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, 2010





OR





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


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period
from               to





Commission
File Number:  0-13078





CAPITAL GOLD CORPORATION(Exact
      name of registrant as specified in its
charter)





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





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


(Address
of principal executive offices)





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





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





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


Yes   x           No 
 ̈





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





Yes  ̈ No  ̈




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





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





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





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





Class
                      
                      Outstanding at March 3,
2010Common
      Stock, par value $.0001 per share
                      
                      48,497,173










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, 2010.





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





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





As
discussed more fully in Note 1 to the accompanying condensed consolidated
financial statements, the financial information as of the fiscal year ended July
31, 2009 and for the three and six months ended January 31, 2009 has been recast
so that the basis of presentation is consistent with that of the financial
information as of January 31, 2010 and for the three and six months ended
January 31, 2010. This recast reflects a 1-for-4 reverse stock split of the
Company’s common stock that became effective on January 25, 2010.


-2-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEET


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





January 31,
                  2010
                  (unaudited)
                
                
                July 31,
                  2009ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                
                $
                4,943
                
                
                $
                6,448Accounts
      Receivable
                
                
                2,417
                
                
                
                2,027Ore
      on Leach Pads (Note 6)
                
                
                26,397
                
                
                
                20,024Material
      and Supply Inventories (Note 5)
                
                
                1,712
                
                
                
                1,381Deposits
      (Note 7)
                
                
                129
                
                
                
                26Marketable
      Securities  (Note 4)
                
                
                35
                
                
                
                35Prepaid
      Expenses
                
                
                380
                
                
                
                277Loans
      Receivable – Affiliate (Note 12 and 16)
                
                
                30
                
                
                
                33Other
      Current Assets (Note 8)
                
                
                1,050
                
                
                
                1,042Total
      Current Assets
                
                
                37,093
                
                
                
                31,293Mining
      Concessions (Note 11)
                
                
                52
                
                
                
                51Property
      & Equipment – net (Note 9)
                
                
                24,725
                
                
                
                22,417Intangible
      Assets – net (Note 10)
                
                
                686
                
                
                
                318Other
      Assets:Investment
      (Note 13)
                
                
                500
                
                
                
                -Deferred
      Financing Costs
                
                
                482
                
                
                
                424Deferred
      Tax Asset (Note 21)
                
                
                32
                
                
                
                32Security
      Deposits
                
                
                66
                
                
                
                66Total
      Other Assets
                
                
                1,080
                
                
                
                522Total
      Assets
                
                $
                63,636
                
                
                $
                54,601LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                
                $
                1,427
                
                
                $
                988Accrued
      Expenses (Note 20)
                
                
                4,435
                
                
                
                1,633Derivative
      Contracts (Note 19)
                
                
                112
                
                
                
                193Deferred
      Tax Liability (Note 21)
                
                
                4,279
                
                
                
                4,233Current
      Portion of Long-term Debt (Note 18)
                
                
                3,600
                
                
                
                3,600Total
      Current Liabilities
                
                
                13,853
                
                
                
                10,647Reclamation
      and Remediation Liabilities (Note 14)
                
                
                1,854
                
                
                
                1,594Other
      liabilities
                
                
                79
                
                
                
                78Long-term
      Debt (Note 18)
                
                
                2,600
                
                
                
                4,400Total
      Long-term Liabilities
                
                
                4,533
                
                
                
                6,072Commitments
      and ContingenciesStockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share; Authorized 75,000,000 shares; Issued
      and Outstanding 48,497,173 and 48,463,406 shares,
    respectively
                
                
                5
                
                
                
                5Additional
      Paid-In Capital
                
                
                64,810
                
                
                
                64,071Accumulated
      Deficit
                
                
                (16,205
                )
                
                
                (22,089
                )Deferred
      Financing Costs
                
                
                (1,406
                )
                
                
                (1,808
                )Deferred
      Compensation
                
                
                (157
                )
                
                
                (319
                )Accumulated
      Other Comprehensive Income (Note 15)
                
                
                (1,797
                )
                
                
                (1,978
                )Total
      Stockholders’ Equity
                
                
                45,250
                
                
                
                37,882Total
      Liabilities and Stockholders’ Equity
                
                $
                63,636
                
                
                $
                54,601





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


-3-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For
      The Three Months EndedJanuary 31,2010
                              
