issuance of common stock upon the exercising of 6,646,750 warrants.




Term
loan and Revolving Credit Facility





In September 2008, we entered into an
Amended and Restated Credit Agreement (the “Credit Agreement”) involving our
wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), the
Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender.  The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006 (the “Original
Agreement”).  Under the Original Agreement, MSR and Oro borrowed money
in an aggregate principal amount of up to $12,500 (the “Term Loan”) for the
purpose of constructing, developing and operating the El Chanate gold mining
project in Sonora State, Mexico.  We guaranteed the repayment of the
Term Loan and the performance of the obligations under the Credit
Agreement.  As of April 30, 2009, the outstanding amount on the Term
Loan was $9,125 and accrued interest on this facility was approximately
$28.





The Credit Agreement also established a
new senior secured revolving credit facility that permits the Borrowers to
borrow up to $5,000 during the one year period after the closing of the Credit
Agreement. The Borrowers may request a borrowing of the Revolving Commitment
from time to time, provided that the Borrowers are not entitled to request a
borrowing more than once in any calendar month (each borrowing a “Revolving
Loan”). Repayment of the Revolving Loans will be secured and guaranteed in the
same manner as the Term Loan. Term Loan principal shall be repaid quarterly
commencing on September 30, 2008 and consisting of four payments in the amount
of $1,125, followed by eight payments in the amount of $900 and two final
payments in the amount of $400. There is no prepayment fee.  There was
no amount outstanding on the revolving credit facility as of April 30,
2009.  Principal under the Term Loan and the Revolving Loans shall
bear interest at a rate per annum equal to the LIBO Rate, as defined in the
Credit Agreement, for the applicable Interest Period plus the Applicable Margin.
An Interest Period can be one, two, three or six months, at the option of the
Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively.  The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment.  Pursuant to the terms of the Original Agreement, Standard
Bank exercised significant control over the operating accounts of MSR located in
Mexico and in the United States. Standard Bank’s control over the accounts has
been lifted significantly under the terms of the Credit Agreement, giving the
Borrowers authority to exercise primary day-to-day control over the
accounts.  However, the accounts remain subject to an account pledge
agreement between MSR and Standard Bank.


38


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





Debt
Covenants





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





In connection with the amendment of
our credit arrangement proceedings in September 2008, MSR, as a condition
precedent to closing, obtained a six month waiver letter from the Lender of any
default or event of default as a result of not being in compliance with
regulations of Mexican federal law with regard to certain filing and
environmental bonding issues in connection with the operation of mining the El
Chanate concessions as well as certain insurance requirements.  MSR is
currently compliant with these regulations.





As of April 30, 2009, the Company and
its related entities were in compliance with all debt covenants and default
provisions.




As of
April 30, 2009, we and our related entities were in compliance with all debt
covenants and default provisions.  For the purposes of meeting these
financial covenants, the accounts of Caborca Industrial are not required to be
included in the calculation of these covenants.





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 have received the required Mexican
government permits and extensions for construction, mining and processing the El
Chanate ores.  Once we revise our new mine plan, we may need to extend
the permits for mining and processing for the new life of mine.  See
also “Debt Covenants”
above.





We
received the renewable explosive permit from the government that expires on
December 31, 2009 and is renewable annually.


39


We
include environmental and reclamation costs on an ongoing basis, in our internal
revenue and cost projections.  No assurance can be given that
environmental regulations will not be changed in a manner that would adversely
affect our planned operations.  We estimated the reclamation costs for
the El Chanate site to be approximately $2,900.  Reclamation costs are
allocated to expense over the life of the related assets and are periodically
adjusted to reflect changes in the estimated present value resulting from the
passage of time and revisions to the estimates of either the timing or amount of
the reclamation and closure costs. The asset retirement obligation is based on
when the spending for an existing environmental disturbance and activity to date
will occur. We review, on an annual basis, unless otherwise deemed necessary,
the asset retirement obligation at each mine site.  We reviewed the
estimated present value of the El Chanate mine reclamation and closure costs as
of July 31, 2008.  This review resulted in an increase in the Asset
Retirement Obligation by approximately $293 to approximately $1,666 as of July
31, 2008.  As of April 30, 2009, approximately $1,268 was accrued for
reclamation obligations relating to mineral properties in accordance with SFAS
No. 143, “Accounting for Asset Retirement Obligations.”





