Table of Contents





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 January 31, 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





Not
applicable


(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  o





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  o
            Accelerated
      filer  xNon-accelerated
      filer  o
            Smaller
      reporting company  o(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  o  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
      March  1, 2009Common
      Stock, par value $.0001 per share
            193,349,826





Table of Contents
   TABLE OF CONTENTS





PART
      I.FINANCIAL
      INFORMATIONItem
      1.Financial
      Statements
            3Condensed Consolidated Balance Sheet
            4Condensed Consolidated Statement of
    Operations
            5Condensed Consolidated Statement of Stockholders’
      Equity
            7Condensed Consolidated Statement of Cash
    Flows
            8Notes to Condensed Consolidated Financial
      Statements
            10Item
      2.Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            28Item 3. Quantitative and Qualitative Disclosures About
      Market Risk
            44Item
      4.Controls
      and Procedures
            46PART
      II.OTHER
      INFORMATIONItem
      1.Legal
      Proceedings.
            46Item
      1A.Risk
      Factors
            46Item
      2.Unregistered
      Sales of Equity Securities and Use of Proceeds
            53Item
      3.Defaults
      Upon Senior Securities
            53Item
      4.Submission
      of Matters to a Vote of Security Holders
            54Item
      5.Other
      Information
            54Item
      6.Exhibits
            54SIGNATURES
            55








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PART
I.  FINANCIAL INFORMATION





Item 1.  Financial
Statements





The
accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring adjustments), which
we consider necessary for the fair presentation of results for the three and six
months ended January 31, 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 six months ended January 31, 2009 are not
necessarily indicative of the results for the entire fiscal year ending July 31,
2009.






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CAPITAL
      GOLD CORPORATIONCONDENSEDCONSOLIDATED BALANCE SHEET
              (in
      thousands, except for share and per share
  amounts)






ASSETSCurrent
      Assets:
            
            January
      31,
              2009
              (Unaudited)
            
            
            July
      31,
              2008Cash
      and Cash Equivalents
            
            $
            8,848
            
            
            $
            10,992Accounts
      Receivable
            
            
            1,201
            
            
            
            1,477Stockpiles
      and Ore on Leach Pads (Note 4)
            
            
            13,513
            
            
            
            12,176Material
      and Supply Inventories
            
            
            1,207
            
            
            
            937Deposits
            
            
            342
            
            
            
            9Marketable
      Securities  (Note 3)
            
            
            60
            
            
            
            65Prepaid
      Expenses
            
            
            197
            
            
            
            219Loans
      Receivable – Affiliate (Note 9 and13)
            
            
            35
            
            
            
            39Other
      Current Assets (Note 5)
            
            
            1,200
            
            
            
            490Total
      Current Assets
            
            
            26,603
            
            
            
            26,404Mining
      Concessions (Note 8)
            
            
            54
            
            
            
            59Property
      & Equipment – net (Note 6)
            
            
            22,537
            
            
            
            20,918Intangible
      Assets – net (Note 7)
            
            
            342
            
            
            
            181Other
      Assets:Deferred
      Financing Costs
            
            
            516
            
            
            
            599Mining
      Reclamation Bonds
            
            
            82
            
            
            
            82Deferred
      Tax Asset (Note 17)
            
            
            768
            
            
            
            573Security
      Deposits
            
            
            63
            
            
            
            63Total
      Other Assets
            
            
            1,429
            
            
            
            1,317Total
      Assets
            
            $
            50,965
            
            
            $
            48,879LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
            
            $
            786
            
            
            $
            788Accrued
      Expenses (Note 10)
            
            
            4,336
            
            
            
            2,673Derivative
      Contracts (Note 16)
            
            
            987
            
            
            
            930Deferred
      Tax Liability (Note 17)
            
            
            2,492
            
            
            
            2,063Current
      Portion of Long-term Debt (Note 15)
            
            
            4,050
            
            
            
            4,125Total
      Current Liabilities
            
            
            12,651
            
            
            
            10,579Reclamation
      and Remediation Liabilities (Note 11)
            
            
            1,215
            
            
            
            1,666Other
      liabilities
            
            
            43
            
            
            
            62Long-term
      Debt (Note 15)
            
            
            6,200
            
            
            
            8,375Total
      Long-term Liabilities
            
            
            7,458
            
            
            
            10,103Commitments
      and Contingencies
            
            
            —
            
            
            
            —Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share;Authorized
      300,000,000 shares; Issued andOutstanding
      193,349,826 and 192,777,326 shares, respectively
            
            
            19
            
            
            
            19Additional
      Paid-In Capital
            
            
            63,668
            
            
            
            63,074Accumulated
      Deficit
            
            
            (27,363
            )
            
            
            (32,496
            )Deferred
      Financing Costs
            
            
            (2,209
            )
            
            
            (2,611
            )Deferred
      Compensation
            
            
            (433
            )
            
            
            (549
            )Accumulated
      Other Comprehensive Income (Note 12)
            
            
            (2,826
            )
            
            
            760Total
      Stockholders’ Equity
            
            
            30,856
            
            
            
            28,197Total
      Liabilities and Stockholders’ Equity
            
            $
            50,965
            
            
            $
            48,879The
      accompanying notes are an integral part of the financial
      statements.






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CAPITAL
      GOLD CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
              (UNAUDITED)(in
      thousands, except for share and per share amounts)






For
      The Three Months EndedJanuary
      31,2009
            
            
            2008RevenuesSales
      – Gold, net
            
            $
            11,369
            
            
            $
            8,043Costs
      and Expenses:Costs
      Applicable to Sales
            
            
            3,655
            
            
            
            2,419Depreciation
      and Amortization
            
            
            755
            
            
            
            881General
      and Administrative
            
            
            1,061
            
            
            
            1,371Exploration
            
            
            406
            
            
            
            496Total
      Costs and Expenses
            
            
            5,877
            
            
            
            5,167Income
      (Loss) from Operations
            
            
            5,492
            
            
            
            2,876Other
      Income (Expense):Interest
      Income
            
            
            11
            
            
            
            31Interest
      Expense
            
            
            (227
            )
            
            
            (288
            )Other
      Income (Expense)
            
            
            (24
            )
            
            
            14Loss
      on change in fair value of derivative
            
            
            (274
            )
            
            
            (342
            )Total
      Other Expense
            
            
            (514
            )
            
            
            (585
            )Income
      before Income Taxes
            
            
            4,978
            
            
            
            2,291Income
      Tax Expense
            
            
            (1,782
            )
            
            
            (165
            )Net
      Income
            
            $
            3,196
            
            
            $
            2,126Income
      Per Common ShareBasic
            
            $
            0.02
            
            
            $
            0.01Diluted
            
            $
            0.02
            
            
            $
            0.01Basic
      Weighted Average Common Shares Outstanding
            
            
            193,195,478
            
            
            
            174,764,787Diluted
      Weighted Average Common Shares Outstanding
            
            
            198,706,128
            
            
            
            196,191,405The
      accompanying notes are an integral part of the financial
      statements.