                              
                              2009RevenuesSales
      – Gold, net
                              
                              $
                              13,228
                              
                              
                              $
                              11,369Costs
      and Expenses:Costs
      Applicable to Sales
                              
                              
                              4,625
                              
                              
                              
                              3,655Depreciation
      and Amortization
                              
                              
                              866
                              
                              
                              
                              755General
      and Administrative
                              
                              
                              2,031
                              
                              
                              
                              1,061Exploration
                              
                              
                              349
                              
                              
                              
                              406Total
      Costs and Expenses
                              
                              
                              7,871
                              
                              
                              
                              5,877Income
      from Operations
                              
                              
                              5,357
                              
                              
                              
                              5,492Other
      Income (Expense):Interest
      Income
                              
                              
                              4
                              
                              
                              
                              11Interest
      Expense
                              
                              
                              (102
                              )
                              
                              
                              (227
                              )Other
      Expense
                              
                              
                              (37
                              )
                              
                              
                              (24
                              )Loss
      on change in fair value of derivative
                              
                              
                              -
                              
                              
                              
                              (274
                              )Total
      Other Expense
                              
                              
                              (135
                              )
                              
                              
                              (514
                              )Income
      before Income Taxes
                              
                              
                              5,222
                              
                              
                              
                              4,978Income
      Tax Expense
                              
                              
                              (2,278
                              )
                              
                              
                              (1,782
                              )Net
      Income
                              
                              $
                              2,944
                              
                              
                              $
                              3,196Income
      Per Common ShareBasic
                              
                              $
                              0.06
                              
                              
                              $
                              0.07Diluted
                              
                              $
                              0.06
                              
                              
                              $
                              0.06Basic
      Weighted Average Common Shares Outstanding
                              
                              
                              48,494,297
                              
                              
                              
                              48,298,870Diluted
      Weighted Average Common Shares Outstanding
                              
                              
                              49,976,904
                              
                              
                              
                              49,676,532





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


-4-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For
      The Six Months EndedJanuary 31,2010
                              
                              
                              2009RevenuesSales
      – Gold, net
                              
                              $
                              24,955
                              
                              
                              $
                              20,544Costs
      and Expenses:Costs
      Applicable to Sales
                              
                              
                              8,735
                              
                              
                              
                              6,697Depreciation
      and Amortization
                              
                              
                              1,709
                              
                              
                              
                              1,458General
      and Administrative
                              
                              
                              3,660
                              
                              
                              
                              2,438Exploration
                              
                              
                              681
                              
                              
                              
                              896Total
      Costs and Expenses
                              
                              
                              14,785
                              
                              
                              
                              11,489Income
      from Operations
                              
                              
                              10,170
                              
                              
                              
                              9,055Other
      Income (Expense):Interest
      Income
                              
                              
                              8
                              
                              
                              
                              24Interest
      Expense
                              
                              
                              (235
                              )
                              
                              
                              (427
                              )Other
      Expense
                              
                              
                              (62
                              )
                              
                              
                              (232
                              )Loss
      on change in fair value of derivative
                              
                              
                              -
                              
                              
                              
                              (578
                              )Total
      Other Expense
                              
                              
                              (289
                              )
                              
                              
                              (1,213
                              )Income
      before Income Taxes
                              
                              
                              9,881
                              
                              
                              
                              7,842Income
      Tax Expense
                              
                              
                              (3,997
                              )
                              
                              
                              (2,709
                              )Net
      Income
                              
                              $
                              5,884
                              
                              
                              $
                              5,133Income
      Per Common ShareBasic
                              
                              $
                              0.12
                              
                              
                              $
                              0.11Diluted
                              
                              $
                              0.12
                              
                              
                              $
                              0.10Basic
      Weighted Average Common Shares Outstanding
                              
                              
                              48,505,818
                              
                              
                              
                              48,278,255Diluted
      Weighted Average Common Shares Outstanding
                              
                              
                              49,861,776
                              
                              
                              
                              49,729,966





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


-5-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


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





AccumulatedAdditional
                      
                      
                      
                      
                      
                      Other
                      
                      
                      Deferred
                      
                      
                      
                      
                      