We owned
properties in Leadville, Colorado for which we have previously 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.  The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of our Leadville Mining properties in August 2007.  The Division
concluded that based upon 2007 equipment prices and labor costs, an additional
$46 was necessary to be bonded with the Division to reclaim the site to achieve
the approved post-mining land use.  The total amount of the bond
sufficient to perform reclamation as of April 30, 2009, was approximately
$82.  We have met this bonding requirement.  During our
fiscal year ended July 31, 2008, we sold two of the Leadville Mining claims and
the mill for gross proceeds of $100.  In May 2009, we received our
bond back from the Division.





To date,
we have not been adversely affected by the recent volatility in the global
credit and foreign exchange markets.  To a minor degree we have
benefited from the devaluation of the Mexican peso compared to the U.S. dollar.
 We will continue to assess the evolution of our business and the impact of
the global credit crisis.





While we
believe that our available funds in conjunction with anticipated revenues from
gold sales will be adequate to cover capital expenditures, debt service, net
smelter return, as well as operating activities at El Chanate and corporate
general and administrative expenses for fiscal 2009, if we encounter unexpected
problems we may need to raise additional capital.  We also may need to
raise additional capital for significant property acquisitions and/or
exploration activities. To the extent that we need to obtain additional capital,
management intends to raise such funds through the sale of our securities and/or
entering into a joint venture 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.





New
Accounting Pronouncements





Fair
Value Accounting





In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of
FAS 157 were adopted January 1, 2009. In February 2008, the FASB staff
issued FSP No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The provisions of FSP FAS 157-2 are effective
for Companies beginning January 1, 2009, and are not expected to have a
significant impact on us.


40





In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”), which clarifies the application of FASB Statement
No. 157, “Fair Value Measurements” (“FAS 157”) in an inactive market.
The intent of this FSP is to provide guidance on how the fair value of a
financial asset is to be determined when the market for that financial asset is
inactive. FSP FAS 157-3 states that determining fair value in an
inactive market depends on the facts and circumstances, requires the use of
significant judgment and in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. FSP FAS 157-3 was effective
upon issuance. We incorporated the principles of FSP FAS 157-3 in
determining the fair value of financial assets when the market for those assets
is not active.





FAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:




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




The
following table sets forth our financial assets and liabilities measured at fair
value by level within the fair value hierarchy. As required by FAS 157,
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement.





Fair Value at April 30, 2009
                                (in thousands)Total
                              
                              
                              Level 1
                              
                              
                              Level 2
                              
                              
                              Level 3Assets:Cash
      equivalents
                              
                              $
                              3,838
                              
                              
                              $
                              3,838
                              
                              
                              $
                              -
                              
                              
                              $
                              -Marketable
      securities
                              
                              
                              70
                              
                              
                              
                              70
                              
                              
                              
                              -
                              
                              
                              
                              -$
                              3,908
                              
                              
                              $
                              3,908
                              
                              
                              $
                              -
                              
                              
                              $
                              -Liabilities:Interest
      rate swap
                              
                              
                              228
                              
                              
                              
                              -
                              
                              
                              
                              228
                              
                              
                              
                              -$
                              228
                              
                              
                              $
                              -
                              
                              
                              $
                              228
                              
                              
                              $
                              -





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




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


41





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





In
April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which provides additional guidance on determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. In April 2009, the FASB issued Staff Position
No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which: 1)
clarifies the interaction of the factors that should be considered when
determining whether a debt security is other than temporarily impaired, 2)
provides guidance on the amount of an other-than-temporary impairment recognized
in earnings and other comprehensive income and 3) expands the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the FASB issued Staff Position No. 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), which requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Adoption of these Staff Positions is
required for our interim reporting period beginning April 1, 2009 with
early adoption permitted. The Company adopted the provisions of FSP FAS 157-4,
FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 for the interim
period ended April 30, 2009. The adoption of this standard did not have a
material impact on the financial condition or the results of our
operations.





See also
Note 18 to the Condensed Consolidated Financial Statements contained in Item 1.
Financial Statements above.