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CAPITAL
      GOLD CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF OPERATIONS
              (UNAUDITED)(in
      thousands, except for share and per share amounts)




For
      The Six Months EndedJanuary
      31,2009
            
            
            2008RevenuesSales
      – Gold, net
            
            $
            20,544
            
            
            $
            14,569Costs
      and Expenses:Costs
      Applicable to Sales
            
            
            6,697
            
            
            
            4,568Depreciation
      and Amortization
            
            
            1,458
            
            
            
            1,830General
      and Administrative
            
            
            2,438
            
            
            
            2,280Exploration
            
            
            896
            
            
            
            631Total
      Costs and Expenses
            
            
            11,489
            
            
            
            9,309Income
      from Operations
            
            
            9,055
            
            
            
            5,260Other
      Income (Expense):Interest
      Income
            
            
            24
            
            
            
            51Interest
      Expense
            
            
            (427
            )
            
            
            (569
            )Other
      Expense
            
            
            (232
            )
            
            
            (1
            )Loss
      on change in fair value of derivative
            
            
            (578
            )
            
            
            (703
            )Total
      Other Expense
            
            
            (1,213
            )
            
            
            (1,222
            )Income
      before Income Taxes
            
            
            7,842
            
            
            
            4,038Income
      Tax Expense
            
            
            (2,709
            )
            
            
            (165
            )Net
      Income
            
            $
            5,133
            
            
            $
            3,873Income
      Per Common ShareBasic
            
            $
            0.03
            
            
            $
            0.02Diluted
            
            $
            0.03
            
            
            $
            0.02Basic
      Weighted Average Common Shares Outstanding
            
            
            193,113,019
            
            
            
            172,809,806Diluted
      Weighted Average Common Shares Outstanding
            
            
            198,919,865
            
            
            
            194,594,693The
      accompanying notes are an integral part of the financial
      statements.






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CAPITAL
      GOLD CORPORATIONCONDENSED 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
            
            
            $
            (32,496
            )
            
            $
            760
            
            
            $
            (2,611
            )
            
            $
            (549
            )
            
            $
            28,197Amortization
      of deferred finance costs
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            402
            
            
            
            —
            
            
            
            402Equity
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            359
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            116
            
            
            
            475Common
      stock issued upon the exercising of options and warrants
            
            
            350,000
            
            
            
            —
            
            
            
            122
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            122Issuance
      of restricted common stock
            
            
            222,500
            
            
            
            —
            
            
            
            113
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            
            113Net
      income for the six months ended January 31, 2009
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,133
            
            
            
            —
            
            
            
            
            
            
            
            —
            
            
            
            5,133Change
      in fair value on interest rate swaps
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (51
            )
            
            
            —
            
            
            
            —
            
            
            
            (51
            )Unrealized
      loss on marketable securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5
            )
            
            
            —
            
            
            
            —
            
            
            
            (5
            )Equity
      adjustment from foreign currency translation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,530
            )
            
            
            —
            
            
            
            —
            
            
            
            (3,530
            )Total
      comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,547Balance
      at January 31, 2009
            
            
            193,349,826
            
            
            $
            19
            
            
            $
            63,668
            
            
            $
            (27,363
            )
            
            $
            (2,826
            )
            
            $
            (2,209
            )
            
            $
            (433
            )
            
            $
            30,856






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




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CAPITAL
      GOLD CORPORATIONCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
              (UNAUDITED)(in
      thousands, except for share and per share
  amounts)






For
      TheSix
      Months EndedJanuary
      31,2009
            
            
            2008Cash
      Flow From Operating Activities:Net
      Income
            
            $
            5,133
            
            
            $
            3,873Adjustments
      to Reconcile Net Income toNet
      Cash Provided by (Used in) Operating Activities:Depreciation
      and Amortization
            
            
            1,458
            
            
            
            1,830Accretion
      of Reclamation and Remediation
            
            
            75
            
            
            
            73Loss
      on change in fair value of derivative
            
            
            578
            
            
            
            703Equity
      Based Compensation
            
            
            588
            
            
            
            327Changes
      in Operating Assets and Liabilities:Decrease
      in Accounts Receivable
            
            
            276
            
            
            
            —Decrease
      (Increase) in Prepaid Expenses
            
            
            22
            
            
            
            (468
            )Increase
      in Inventory
            
            
            (852
            )
            
            
            (3,888
            )Increase
      in Other Current Assets
            
            
            (709
            )
            
            
            (248
            )(Increase)
      Decrease in Other Deposits
            
            
            (334
            )
            
            
            611Increase
      in Mining Reclamation Bond
            
            
            —
            
            
            
            (46
            )Increase
      in Deferred Tax Asset
            
            
            (195
            )
            
            
            —(Decrease)
      Increase in Accounts Payable
            
            
            (2
            )
            
            
            452Decrease
      in Derivative Liability
            
            
            (572
            )
            
            
            (587
            )Decrease
      in Other Liability
            
            
            (18
            )
            
            
            —Decrease
      in Reclamation and Remediation
            
            
            (526
            )
            
            
            —Increase
      in Deferred Tax Liability
            
            
            429
            
            
            
            —Increase
      in Accrued Expenses
            
            
            1,663
            
            
            
            848Net
      Cash Provided By Operating Activities
            
            
            7,014
            
            
            
            3,480Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property andEquipment
            
            
            (3,323
            )
            
            
            (2,809
            )Purchase
      of Intangibles
            
            
            (180
            )
            
            
            (90
            )Net
      Cash Used in Investing Activities
            
            
            (3,503
            )
            
            
            (2,899
            )The
      accompanying notes are an integral part of the financial
      statements.





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CAPITAL
      GOLD CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED(UNAUDITED)(in
      thousands, except for share and per share
  amounts)






For
      TheSix
      Months EndedJanuary
      31,2009
            
            
            2008Cash
      Flow From Financing Activities:Advances
      to Affiliate
            
            
            4
            
            
            
            8Repayments
      on Notes Payable
            
            
            (2,250
            )
            
            
            —Proceeds
      From Issuance of Common Stock
            
            
            121
            
            
            
            2,156Net
      Cash (Used in) Provided By Financing Activities
            
            
            (2,125
            )
            
            
            2,164Effect
      of Exchange Rate Changes
            
            
            (3,530
            )
            
            
            27(Decrease)
      Increase In Cash and Cash Equivalents
            
            
            (2,144
            )
            
            
            2,772Cash
      and Cash Equivalents - Beginning
            
            
            10,992
            
            
            
            2,225Cash
      and Cash Equivalents – Ending
            
            $
            8,848
            
            
            $
            4,997Supplemental
      Cash Flow Information:Cash
      Paid For Interest
            
            $
            465
            
            
            $
            598Cash
      Paid For Income Taxes
            
            $
            1,569
            
            
            $
            1Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
            
            $
            51
            
            
            $
            261The
      accompanying notes are an integral part of the financial
      statements.






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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 United States (“U.S.”) generally accepted accounting
principles (“GAAP”) for interim financial information and 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 Industriale”), a Mexican corporation 100% owned by two of the
Company’s officers and directors for mining support services. These services
include, but are not limited to, the payment of mining salaries and related
costs. Caborca Industrial bills the Company for these services at 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/A 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 $0.33 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.