                      TotalCommon
      Stock
                      
                      
                      paid-in-
                      
                      
                      Accumulated
                      
                      
                      Comprehensive
                      
                      
                      Financing
                      
                      
                      Deferred
                      
                      
                      Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Deficit
                      
                      
                      Income/(Loss)
                      
                      
                      Costs
                      
                      
                      Compensation
                      
                      
                      EquityBalance
      at July 31, 2009
                      
                      
                      48,463,406
                      
                      
                      $
                      5
                      
                      
                      $
                      64,071
                      
                      
                      $
                      (22,089
                      )
                      
                      $
                      (1,978
                      )
                      
                      $
                      (1,808
                      )
                      
                      $
                      (319
                      )
                      
                      $
                      37,882Amortization
      of deferred finance costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      402
                      
                      
                      
                      -
                      
                      
                      
                      402Equity
      based compensation
                      
                      
                      (41,667
                      )
                      
                      
                      -
                      
                      
                      
                      686
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      162
                      
                      
                      
                      848Common
      stock issued upon the exercising of options and warrants
                      
                      
                      75,434
                      
                      
                      
                      -
                      
                      
                      
                      53
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      53Net
      income for the six months ended January 31, 2010
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,884
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      5,884Change
      in fair value on interest rate swaps
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      81
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      81Equity
      adjustment from foreign currency translation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      100
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      100Total
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,065Balance
      at January 31, 2010
                      
                      
                      48,497,173
                      
                      
                      $
                      5
                      
                      
                      $
                      64,810
                      
                      
                      $
                      (16,205
                      )
                      
                      $
                      (1,797
                      )
                      
                      $
                      (1,406
                      )
                      
                      $
                      (157
                      )
                      
                      $
                      45,250





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


-6-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


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





For
      TheSix
      Months EndedJanuary
      31,2010
                  
                  
                  2009Cash
      Flow From Operating Activities:Net
      Income
                  
                  $
                  5,884
                  
                  
                  $
                  5,133Adjustments
      to Reconcile Net Income toNet
      Cash Provided by Operating Activities:Depreciation
      and Amortization
                  
                  
                  1,709
                  
                  
                  
                  1,458Accretion
      of Reclamation and Remediation
                  
                  
                  76
                  
                  
                  
                  75Loss
      on change in fair value of derivative
                  
                  
                  -
                  
                  
                  
                  578Equity
      Based Compensation
                  
                  
                  848
                  
                  
                  
                  588Changes
      in Operating Assets and Liabilities:Decrease
      (increase) in Accounts Receivable
                  
                  
                  (390
                  )
                  
                  
                  276Decrease
      (increase) in Prepaid Expenses
                  
                  
                  (103
                  )
                  
                  
                  22Increase
      in Inventory
                  
                  
                  (6,175
                  )
                  
                  
                  (852
                  )Increase
      in Other Current Assets
                  
                  
                  (8
                  )
                  
                  
                  (709
                  )Increase
      in Deposits
                  
                  
                  (103
                  )
                  
                  
                  (334
                  )Increase
      in Deferred Tax Asset
                  
                  
                  -
                  
                  
                  
                  (195
                  )Increase
      (decrease) in Accounts Payable
                  
                  
                  439
                  
                  
                  
                  (2
                  )Decrease
      in Derivative Liability
                  
                  
                  -
                  
                  
                  
                  (572
                  )Increase
      (decrease) in Other Liability
                  
                  
                  1
                  
                  
                  
                  (18
                  )Increase
      (decrease) in Reclamation and Remediation
                  
                  
                  184
                  
                  
                  
                  (526
                  )Increase
      in Deferred Tax Liability
                  
                  
                  46
                  
                  
                  
                  429Increase
      in Accrued Expenses
                  
                  
                  2,802
                  
                  
                  
                  1,663Net
      Cash Provided By Operating Activities
                  
                  
                  5,210
                  
                  
                  
                  7,014Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property and Equipment
                  
                  
                  (4,031
                  )
                  
                  
                  (3,323
                  )Purchase
      of Intangibles
                  
                  
                  (391
                  )
                  
                  
                  (180
                  )Investment
      in Privately Held Company
                  
                  
                  (500
                  )
                  
                  
                  -Net
      Cash Used in Investing Activities
                  
                  
                  (4,922
                  )
                  