Disclosure
About Off-Balance Sheet Arrangements





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





Critical
Accounting Policies





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


42




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




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




Ore
on Leach Pads




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




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




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




In-process
Inventory




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




Precious
Metals Inventory




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


43


Materials
and Supplies




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




Property, Plant and Mine
Development




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




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





Impairment of Long-Lived
Assets




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




Reclamation and Remediation
Costs (Asset Retirement Obligations)




Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and abandonment costs. The Asset Retirement Obligation is based on
when the spending for an existing environmental disturbance and activity to date
will occur. We review, on an annual basis, unless otherwise deemed necessary,
the asset retirement obligation at our mine site in accordance with FASB FAS
No. 143, “Accounting for Asset Retirement Obligations.”


44


Deferred Financing
Costs





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





Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements and net profit interests are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with SFAS 144. There was no impairment at
April 30, 2009.





Fair Value of Financial
Instruments





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





Revenue
Recognition





Revenue
is recognized from the sale of gold dore when persuasive evidence of an
arrangement exists, the price is determinable, the product has been delivered to
the refinery, the title and risk of loss has been transferred to the refiner and
collection of the sales price is reasonably assured from the customer. 
Sales are calculated based upon assay of the dore’s precious metal content and
its weight.  The Company receives 95% of the precious metal content
contained within the dore from the refinery based upon the preliminary assay of
the Company.  We forward an irrevocable transfer letter to the refinery to
authorize the transfer of the precious metal content to the customer.  The
sale is recorded by us upon the refinery pledging the precious metal content to
the customer.  Revenues from by-product sales, which consist of
silver, will be credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $809 and $347 for the
nine months ended April 30, 2009 and 2008, respectively.





Income
Taxes




We
adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007.  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" (“SFAS 109”).  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.  The adoption of this standard did
not have a material impact on the financial condition or the results of our
operations.


45




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




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




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





Equity Based
Compensation





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





Effective
February 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004) “Shared Based Payment” (“SFAS 123R”). Under
SFAS 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 SFAS 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 123R,
except that forfeitures rates will be estimated for all options, as required by
SFAS 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”).




46


On
February 24, 2009, we settled with Standard Bank, Plc., the remaining 58,233
ounces of gold under the original Gold Price Protection arrangements entered
into in March 2006. The purpose of these arrangements at the time was to protect
the Company in the event the gold price dropped below $500 per ounce. Total
remuneration to unwind these arrangements was approximately $1,906.





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





We 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.





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.





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




Metal
Price




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


47




Foreign
Currency




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




Gold
Price Protection Agreement





On
February 24, 2009, we settled with Standard Bank, Plc., the remaining 58,233
ounces of gold under the original Gold Price Protection arrangements entered
into in March 2006. The purpose of these arrangements at the time was to protect
the Company in the event the gold price dropped below $500 per ounce. Total
remuneration to unwind these arrangements was approximately $1,906.





Interest
Rate Swap Contracts





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





Market
Risk Disclosures


April
30, 2009


(in
thousands)





Instruments
entered into for hedging purposes -





Type of Derivative
                            
                            Notional Size
                            
                            
                            Fixed Price or
                              Strike Price
                            
                            Underlying Price
                            
                            Termination or
                              Expiration
                            
                            Fair ValueInterest
      Rate Swaps
                            
                            $
                            5,250
                            (1)
                            
                            
                            5.30
                            %
                            3 Mo. USD LIBOR
                            
                            12/31/2010
                            
                            $
                            (228
                            )





(1)The value shown reflects
the notional as of April 30, 2009. Over the term of the swap, the notional
amortizes, dropping to approximately $656.





As of April 30, 2009, the dollar
value of a basis point for this interest rate swap was approximately $463,
suggesting that a one-basis point rise (fall) of the yield curve would likely
foster an increase (decrease) in the interest rate swaps value by approximately
$463.  Because hedge accounting is applied, the contract serves to
lock in a fixed rate of interest for the portion of the variable rate debt equal
to the swap's notional size.  The swap covers only 75% of our variable
rate exposure.




48


The combined gold forward sales and
long call options served to synthesize a put option that protects us from the
market exposure to gold prices below $535 per ounce on the volume of sales
consistent with the notional size of these contracts.  These contracts
covered approximately 75% of production during the nine months ended April 30,
2009.





Item
4. Controls and
Procedures.





Disclosure
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 not only 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 but also to ensure that information
required to be disclosed is accumulated and communicated to the Chief Executive
Officer and our Chief Financial Officer to allow timely decisions regarding
required disclosure.