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


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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 123, it will recognize compensation cost relating to the
unvested portion of awards granted prior to the date of adoption, using the same
estimate of the grant-date fair value and the same attribution method used to
determine the pro forma disclosures under SFAS 123R, 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
six months ended January 31, 2009 and 2008, were $0.48 and $0.32, respectively.
The fair values of the options and warrants granted were estimated based on the
following weighted average assumptions:




Six
      months ended January 31,2009
            
            
            2008Expected
      volatility
            
            
            69.98
      – 79.72%
            
            
            
            47.60
      – 58.69%Risk-free
      interest rate
            
            
            .86
      – 1.56%
            
            
            
            3.74%Expected
      dividend yield
            
            
            —
            
            
            
            —Expected
      life
            
            2.0
      – 5.0 years
            
            
            6.3
      years




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




Number
      of
              Options
            
            
            Weighted
              Average
              exercise
              price
            
            
            Weighted
              average
              remaining
              contracted
              term
      (years)
            
            
            Aggregate
              intrinsic
              valueOutstanding
      at July 31, 2007
            
            
            2,500,000
            
            
            $
            .34
            
            
            
            1.20
            
            
            $
            255Options
      granted
            
            
            2,500,000
            
            
            
            .63Options
      exercised
            
            
            (1,450,000
            )
            
            
            .32
            
            
            
            —
            
            
            
            —Options
      expired
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Warrants
      and options outstanding at July 31, 2008
            
            
            3,550,000
            
            
            $
            .55
            
            
            
            4.00
            
            
            $
            334Options
      granted
            
            
            1,000,000
            
            
            $
            .49
            
            
            
            —
            
            
            
            —Options
      exercised
            
            
            ( 250,000
            )
            
            
            .34
            
            
            
            —
            
            
            
            —Options
      expired
            
            
            ( 300,000
            )
            
            
            .35
            
            
            
            —
            
            
            
            —Warrants
      and options outstanding at January 31, 2009
            
            
            4,000,000
            
            
            $
            .56
            
            
            
            5.15
            
            
            $
            263Warrants
      and options exercisable at January 31, 2009
            
            
            1,833,300
            
            
            $
            .54
            
            
            
            2.45
            
            
            $
            170


Unvested
stock option and warrant balances for employees at January 31, 2009 are as
follows:


Number
      of
                Options
            
            
            Weighted
              Average
              Exercise
              price
            
            
            Weighted
              average
              remaining
              contracted
              term
      (years)
            
            
            Aggregate
              Intrinsic
      valueOutstanding
      at July 31, 2007
            
            
            150,000
            
            
            $
            .32
            
            
            
            0.67
            
            
            $
            18Options
      granted
            
            
            2,500,000
            
            
            $
            .63
            
            
            
            —
            
            
            
            —Options
      vested
            
            
            (900,000
            )
            
            $
            .58
            
            
            
            —
            
            
            
            —Unvested
      Options outstanding at July 31, 2008
            
            
            1,750,000
            
            
            $
            .63
            
            
            
            4.49
            
            
            $
            8Options
      granted
            
            
            1,000,000
            
            
            $
            .49
            
            
            
            —
            
            
            
            —Options
      vested
            
            
            (583,300
            )
            
            
            .63
            
            
            
            —
            
            
            
            —Unvested
      Options outstanding at January 31, 2009
            
            
            2,166,700
            
            
            $
            .59
            
            
            
            5.77
            
            
            $
            140









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Stock
      option and warrant activity for non-employees during the year ended July
      31, 2008, and  six months ended January 31, 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
            
            
            $
            2,578Options
      granted
            
            
            1,715,000
            
            
            
            .66
            
            
            
            —
            
            
            
            —Options
      exercised
            
            
            (21,555,542
            )
            
            
            .33
            
            
            
            —
            
            
            
            —Options
      expired
            
            
            ( 680,000
            )
            
            
            .30
            
            
            
            —
            
            
            
            —Warrants
      and options outstanding at July 31, 2008
            
            
            2,015,000
            
            
            $
            .62
            
            
            
            3.54
            
            
            $
            54Options
      granted
            
            
            1,400,000
            
            
            $
            .50
            
            
            
            —
            
            
            
            —Options
      exercised
            
            
            (100,000
            )
            
            
            .36
            
            
            
            —
            
            
            
            —Options
      expired
            
            
            (100,000
            )
            
            
            —
            
            
            
            —Warrants
      and options outstanding at January 31, 2009
            
            
            3,215,000
            
            
            $
            .58
            
            
            
            3.78
            
            
            $
            154Warrants
      and options exercisable at January 31, 2009
            
            
            1,974,958
            
            
            $
            .61
            
            
            
            1.92
            
            
            $
            35




Unvested
stock options and warrant balances for non-employees at January 31, 2009 are as
follows:




Number
      of
                Options
            
            
            Weighted
              Average
              Exercise
              price
            
            
            Weighted
              average
              remaining
              contracted
              term
      (years)
            
            
            Aggregate
              Intrinsic
      valueOutstanding
      at July 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Options
      granted
            
            
            650,000
            
            
            $
            .63
            
            
            
            —
            
            
            
            —Options
      vested
            
            
            (195,000
            )
            
            $
            .63
            
            
            
            —
            
            
            
            —Unvested
      Options outstanding at July 31, 2008
            
            
            455,000
            
            
            $
            .63
            
            
            
            4.49
            
            
            $
            3Options
      granted
            
            
            1,275,000
            
            
            $
            .49
            
            
            
            —
            
            
            
            —Options
      vested
            
            
            (457,458
            )
            
            
            .50
            
            
            
            —
            
            
            
            —Unvested
      Options outstanding at January 31, 2009
            
            
            1,272,542
            
            
            $
            .54
            
            
            
            5.38
            
            
            $
            179




The
impact on the Company’s results of operations of recording equity based
compensation for the six months ended January 31, 2009 and 2008 for employees
and non-employees was approximately $588 and $327 and reduced earnings per share
by $0.00 and $0.00 per basic and diluted share, respectively.




As of
January 31, 2009, there was approximately $983 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)January
      31,
              2009
            
            
            July
      31,
              2008Marketable
      equity securities, at cost
            
            $
            50
            
            
            $
            50Marketable
      equity securities, at fair value
              (See
      Notes 9 & 13)
            
            $
            60
            
            
            $
            65






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




(in
      thousands)January
      31,
              2009
            
            
            July
      31,
              2008Ore
      on leach pads
            
            $
            13,513
            
            
            $
            12,176Total
            
            $
            13,513
            
            
            $
            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)January
      31,
              2009
            
            
            July
      31,
              2008Value
      added tax to be refunded
            
            $
            1,194
            
            
            $
            425Other
            
            
            6
            
            
            
            65Total
      Other Current Assets
            
            $
            1,200
            
            
            $
            490




NOTE 6 –
Property and Equipment




Property
and Equipment consist of the following:




(in
      thousands)January
      31,
              2009
            
            
            July
      31,
              2008Process
      equipment and facilities
            
            $
            23,084
            
            
            $
            21,693Mining
      equipment
            
            
            2,248
            
            
            
            974Mineral properties
            
            
            141
            
            
            
            141Construction
      in progress
            
            
            1,876
            
            
            
            1,277Computer
      and office equipment
            
            
            343
            
            
            
            316Improvements
            
            
            16
            
            
            
            16Furniture
            
            
            47
            
            
            
            38Total
            
            
            27,755
            
            
            
            24,455Less:
      accumulated depreciation
            
            
            (5,218
            )
            
            
            (3,537
            )Property
      and equipment, net
            
            $
            22,537
            
            
            $
            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.