                  
                  (3,503
                  )





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


-7-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)


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





For
      TheSix
      Months EndedJanuary 31,2010
                                
                                
                                2009Cash
      Flow From Financing Activities:Repayments
      from Affiliate, net
                                
                                
                                4
                                
                                
                                
                                4Payment
      of Deferred Finance Costs
                                
                                
                                (150
                                )
                                
                                
                                -Repayments
      on Notes Payable
                                
                                
                                (1,800
                                )
                                
                                
                                (2,250
                                )Proceeds
      From Issuance of Common Stock
                                
                                
                                53
                                
                                
                                
                                121Net
      Cash Used in Financing Activities
                                
                                
                                (1,893
                                )
                                
                                
                                (2,125
                                )Effect
      of Exchange Rate Changes
                                
                                
                                100
                                
                                
                                
                                (3,530
                                )(Decrease)
      Increase In Cash and Cash Equivalents
                                
                                
                                (1,505
                                )
                                
                                
                                (2,144
                                )Cash
      and Cash Equivalents - Beginning
                                
                                
                                6,448
                                
                                
                                
                                10,992Cash
      and Cash Equivalents – Ending
                                
                                
                                4,943
                                
                                
                                $
                                8,848Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                                
                                $
                                242
                                
                                
                                $
                                465Cash
      Paid For Income Taxes
                                
                                $
                                2,156
                                
                                
                                $
                                1,569Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
                                
                                $
                                81
                                
                                
                                $
                                51





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


-8-


CAPITAL
GOLD CORPORATION


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


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





NOTE 1 -
Basis of Presentation





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





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





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





The
financial information in the accompanying condensed consolidated financial
statements as of the fiscal year ended July 31, 2009 and for the three and six
months ended January 31, 2009 has been recast so that the basis of presentation
is consistent with that of the financial information as of January 31, 2010 and
for the three and six months ended January 31, 2010. This recast reflects
a 1-for-4 reverse stock split of the Company’s common stock that became
effective on January 25, 2010.





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


-9-





NOTE 2 –
Summary of Significant Accounting Policies





Recently
Issued Accounting Pronouncements





The
Accounting Standards Codification





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




Share-Based
Payment Transactions





Effective
August 1, 2009, the Company adopted a provision in accordance with ASC guidance
for earnings per share (originally issued as FASB Staff Position No. EITF
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities”).  This guidance establishes that unvested
share-based payment awards that contain nonforfeitable rights to dividends are
participating securities and shall be included in the computation of earnings
per share under the two-class method. The adoption of the ASC did not have a
material effect on the Company’s Condensed Consolidated Financial
Statements.





Fair
Value Measurements





In
January 2010, the ASC guidance for fair value measurements and disclosure was
updated to require additional disclosures related to: i) transfers in and
out of level 1 and 2 fair value measurements and ii) enhanced detail
in the level 3 reconciliation. The guidance was amended to provide clarity
about: i) the level of disaggregation required for assets and liabilities
and ii) the disclosures required for inputs and valuation techniques used
to measure fair value for both recurring and nonrecurring measurements that fall
in either level 2 or level 3. The updated guidance is effective for
the Company’s interim reporting period beginning February 1, 2010, with the
exception of the Level 3 disaggregation, which is effective for the fiscal
years beginning August 1, 2011. The Company is evaluating the potential impact
of adopting this guidance on the Company’s consolidated financial position,
results of operations and cash flows.





Variable
Interest Entities





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




-10-


Equity
Method Investment




In
November 2008, the ASC guidance for equity method and joint venture
investments was updated to clarify the accounting for certain transactions and
impairment considerations involving equity method investments. The intent is to
provide guidance on: (i) determining the initial measurement of an equity
method investment, (ii) recognizing other-than-temporary impairments of an
equity method investment and (iii) accounting for an equity method
investee’s issuance of shares. The updated guidance was effective for the
Company’s fiscal year beginning August 1, 2009 and was applied
prospectively. The Company will apply the updated guidance to the Company’s
investments prospectively.




Equity-linked
Financial Instruments




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





Accounting
for the Useful Life of Intangibles





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





NOTE 3 -
Equity Based Compensation





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





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $1.40 to $3.60 per
share of common stock. Certain of these grants are exercisable immediately upon
grant while others vest. Certain grants have vested or are vesting over a period
of between three to five years. Also, certain grants contain a provision whereby
they become immediately exercisable upon a change of control.