In designing and evaluating the
disclosure controls and procedures, management of the Company recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.  Our Chief Executive
Officer and our Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q.  They have concluded that, as of that
date, our disclosure controls and procedures were effective.





Internal
Controls over Financial Reporting





No change
in our internal control over financial reporting occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item
1.                
 Legal
Proceedings.





None.





Item
1A.               Risk
Factors





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


49


Risks related to our
business and operations





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





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





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





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





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





Sinergia,
our mining contractor, is using equipmentthat is not
new.  Such equipment is subject to the risk of more frequent
breakdowns and need for repair than new equipment.  If the equipment
that we or Sinergia uses breaks down and needs to be repaired or replaced, we
may 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.





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





The gold
deposit we have identified at our El Chanate Project is relatively
low-grade.  If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if we experience problems related to the mining, processing,
or recovery of gold from ore at the 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 initial production phase and to require more
capital than anticipated.  There can be no assurance that our
operations at El Chanate will continue to be profitable.




50


We
have only one project.  As a result, our chances of conducting viable
mining operations are dependent upon the success of that project.





Our only
current operating properties are the El Chanate
concessions.  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.  Our ability to generate profits from operations
could be materially and adversely affected by such fluctuating
prices.





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the twelve months ended
April 30, 2009, the spot price for gold on the London Exchange has fluctuated
between $712.50 and $989.00 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 current
significant instability in the financial markets heightens these
fluctuations.  The price of gold has historically fluctuated widely
and, depending on the price of gold, revenues from mining operations may not be
sufficient to offset the costs of such operations.





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





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




Further,
there can be no assurance that the use of hedging techniques will always be to
our benefit.  Hedging instruments that protect against 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 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.




51


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





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





·
            labor
      disputes,


·
            invalidity
      of governmental orders,


·
            uncertain
      or unpredictable political, legal and economic
    environments,


·
            war
      and civil disturbances,


·
            changes
      in laws or policies,


·
            taxation,


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


·
            governmental
      seizure of land or mining claims,


·
            limitations
      on ownership,


·
            limitations
      on the repatriation of earnings,


·
            increased
      financial costs,


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


·
            foreign
      exchange controls.





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





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





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





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





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





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


52


·
            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.  If we incur material losses or liabilities in excess of
our insurance coverage, our financial position could be materially and adversely
affected.





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





·
            environmental
      hazards,


·
            industrial
      accidents,


·
            metallurgical
      and other processing,


·
            acts
      of God, and/or


·
            mechanical
      equipment and facility performance
problems.





Such
risks could result in:





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


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses and /or


·
            possible
      legal liability.




53


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





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





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





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





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





There
are uncertainties as to title matters in the mining industry.  We
believe that we have good title to our properties; however, any defects in such
title that cause us to lose our rights in mineral properties could jeopardize
our 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 by third parties or governmental agencies. In addition, there can be
no assurance that the concessions in which we have an interest are not subject
to prior unregistered agreements, transfers or claims and title may be affected
by undetected defects.  Any such defects could have a material adverse
effect on us.





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





Gold 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.




54


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





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





·
            the
      location of economic ore bodies,


·
            development
      of appropriate metallurgical
processes,


·
            receipt
      of necessary governmental approvals
and


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





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





·
            the
      price of gold,


·
            the
      particular attributes of the deposit, such as
  its


o
            size,


o
            grade
      and


o
            proximity
      to infrastructure,


·
            financing
      costs,


·
            taxation,


·
            royalties,


·
            land
      tenure,


·
            land
      use,


·
            water
      use,


·
            power
      use,


·
            importing
      and exporting gold and


·
            environmental
      protection.





The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





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





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





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





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




55


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





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





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





None.





Item
      3.
            Defaults Upon Senior
      Securities.





None.





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





None.





Item
      5.
            Other
      Information.





None.





Item
      6.
            Exhibits.




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.




56


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 CORPORATIONRegistrantBy:
                                        /s/ Gifford A.
      DieterleGifford
      A.  DieterleChief
      Executive Officer, President and Treasurer(Duly
      Authorized Officer)By:
                                        /s/ Christopher M.
      ChipmanChristopher
      M. ChipmanChief
      Financial Officer(Principal
      Financial
Officer)


Date:  June
9, 2009


57