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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 $337 as an initial
deposit on 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 six months ended January 31, 2009 and 2008 was approximately
$1,681 and $1,274, respectively.





NOTE 7 -
Intangible Assets





Intangible
assets consist of the following:





(in
      thousands)January
      31,
              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
            
            
            (560
            )
            
            
            (541
            )Intangible
      assets, net
            
            $
            342
            
            
            $
            181





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 January 31, 2009.





Amortization expense for the six months
ended January 31, 2009 and 2008 was approximately $19 and $391,
respectively.  The Repurchase of Net Profits Interest was fully
amortized as of April 30, 2008.





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NOTE 8 -
Mining Concessions





Mining
concessions consist of the following:





(in
      thousands)January
      31,
              2009
            
            
            July
      31,
              2008El
      Chanate
            
            $
            45
            
            
            $
            45El
      Charro
            
            
            25
            
            
            
            25Total
            
            
            70
            
            
            
            70Less:
      accumulated amortization
            
            
            (16
            )
            
            
            (11
            )Total
            
            $
            54
            
            
            $
            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 six months
ended January 31, 2009 and 2008 was approximately $5 and $4,
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).




NOTE 10 –
Accrued Expenses




Accrued
expenses consist of the following:


(in
      thousands)January
      31,
              2009
            
            
            July
      31,
              2008Net
      profit interest
            
            $
            1,000
            
            
            $
            753Net
      smelter return
            
            
            263
            
            
            
            189Mining
      contractor
            
            
            216
            
            
            
            193Income
      tax payable
            
            
            1,568
            
            
            
            777Utilities
            
            
            132
            
            
            
            110Interest
            
            
            34
            
            
            
            72Salaries,
      wages and employee benefits
            
            
            780
            
            
            
            334Other
      liabilities
            
            
            343
            
            
            
            245$
            4,336
            
            
            $
            2,673






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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 of 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 January 31, 2009,
approximately $1,215 was accrued for reclamation obligations relating to mineral
properties in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations.” For the six months ended January 31, 2009, the Company
reclaimed certain areas at its El Chanate mine representing approximately
$23.  Accretion expense for the six months ended January 31, 2009 and
2008 was approximately $75 and $73, respectively.




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)
            
            
            (3,530
            )
            
            
            (5
            )
            
            
            (51
            )
            
            
            (3,586
            )Balance
      as of January 31, 2009
            
            $
            (2,849
            )
            
            $
            10
            
            
            $
            13
            
            
            $
            (2,826
            )




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 six months ended January 31,
2009.





NOTE 13 -
Related Party Transactions





In August
2002, the Company purchased marketable equity securities of a related company.
The Company also recorded approximately $4 and $3 in expense reimbursements
including office rent from this entity for the six months ended January 31, 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 $2,387 and $1,522 for the six months
ended January 31, 2009 and 2008, respectively.




- 16
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The
Company incurred approximately $11 during the six months ended January 31, 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 (the “Code”).




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 six months ended January 31, 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 $122 during the six months ended
January 31, 2009 from the exercising of an aggregate of 350,000 options issued
to officers and directors.




During
the six months ended January 31, 2009 and 2008, the Company recorded
approximately $116 and $349 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.




- 17
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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.




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 two year options 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 two year options 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.




- 18
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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 vests 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 2,250,000 options received by these
individuals totaling $647,000.  The grant date fair value of each
stock option was $0.29.





NOTE 15 -
Debt




Long term
debt consists of the following:




(in
      thousands)January
      31,
              2009
            
            
            July
      31,
              2008Total
      debt
            
            $
            10,250
            
            
            $
            12,500Less
      current portion
            
            
            4,050
            
            
            
            4,125Long-term
      debt
            
            $
            6,200
            
            
            $
            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 Original Agreement.  As of January 31, 2009, the outstanding
amount on the term note was $10,250 and accrued interest on this facility was
approximately $34.




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 consisting of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900


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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 January 31, 2009.  Principal under the Term Loan and the
Revolving Loans 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 has not yet complied with these regulations due to
the absence of professionals in the area qualified to conduct studies to
facilitate compliance.  MSR has agreed to make a commercially
reasonable effort to come into compliance with these
requirements.  The Company believes it has met the insurance
requirements required by the Lender.  MSR has made significant
progress on compliance with the aforementioned Mexican federal law regulations
and believes it will be compliant by April 2009.  The original waiver
letter expired on March 9, 2009; therefore, on March 6, 2009, the Company
obtained a three month extension from the Lender.




As of
January 31, 2009, except for the aforementioned waiver, the Company and its
related entities were in compliance with all debt covenants and default
provisions.




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




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.  The volume of these derivative positions represents about 68%
and 90% of sales during the six months ended


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January
31, 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.





The following is a reconciliation of
the derivative contracts regarding the Company’s Gold Price Protection
agreement:





(in
      thousands)Liability
      balance as of July 31, 2008
            
            $
            738Loss
      on change in fair value of derivative
            
            
            569Net
      cash settlements
            
            
            (588
            )Liability
      balance as of January 31, 2009
            
            $
            719





For the
six months ended January 31, 2009 and 2008, the Company has paid Standard Bank
approximately $588 and $591 on the settlement of 16,811 and 16,895 ounces,
respectively.  Since inception, the Company has paid Standard Bank an
aggregate of approximately $2,229 on the settlement of 63,694
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.  The remaining ounces to settle
with regard to this agreement amounted to 58,233 as of January 31,
2009.




Rather
than modifying the original Gold Price Protection agreement with Standard Bank
to satisfy these forward sale obligations, the Company has 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.





See Note
19 - Subsequent Events for more information regarding the close-out of this
arrangement.





Interest Rate Swap
Agreement





On
October 11, 2006, prior to our initial draw on the Credit Facility, the Company
entered into 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.




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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
            
            
            95Interest
      expense (income)
            
            
            50Net
      cash settlements
            
            
            (69
            )Liability
      balance as of January 31, 2009
            
            $
            268




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.




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
      Results4/30/08
            
            Interest
      Rate contracts
            
            $
            28
            
            Interest
      Income (Expense)
            
            
            (24
            )
            
            
            —
            
            
            
            N/A7/31/08
            
            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/A




Quarter
              Ended
            
            Derivatives
      Not
              Designated
      in
              Hedging
      Relationships
            
            Location
      of Results
            
            Amount
      of
              Gain
      (Loss)4/30/08
            
            Gold
      contracts
            
            Other
      Income (Expense)
            
            $
            (337
            )7/31/08
            
            Gold
      contracts
            
            Other
      Income (Expense)
            
            $
            (319
            )10/31/08
            
            Gold
      contracts
            
            Other
      Income (Expense)
            
            $
            (304
            )1/31/09
            
            Gold
      contracts
            
            Other
      Income (Expense)
            
            $
            (274
            )




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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
      DerivativesApril
      30, 2008
            
            Balance
      Sheet Location
            
            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
            
            Current
      Liabilities
            
            $
            274Derivatives
      designated as non-hedging instrumentsGold
      derivatives
            
            Current
      Liabilities
            
            $
            702July
      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
            
            $
            734January
      31, 2009
            
            Balance
      Sheet Location
            
            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
            
            Current
      Liabilities
            
            $
            268Derivatives
      designated as non-hedging instrumentsGold
      derivatives
            
            Current
      Liabilities
            
            $
            719


NOTE 17 –
Income Taxes




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




(in
      thousands)January
      31,
              2009
            
            
            January
      31,
              2008Current:United
      States
            
            $
            —
            
            
            $
            —Foreign
            
            
            (1,924
            )
            
            
            (165
            )(1,924
            )
            
            
            (165
            )Deferred:United
      States
            
            
            —
            
            
            
            —Foreign
            
            
            (785
            )
            
            
            ——
            
            
            
            —Total
            
            $
            (2,709
            )
            
            $
            (165
            )





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





(in
      thousands)January
      31,
              2009
            
            
            January
      31,
              2008United
      States
            
            $
            (2,965
            )
            
            $
            (2,780
            )Foreign
            
            
            10,807
            
            
            
            6,818Total
            
            $
            7,842
            
            
            $
            4,038




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.