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





The Company accounts for non-employee
equity based awards in which goods or services are the consideration received
for the equity instruments issued at their fair value.


-11-





The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield and expected life. The estimate of the
number of forfeitures considers historical employee turnover rates and
expectations about the future. The estimated per share weighted average
grant-date fair values of stock options and warrants granted during the six
months ended January 31, 2010, and 2009 were $2.16 and $1.10. The fair values of
the options and warrants granted were estimated based on the following weighted
average assumptions:





Six
      months ended January 31,2010
                  
                  
                  2009Expected
      volatility
                  
                  
                  71.25
                  %
                  
                  
                  79.72
                  %Risk-free
      interest rate
                  
                  
                  2.48
                  %
                  
                  
                  0.86-1.56
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life
                  
                  5.0
      years
                  
                  
                  2.0
      – 5.0 yearsForfeiture
      rate
                  
                  -
                  
                  
                  -




Stock
option activity for employees during the fiscal years ended July 31, 2009 and
2008, and six months ended January 31, 2010 are as follows (all tables in
thousands, except for option, price and term data):





Number of
                    Options
                  
                  
                  Weighted
                    average
                    exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                    term (years)
                  
                  
                  Aggregate
                      intrinsic valueOutstanding
      at July 31, 2007
                  
                  
                  625,000
                  
                  
                  $
                  1.36
                  
                  
                  
                  1.20
                  
                  
                  $
                  255Options
      granted*
                  
                  
                  625,000
                  
                  
                  
                  2.52
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (362,500
                  )
                  
                  
                  1.28
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2008
                  
                  
                  887,500
                  
                  
                  $
                  2.20
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted*
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (176,432
                  )
                  
                  
                  1.48
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (86,068
                  )
                  
                  
                  1.40
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2009
                  
                  
                  875,000
                  
                  
                  $
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  $
                  70Options
      granted*
                  
                  
                  500,000
                  
                  
                  $
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (26,932
                  )
                  
                  
                  2.18
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (223,068
                  )
                  
                  
                  2.25
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at January 31, 2010
                  
                  
                  1,125,000
                  
                  
                  $
                  2.94
                  
                  
                  
                  4.83
                  
                  
                  $
                  3Options
      exercisable at January 31, 2010
                  
                  
                  550,014
                  
                  
                  $
                  2.76
                  
                  
                  
                  4.78
                  
                  
                  $
                  98





*
Issuances under 2006 Equity Incentive Plan.


-12-





Unvested
stock option balances for employees at January 31, 2010 are as
follows:





Number
      ofOptions
              
              
              Weighted
                average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contracted
                  term
      (years)
              
              
              Aggregate
                Intrinsic
      valueOutstanding
      at July 31, 2007
              
              
              37,500
              
              
              $
              1.28
              
              
              
              1.67
              
              
              $
              17Options
      granted
              
              
              625,000
              
              
              
              2.52
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (225,000
              )
              
              
              2.32
              
              
              
              -
              
              
              
              -Unvested
      Options Outstanding at July 31, 2008
              
              
              437,500
              
              
              $
              2.52
              
              
              
              4.49
              
              
              $
              8Options
      granted
              
              
              250,000
              
              
              
              1.96
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (250,000
              )
              
              
              2.24
              
              
              
              -
              
              
              
              -Unvested
      Options outstanding at July 31, 2009
              
              
              437,500
              
              
              $
              2.36
              
              
              
              5.18
              
              
              $
              35Options
      granted
              
              
              500,000
              
              
              
              3.60
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (237,515
              )
              
              
              3.23
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (125,000
              )
              
              
              2.24
              
              
              
              -
              
              
              
              -Unvested
      Options outstanding at January 31, 2010
              
              
              574,985
              
              
              $
              3.11
              
              
              
              4.88
              
              
              $
              -




-13-





Stock
option and warrant activity for non-employees during the years ended July 31,
2009 and 2008, and six months ended January 31, 2010 are as
follows:




Number of
                        options
                      
                      
                      Weighted
                        average
                        exercise
                        price
                      
                      
                      Weighted
                        average
                        remaining
                        contracted
                        term (years)
                      
                      
                      Aggregate
                        Intrinsic valueWarrants
      and options outstanding at July 31, 2007
                      
                      
                      5,633,886
                      
                      
                      $
                      1.32
                      
                      
                      
                      1.48
                      
                      
                      $
                      2,578Options
      granted*
                      
                      
                      428,750
                      
                      
                      
                      2.64Options
      exercised
                      
                      
                      (5,388,886
                      )
                      
                      
                      1.32
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      expired
                      
                      
                      (170,000
                      )
                      
                      
                      1.20
                      
                      
                      
                      -
                      
                      
                      
                      -Warrants
      and options outstanding at July 31, 2008
                      
                      
                      503,750
                      
                      
                      $
                      2.48
                      
                      
                      
                      3.54
                      
                      
                      $
                      54Options
      granted
                      
                      
                      350,000
                      
                      
                      
                      2.00
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      exercised
                      
                      
                      (37,500
                      )
                      
                      
                      1.56
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      expired
                      
                      
                      (37,500
                      )
                      
                      
                      1.56
                      
                      
                      
                      -
                      
                      
                      
                      -Warrants
      and options outstanding at July 31, 2009
                      
                      
                      778,750
                      
                      
                      $
                      2.36
                      
                      
                      
                      3.36
                      
                      
                      $
                      73Options
      granted
                      
                      
                      187,500
                      
                      
                      
                      3.60
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      exercised
                      
                      
                      (48,502
                      )
                      
                      
                      1.77
                      
                      
                      
                      -
                      
                      
                      
                      -Options
      expired
                      
                      
                      (266,916
                      )
                      
                      
                      2.18
                      
                      
                      
                      -
                      
                      
                      
                      -Warrants
      and options outstanding at January 31, 2010
                      
                      
                      650,832
                      
                      
                      $
                      2.82
                      
                      
                      
                      3.12
                      
                      
                      $
                      204Warrants
      and options exercisable at January 31, 2010
                      
                      
                      467,482
                      
                      
                      $
                      2.80
                      
                      
                      
                      1.84
                      
                      
                      $
                      65


* 278,750
issued under 2006 Equity Incentive Plan.


-14-





Unvested
stock option balances for non-employees at January 31, 2010 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
                              
                              
                              162,500
                              
                              
                              
                              2.52
                              
                              
                              
                              -
                              
                              
                              
                              -Options
      vested
                              
                              
                              (48,750
                              )
                              
                              
                              2.52
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding
      at July 31, 2008
                              
                              
                              113,750
                              
                              
                              $
                              2.52
                              
                              
                              
                              4.49
                              
                              
                              $
                              3Options
      granted
                              
                              
                              318,750
                              
                              
                              
                              1.96
                              
                              
                              
                              -
                              
                              
                              
                              -Options
      vested
                              
                              
                              (191,875
                              )
                              
                              
                              2.04
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding
      at July 31, 2009
                              
                              
                              240,625
                              
                              
                              $
                              2.16
                              
                              
                              
                              4.88
                              
                              
                              $
                              70Options
      granted
                              
                              
                              187,500
                              
                              
                              
                              3.60
                              
                              
                              
                              -
                              
                              
                              
                              -Options
      vested
                              
                              
                              (129,152
                              )
                              
                              
                              3.07
                              
                              
                              
                              -
                              
                              
                              
                              -Options
      expired
                              
                              
                              (115,625
                              )
                              
                              
                              2.35
                              
                              
                              
                              -
                              
                              
                              
                              -Unvested
      options outstanding at January 31, 2010
                              
                              
                              183,348
                              
                              
                              $
                              2.85
                              
                              
                              
                              4.55
                              
                              
                              $
                              16




The impact on the Company’s results of
operations of recording equity based compensation for the six months ended
January 31, 2010 and 2009, for employees and non-employees was approximately
$848 and $588 and reduced earnings per share by $0.02 and $0.01 per basic and
diluted share, for each period, respectively.  The Company has not
recognized any tax benefit or expense for the six months ended January 31, 2010
and 2009, related to these items due to the Company’s net operating losses and
corresponding valuation allowance within the U.S. (See Note 21).