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




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 the Company’s beginning January 1, 2009,
and are not expected to have a significant impact on the Company.
   - 24
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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).




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 January 31, 2009
              (in
      thousands)Assets:
            
            Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Cash
      equivalents
            
            $
            4,314
            
            
            $
            4,314
            
            
            $
            —
            
            
            $
            —Marketable
      securities
            
            
            60
            
            
            
            60
            
            
            
            —
            
            
            
            —$
            4,374
            
            
            $
            4,374
            
            
            $
            —
            
            
            $
            —Liabilities:Gold
      price protection
            
            $
            719
            
            
            $
            —
            
            
            $
            719
            
            
            $
            —Interest
      rate swap
            
            
            268
            
            
            
            —
            
            
            
            268
            
            
            
            —$
            987
            
            
            $
            —
            
            
            $
            987
            
            
            $
            —





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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’s derivative instrument is valued using pricing models. Where possible,
the Company verifies the values produced by its pricing models to market prices.
Valuation models require a variety of inputs, including contractual terms,
market prices, yield curves, credit spreads, measures of volatility, and
correlations of such inputs. The Company’s derivative (Gold Price Protection
arrangement) trades in liquid markets, and as such, model inputs can generally
be verified and do not involve significant management judgment. Such instruments
are classified within Level 2 of the fair value hierarchy.
  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
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.
  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.
  The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:
  * FASB
Statements of Financial Accounting Standards and Interpretations, FASB Statement
133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research
Bulletins and Accounting Principles Board Opinions that are not superseded by
actions of the FASB, and Rules and interpretive releases of the SEC for SEC
registrants.


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* FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position.




* AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.




Statement
162 is effective 60 days following the SEC's approval of the PCAOB amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company believes the adoption of this standard will not
have an impact on the financial condition or the results of the Company’s
operations.




The FASB
issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts.This new standard clarifies how FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities.  It also
requires expanded disclosures about financial guarantee insurance
contracts.




Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise's risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008.  Except for the required disclosures,
earlier application is not permitted.  The Company believes the
adoption of this standard will not have an impact on the financial condition or
the results of the Company’s operations.




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 January 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.




NOTE 19 –
Subsequent Events





In
February 2009, the Company paid $337 as the second deposit on the procurement of
a new secondary crusher for the El Chanate mine.  The amount paid
towards this commitment is $674.  The total cost for this piece of
equipment is approximately $1,012.




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 $1,900. In
conjunction with the settlement of the gold price protection agreement, the
Company will incur an other expense of approximately $1,200 during the fiscal
quarter ended April 30, 2009.








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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.





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%


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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%.





Metric
            U.S.Materials
              Reserves
              Proven
              Probable
              Total
      Reserves
              Waste
              Total
              
              Contained
      Gold
              
              Production
              Ore
      Crushed**
              
              Operating
      Days/Year
              Gold
      Plant Average Recovery
              Average
      Annual Production**
              Total
      Gold Produced
            26.7
      Million Tonnes  @  0.68   g/t*
              12.8 Million
      Tonnes  @  0.61
      g/t*
              39.5
      Million
      Tonnes  @  0.66   g/t*
              24.1 Million
      Tonnes
              63.6
      Million Tonnes
              
              25.89
      Million grams
              
              2.6
      Million Tonnes /Year
              7,500
      Mt/d
              
              365
      Days per year
              66.8
      %
              1.35  Million
      grams
              17.29
      Million grams
            29.4
      Million Tons @  0.0198 opt*
              14.1 Million
      Tons @  0.0179
      opt*
              43.5
      Million Tons @  0.0192 opt*
              26.6 Million
      Tons
              70.1
      Million tons
              
              832,280  Oz
              
              2.87
      Million Tons/Year
              8,267
      t/d
              
              365
      Days per year
              66.8
      %
              43,414  Oz
              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;




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




·
            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
              Basic
      Parameters
              Gold
      Price
              Shipping
      and Refining
              Gold
      Recovery
              Royalty
              
              Operating
      Costs per Tonne of Ore
              Mining
      *
              Processing/Leach
      Pad
              G&A
              Total
              
              Internal Cutoff
      Grade
              Head
      Grade Cutoff (66.8% recov.)
              Recovered
      Gold Grade Cutoff
            Internal
      Cutoff Grade
              
              US$550/oz
              US$
      4.14/oz
              66.8%
              4%
      of NSR
              
              $
      per Tonne of Ore
              0.070
              1.980
              0.800
              2.850
              
              Grams
      per Tonne
              0.25
              0.17
            Break
      Even Cutoff Grade
              
              US$550/oz
              US$
      4.14/oz
              66.8%
              4%
      of NSR
              
              $
      per Tonne of Ore
              1.360
              1.980
              0.800
              4.140
              
              Grams
      per Tonne
              0.37
              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 six months ended January 31, 2009 and 2008, we sold 24,690 and 18,744 ounces
of gold, respectively.  Gold production at El Chanate is currently at
a level of approximately 5,000 ounces of gold per month. We have implemented
steps which we anticipate will effectively increase annualized production rates
to approximately 70,000 ounces per year in 2009.  We have paid $674
over the past few months as deposits on the procurement of a new secondary
crusher with the intention of increasing the throughput within the crushing
circuitThe total
cost for this piece of equipment is approximately $1,012.  We
completed the leach pad expansion and ADR plant improvements in January
2009.  Management has
been, and anticipates that it will continue to, fund expansion costs with its
cash on hand as well as through revenues from gold sales.






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





Proven and probable mineral reserve (Ktonnes of
      ore)
            
            January
      31,
              2009
            
            
            July
      31,
              2008Ore
            
            
            —
            
            
            
            —Beginning
      balance (Ktonnes)
            
            
            35,286
            
            
            
            38,785Additions
            
            
            —
            
            
            
            —Reductions
            
            
            (1,905
            )
            
            
            (3,499
            )Ending
      Balance
            
            
            33,381
            
            
            
            35,286Contained
      goldBeginning
      balance (thousand of ounces)
            
            
            719
            
            
            
            814Additions
            
            
            —
            
            
            
            —Reductions
            
            
            (53
            )
            
            
            (95
            )Ending
      Balance
            
            
            666
            
            
            
            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.




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 a
60 mile drive 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.




The
Company reports total cash cost on a sales basis. Total cash cost includes
mine site operating costs such as mining, processing, administration, royalties
and production taxes, but is exclusive
of amortization, reclamation, capital and exploration costs. Total cash cost is
then divided by ounces sold to arrive at
the total cash cost of sales. The measure, along with sales, is considered to be
a key indicator of a company’s ability
to generate operating earnings and cash flow from its mining operations. This
data is furnished to provide additional
information and is a non-GAAP measure. It should not be considered in isolation
as a substitute for measures of
performance prepared in accordance with GAAP and is not necessarily indicative
of operating costs presented under GAAP.


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





Net
income for the three months ended January 31, 2009 and 2008 was approximately
$3,196 and $2,126, respectively, representing an increase of approximately 50%
over the prior period. Net income before income taxes was $4,978 and $2,291 for
the three months ended January 31, 2009 and 2008, respectively, which
represented an increase of 117%.  Net income and net income before tax
increased primarily as a result of higher revenues and ounces sold during the
current quarter as compared to the same period a year ago.  There was
minimal income tax expense in the prior period due to a net operating loss
carryforward within our wholly-owned subsidiary, MSR, that offset tax that would
otherwise have been due.  This loss carry-forward was fully utilized
as of December 31, 2007.   Net income per common share was $0.02
and $0.01 for the three months ended January 31, 2009 and 2008, on both a basic
and diluted basis, respectively.


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Revenues & Costs
Applicable to Sales





Gold
sales in the current period totaled approximately $11,369 as compared to $8,043
in the prior period representing an increase of approximately $3,326 or
41%.  We sold 13,277 ounces at an average realizable price per ounce
of approximately $856 in the current period.  We sold 9,550 ounces at
an average realizable price per ounce of $843 during the same period last
year.





Costs
applicable to sales were approximately $3,655 and $2,419, respectively, for the
three months ended January 31, 2009 and 2008, an increase of approximately
$1,236 or 51%, which increased in conjunction with our increase in
revenues.  Our cash cost and total cost per ounce sold, including
royalties, was $251 and $290, respectively, for the three months ended January
31, 2009.  For the three months ended January 31, 2008, cash and total
cost per ounce sold was $252 and $315, respectively.  Cash costs in
the current period were consistent with the same period in the prior
year.  Total costs per ounce sold decreased versus the same period
last year primarily due to 3,727 more gold ounces being sold during the current
period versus the prior period.





Revenues
from by-product sales (silver) are credited to Costs applicable to sales as
a by-product credit.  Silver sales totaled 20,000 ounces amounting to
approximately $225 during the three months ended January 31,
2009.   There were no silver sales during the same period last
year.





Depreciation and
Amortization





Depreciation
and amortization expense during the three months ended January 31, 2009 and 2008
was approximately $755 and $881, respectively.  The primary reason for
the decrease of approximately $126 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.  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
$247 and $272 of depreciation and amortization expense during the three months
ended January 31, 2009 and 2008, respectively.





General and Administration
Expense





General and administrative expenses
during the three months ended January 31, 2009 were approximately $1,061, a
decrease of approximately $310 or 23% from the three months ended January 31,
2008. The decrease in general and administrative expenses was primarily due to
smaller bonuses paid in the three months ended January 31, 2009 compared to the
three months ended January 31, 2008.





Exploration
Expense





Exploration
expense during the three months ended January 31, 2009 and 2008 was
approximately $406 and $496, respectively, or a decrease of $90 or
18%.  Exploration costs during the current period mainly consisted of
on-going exploration and geochemical work being conducted on our leased
concessions located northwest of Saric, Sonora.  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 which
represented the primary reason for costs decreasing during the current
period.





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Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended January 31, 2009 and 2008, was approximately $274 and $342, respectively,
and was reflected as an “Other Expense.”This was primarily due
to the change in fair value of our two identically structured derivative
contracts with Standard Bank which correlates to fluctuations in the gold
price.  These contracts were not designated as hedging derivatives;
and therefore, special hedge accounting does not apply.





Interest expense was approximately
$227 for the three months ended January 31, 2009 compared to approximately $288
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 January 31, 2009, there was
$10,250 outstanding on our term note.





Six months ended January 31,
2009 compared to six months ended January 31, 2008





Net
income for the six months ended January 31, 2009 and 2008 was approximately
$5,133 and $3,873, respectively, representing an increase of approximately 33%
over the prior period.  Net income before income taxes was $7,842 and
$4,038 for the six months ended January 31, 2009 and 2008, respectively, which
represented an increase of 94%.  Net income and net income before tax
increased primarily as a result of higher revenues and ounces sold during the
six months ended January 31, 2009, as compared to the same period a year
ago.  There was minimal income tax expense in the prior period due to
a net operating loss carryforward within our wholly-owned subsidiary, MSR, that
offset tax that would otherwise would have been due.  This loss
carry-forward was fully utilized as of December 31, 2007.   Net
income per common share was $0.03 and $0.02 for the six months ended January 31,
2009 and 2008, on both a basic and diluted basis, respectively.





Revenues & Costs
Applicable to Sales





Gold
sales in the current period totaled approximately $20,544 as compared to $14,569
in the prior period representing an increase of approximately $5,975 or
41%.  We sold 24,690 ounces at an average realizable price per ounce
of approximately $832 in the current period.  We sold 18,744 ounces at
an average realizable price per ounce of $779 during the same period last
year.





Costs
applicable to sales were approximately $6,697 and $4,568, respectively, for the
six months ended January 31, 2009 and 2008, an increase of approximately $2,129
or 47%, which increased in conjunction with our increase in
revenues.  Our cash cost and total cost per ounce sold, including
royalties, was $260 and $299, respectively, for the six months ended January 31,
2009.  For the six months ended January 31, 2008, cash and total cost
per ounce sold was $246 and $314, respectively.  The primary reason we
experienced a cash cost increase this period versus the prior period was
attributable to the Company incurring $806 on the net profit interest due to
Royal Gold.  As of January 31, 2009, we had approximately $1,000
accrued towards this net profit interest which represents the total amount due
under our agreement.





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 $524 and $145 for the six
months ended January 31, 2009 and 2008, on silver ounces sold of 45,334 and
10,000, respectively.


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Depreciation and
Amortization





Depreciation
and amortization expense during the six months ended January 31, 2009 and 2008
was approximately $1,458 and $1,830, respectively.  The primary reason
for the decrease of approximately $372 or 20% 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.  This was fully amortized during
the quarterly period ended April 30, 2008 and $378 was amortized through January
31, 2008.  Depreciation and amortization also includes deferred
financing costs resulting from the credit arrangements entered into with
Standard Bank Plc.  This accounted for approximately $484 and $544 of
depreciation and amortization expense during the six months ended January 31,
2009 and 2008, respectively.




General and Administration
Expense





General
and administrative expenses during the six months ended January 31, 2009 were
approximately $2,438, an increase of approximately $158 or 7% from the six
months ended January 31, 2008. The increase in general and administrative
expenses resulted primarily from: 1) higher salaries and wages due to the hiring
of additional finance and administrative personnel, 2) the effect of
compensation increases to executives enacted in the prior year to levels more
commensurate with industry rates, and 3) higher stock compensation expense
resulting from the vesting of certain stock options and restricted stock grants
issued to officers, directors and employees in the prior year.  The
above mentioned increases in compensation, as well as the stock option and
restricted stock awards, were granted based upon recommendations from an
independent report on executive compensation in the prior year.  This
independent report, requested by our Compensation Committee, was obtained in
order to assist us in attracting and retaining individuals of experience and
ability, to provide incentive to our employees and directors, to encourage
employee and director proprietary interests in the Company, and to encourage
employees to remain in our employ.




Exploration
Expense





Exploration
expense during the six months ended January 31, 2009 and 2008 was approximately
$896 and $631, respectively, or an increase of $265 or 42%.  The
primary reason for the increase can be attributable to increased activity during
the current period associated with on-going exploration 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 will be 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 six months
ended January 31, 2009 and 2008, was approximately $578 and $703, respectively,
and was reflected as an “Other Expense.”This was primarily due
to the change in fair value of our two identically structured derivative
contracts with Standard Bank, which correlates to fluctuations in the gold
price.  These contracts were not designated as hedging derivatives
and, therefore, special hedge accounting does not apply.




Interest
expense was approximately $427 for the six months ended January 31, 2009
compared to approximately $569 for the six months ended January 31,
2008.  This decrease was mainly due to lower interest
charges incurred during the current period related to our credit arrangements
with Standard Bank.  As of January 31, 2009, there was $10,250
outstanding on our term note.




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Changes in Foreign Exchange
Rates




During
the six months ended January 31, 2009 and 2008, we recorded equity adjustments
from foreign currency translations of approximately $3,530 and $27,
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 January 31, 2009 was
14.2847.  As of July 31, 2008, such exchange rate was
10.0483.




Summary of Quarterly
Results


(000’s except per share
Data)




For the three
            
            
            For the three
            
            
            For the six
            
            
            For the sixmonths ended
            
            
            months ended
            
            
            months ended
            
            
            months endedJanuary 31,
              2009
            
            
            January 31,
              2008
            
            
            January 31,
              2009
            
            
            January 31,
              2008Revenues
            
            $
            11,369
            
            
            $
            8,043
            
            
            $
            20,544
            
            
            $
            14,569Net Income
            
            $
            3,196
            
            
            $
            2,126
            
            
            $
            5,133
            
            
            $
            3,873Basic net income per share
            
            $
            0.02
            
            
            $
            0.01
            
            
            $
            0.03
            
            
            $
            0.02Diluted net income per
share
            
            $
            0.02
            
            
            $
            0.01
            
            
            $
            0.03
            
            
            $
            0.02Gold ounces sold
            
            $
            13,277
            
            
            $
            9,550
            
            
            $
            24,690
            
            
            $
            18,744Average price received
            
            $
            856
            
            
            $
            843
            
            
            $
            832
            
            
            $
            779Cash cost per ounce sold
            
            $
            251
            
            
            $
            252
            
            
            $
            260
            
            
            $
            246Total cost per ounce sold
            
            $
            290
            
            
            $
            315
            
            
            $
            299
            
            
            $
            314




Summary of Results of
Operations




For the three
              
              
              For the three
              
              
              For the six
              
              
              For the sixmonths ended
              
              
              months ended
              
              
              months ended
              
              
              months endedJanuary 31,
                2009
              
              
              January 31,
                2008
              
              
              January 31,
                2009
              
              
              January 31,
                2008Tonnes
      of ore mined
              
              
              879,584
              
              
              
              947,845
              
              
              
              1,904,680
              
              
              
              1,816,840Tonnes
      of waste removed
              
              
              1,040,942
              
              
              
              494,020
              
              
              
              2,254,382
              
              
              
              907,605Ratio
      of waste to ore
              
              
              1.18
              
              
              
              0.52
              
              
              
              1.18
              
              
              
              0.50Tonnes
      of ore processed
              
              
              946,445
              
              
              
              911,549
              
              
              
              1,954,126
              
              
              
              1,740,431Grade
      (grams/tonne)
              
              
              0.90
              
              
              
              0.80
              
              
              
              0.88
              
              
              
              0.82Gold
      (ounces)-Produced(1)
              
              
              13,646
              
              
              
              9,834
              
              
              
              25,534
              
              
              
              18,885-Sold
              
              
              13,277
              
              
              
              9,550
              
              
              
              24,690
              
              
              
              18,744







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






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Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the six months ended January 31, 2009 was $7,014 as
compared to Cash provided by
operating activities of $3,480 during the six months ended January 31,
2008.   The increase period-to-period was mainly due to higher
net income during the six months ended January 31, 2009, as well as deductions
to in-process inventory offset by an increase in accrued expenses.




Investing
Activities




Cash used in investing
activities during the six months ended January 31, 2009, amounted to
approximately $3,503, primarily from the acquisition of mobile equipment,
conveyors, ADR plant equipment, and a carbon regeneration kiln.  Cash used in investing activitiesfor the same period a year ago was approximately $2,899, 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 six months ended January 31, 2009 amounted to
approximately $2,125, primarily from the repayment of the note payable in the
amount of $2,250.  Cash provided by financing
activities for the same period a year ago was approximately $2,164, which
mostly was comprised of proceeds received of approximately $2,156 from the
issuance of common stock upon the exercising of 6,321,500 warrants.




Term
loan and Revolving Credit Facility





In
September 2008, we closed an Amended and Restated Credit Agreement (the “Credit
Agreement”) involving our wholly owned Mexican subsidiaries MSR and Oro, as
borrowers (“Borrowers”), 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
Original Agreement.  As of January 31, 2009, the outstanding amount on
the term note was $10,250 and accrued interest on this facility was
approximately $34.





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 January 31, 2009.  Principal under the Term Loan and the
Revolving Loans shall bear interest at a rate per annum equal to the LIBOR Rate,
as defined in the Credit Agreement, for the applicable Interest Period plus
the


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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
Credit 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.





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





Debt
Covenants





Our
Credit Facility 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 Facility
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 Facility could lead to an event of
default thereunder which could result in an acceleration of such
indebtedness.




In
connection with the amending of our credit agreements 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
has not yet complied with these regulations due to the absence of professionals
in the area qualified to conduct studies to facilitate compliance. MSR believes
that the Mexican government is aware of these barriers to compliance and that it
has not enforced the Requirements against MSR or other mining companies in
Sonora. MSR has agreed to make a commercially reasonable effort to come into
compliance with these requirements.  See also “Environmental and Permitting
Issues” section below.  We believe we have met the insurance
requirements required by the Lender.  MSR has made significant
progress on compliance with the aforementioned Mexican federal law regulations
and believes it will be compliant by April 2009.  The original waiver
letter expired on March 9, 2009; therefore, on March 6, 2009, we obtained a
three month extension from our lender.




As of
January 31, 2009, except for the aforementioned waiver, the Company and its
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.






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




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.  As of January 31, 2009,
approximately $1,215 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 January 31, 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.  We are awaiting our bond to be
returned by the Division.




In
February 2009, we paid $337 as the second deposit on the procurement of a new
secondary crusher for the El Chanate mine.  The amount paid towards
this commitment is $674.  The total cost for this piece of equipment
is approximately $1,012.




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
$1,900.  In conjunction with the settlement of the gold price
protection agreement, we will incur other expense of approximately $1,200 during
our fiscal quarter ended April 30, 2009.


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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
joint venturing with one or more strategic partners.  We cannot assure
that adequate additional funding, if needed, will be available.  If we
need additional capital and we are unable to obtain it from outside sources, we
may be forced to reduce or curtail our operations or our anticipated exploration
activities.





New
Accounting Pronouncements





See 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
United States generally accepted accounting principles (“GAAP”) for interim
financial information and 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.




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.






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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 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 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.




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 life 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 or pounds in proven and probable reserves.






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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.”




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 January 31, 2009.






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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 $524 and $145 for the six
months ended January 31, 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.




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.






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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) “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.  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 123R, 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 purchase gold cap on a quarterly basis during
this same period and at identical volumes covering a total volume of 121,927
ounces of gold at a price of $535 per ounce.  Although these contracts
are not designated as hedging derivatives, they serve an economic purpose of
protecting us from the effects of a decline in gold prices.  Because
they are not designated as hedges, however, special hedge accounting does not
apply.  Derivative results are simply marked to market through
earnings, with these effects recorded in other income or other expense, as appropriate
under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“FAS 133”).




On
October 11, 2006, prior to our initial draw on the Credit Facility, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Facility, which requires that we hedge at least 50 percent of our outstanding
debt under this facility.  The agreements entered into cover $9,375 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.






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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.




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 solely 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





In March
2006, we entered into a Gold Price Protection arrangement with Standard Bank to
protect us against future declines in the price of gold.  We agreed to
a series of gold forward sales and call option purchases in anticipation of
entering into the Credit Facility.  Under the price protection
agreement, we have agreed to forward sales for a total volume of 121,927 ounces
of gold forward to Standard
Bank at a price of $500 per ounce.  These forward sales were to be
settled quarterly over the period from March 2007 to September
2010.  We also purchased call options from Standard Bank, enabling the
right to purchase gold on the same quarterly basis for the same total volume
with a strike price of $535 per ounce.  Together, these forward sales
and call options serve to put a floor on our gold sales price and thereby
protect us from the effects of the market price falling below $535 per ounce,
while allowing us to enjoy the upside of higher gold prices.  To date,
we have net settled these contracts, making cash payments reflecting the
difference between the call option purchase price of $535 and the forward sale
price of $500, or $35.00 per ounce on the volume prescribed by the
contracts.






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At
January 31, 2009, the total contractual ounces to settle and cash payments
remaining on the gold price protection agreement were as follows
(000s):





Fiscal year ending:
            
            Ounces Remaining
            
            
            Amount2009
            
            
            16,827
            
            
            $
            5892010
            
            
            33,176
            
            
            $
            1,1612011
            
            
            8,230
            
            
            $
            288Total
            
            
            58,233
            
            
            $
            2,038





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. Total remuneration to unwind these arrangements was
approximately $1,900.





Interest
Rate Swap Contracts





On
October 11, 2006, prior to our initial draw on the Credit Facility, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Facility.  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 DisclosuresJanuary
      31, 2009(in
      thousands)Instruments
      entered into for hedging purposes -




Type
      of
              Derivative
            
            Notional
              Size
            
            
            Fixed
      Price or
              Strike
      Price
            
            Underlying
              Price
            
            Termination
      or
              Expiration
            
            Fair
              ValueInterest
      Rate Swaps
            
            $
            5,813(1)
            
            
            
            5.30
            %
            3
      Mo. USD LIBOR
            
            12/31/2010
            
            $
            (268
            )Gold
      Forward Sales(2)
            
            8,319
      oz./qtr. (3)
            
            
            $500/oz.
            
            Price
      of gold
            
            9/30/2010
            
            $
            (24,466
            )Gold
      Call Options (2)
            
            8,319
      oz./qtr. (3)
            
            
            $535/oz.
            
            Price
      of gold
            
            9/30/2010
            
            $
            23,747





(1)The value shown
      reflects the notional as of January 31, 2009. Over the term of the swap,
      the notional amortizes, dropping to approximately $656.(2)These contracts
      are used for hedging purposes, but hedge accounting is not
      applied.(3)The value shown
      reflects the current notional, but these contracts amortize down to 8,230
      ounces per quarter by the contract
termination.





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As of
January 31, 2009, the dollar value of a basis point for this interest rate swap
was slightly more than $600, 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 slightly more than $600.  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.




The
combined gold forward sales and long call options serve 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 68% of production
during the six months ended January 31, 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.


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Risks related to our
business and operations








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





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





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a 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
Facility 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 Facility could lead to an event of
default thereunder which could result in an acceleration of such indebtedness.
In this regard, in connection with the recent refinance of the Credit Facility,
it was discovered that we were not in compliance with certain 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.  We obtained a waiver from
Standard Bank with regard to these matters (Please see “Management's Discussion and Analysis
of Financial Condition and Results of Operations; Liquidity and Capital
Resources; Debt Covenants” in Part I, Item 2 above).





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.






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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.





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
January 31, 2009, the spot price for gold on the London Exchange has fluctuated
between $712.50 and $1,011.25 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 gold price and interest rate
fluctuations and may incur mark-to-market losses and lose money through our
hedging programs.





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




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.




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In
previous quarters, rather than modifying the original Gold Price Protection
agreement with Standard Bank to satisfy these forward sale obligations, we have
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 ounce.  As of
January 31, 2009, we have paid Standard Bank an aggregate of approximately
$2,229 on the settlement of 63,694 ounces.  The remaining ounces to
settle with regard to this agreement amounted to 58,233 as of January 31,
2009.  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 $1,900.





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.


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




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





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


·
            repatriation
      of income and/or


·
            return
      of capital.





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




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.






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Such
risks could result in:





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


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses and /or


·
            possible
      legal liability.





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





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





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





We are dependent
on the efforts of certain key personnel and contractors to develop our El
Chanate Project.  If we lose the services of these personnel and
contractors and we are unable to replace them, our 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.


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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.





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.


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The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





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





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





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





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





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





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





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





None.





Item 3.  Defaults Upon Senior
Securities.





None.





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





None.





Item 5.  Other
Information.





None.





Item 6.  Exhibits.





10.1
            Amended
      and Restated Engagement Agreement between Capital Gold Corporation and
      John Brownlie, effective as of January 1,
2009.


10.2
            Amended
      and Restated Engagement Agreement between Capital Gold Corporation and
      Christopher Chipman, effective as of January 1,
  2009.


10.3
            Amended
      and Restated Engagement Agreement between Capital Gold Corporation and
      Scott Hazlitt, effective as of January 1,
2009.


10.4
            Executive
      Employment Agreement between Capital Gold Corporation and Gifford
      Dieterle, effective as of January 1,
2009.


10.5
            Executive
      Employment Agreement between Capital Gold Corporation and Jeffrey
      Pritchard, effective as of January 1,
2009.


10.6
            Indemnity
      Agreement between Capital Gold Corporation and John Brownlie, effective
      November 17, 2008.


10.7
            Indemnity
      Agreement between Capital Gold Corporation and Scott Hazlitt, effective
      September 18, 2008.


10.8
            Indemnity
      Agreement between Capital Gold Corporation and Christopher Chipman,
      effective September 18, 2008.


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.






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SIGNATURES




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






CAPITAL
GOLD CORPORATION


Registrant






By: 
/s/ Gifford A. Dieterle


Gifford
A.  Dieterle


Chief
Executive Officer, President
and Treasurer


(Duly
Authorized Officer)






By: 
/s/ Christopher Chipman


Christopher
Chipman


Chief
Financial Officer


(Principal
Financial Officer)














Date:  March
12, 2009