As of January 31, 2010, there was
approximately $1,167 of unrecognized equity based compensation cost related to
options granted which have not yet vested.





NOTE 4 -
Marketable Securities





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





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Marketable
      equity securities, at cost
                  
                  $
                  50
                  
                  
                  $
                  50Marketable
      equity securities, at fair value(See
      Notes 12 & 14)
                  
                  $
                  35
                  
                  
                  $
                  35




-15-





NOTE 5 –
Material and Supplies Inventories





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Materials,
      supplies and other
                  
                  $
                  1,712
                  
                  
                  $
                  1,381Total
                  
                  $
                  1,712
                  
                  
                  $
                  1,381





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





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Ore
      on leach pads
                  
                  $
                  26,397
                  
                  
                  $
                  20,024Total
                  
                  $
                  26,397
                  
                  
                  $
                  20,024




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




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




NOTE 7 –
Deposits





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





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Equipment
      deposits
                  
                  $
                  129
                  
                  
                  $
                  26Total
      Deposits
                  
                  $
                  129
                  
                  
                  $
                  26




-16-





NOTE 8 –
Other Current Assets





Other
current assets consist of the following:





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Value
      added tax to be refunded
                  
                  $
                  1,050
                  
                  
                  $
                  1,032Other
                  
                  
                  -
                  
                  
                  
                  10Total
      Other Current Assets
                  
                  $
                  1,050
                  
                  
                  $
                  1,042





NOTE 9 –
Property and Equipment





Property
and Equipment consist of the following:





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Process
      equipment and facilities
                  
                  $
                  29,825
                  
                  
                  $
                  26,477Mining
      equipment
                  
                  
                  2,494
                  
                  
                  
                  2,248Mineral properties
                  
                  
                  175
                  
                  
                  
                  175Construction
      in progress
                  
                  
                  492
                  
                  
                  
                  70Computer
      and office equipment
                  
                  
                  397
                  
                  
                  
                  389Improvements
                  
                  
                  16
                  
                  
                  
                  16Furniture
                  
                  
                  47
                  
                  
                  
                  47Total
                  
                  
                  33,446
                  
                  
                  
                  29,422Less:
      accumulated depreciation
                  
                  
                  (8,721
                  )
                  
                  
                  (7,005
                  )Property
      and equipment, net
                  
                  $
                  24,725
                  
                  
                  $
                  22,417





Depreciation
expense for the six months ended January 31, 2010 and 2009 was approximately
$1,716 and $1,681, respectively.





NOTE 10 -
Intangible Assets





Intangible
assets consist of the following:





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009Water
      Rights
                  
                  
                  510
                  
                  
                  
                  241Reforestation
      fee
                  
                  
                  195
                  
                  
                  
                  73Mobilization
      Payment to Mineral Contractor
                  
                  
                  70
                  
                  
                  
                  70Investment
      in Right of Way
                  
                  
                  18
                  
                  
                  
                  18Total
                  
                  
                  793
                  
                  
                  
                  402Accumulated
      Amortization
                  
                  
                  (107
                  )
                  
                  
                  (84
                  )Intangible
      assets, net
                  
                  $
                  686
                  
                  
                  $
                  318




-17-





Purchased
intangible assets consisting of rights of way, water rights, easements, net
profit interests, etc. are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the economic lives
of the respective assets, generally five years or using the Units of Production
(“UOP”) method. It is the Company’s policy to assess periodically the carrying
amount of its purchased intangible assets to determine if there has been an
impairment to their carrying value. Impairments of other intangible assets are
determined in accordance with ASC guidance for goodwill and other intangibles.
There was no impairment at January 31, 2010.





Amortization expense for the six months
ended January 31, 2010 and 2009 was approximately $23 and $19,
respectively.





NOTE 11 -
Mining Concessions





Mining
concessions consists of the following:





(in thousands)January 31,
                    2010
                  
                  
                  July 31,
                    2009El
      Chanate
                  
                  $
                  49
                  
                  
                  $
                  45El
      Charro
                  
                  
                  25
                  
                  
                  
                  25Total
                  
                  
                  74
                  
                  
                  
                  70Less:
      accumulated amortization
                  
                  
                  (22
                  )
                  
                  
                  (19
                  )Total
                  
                  $
                  52
                  
                  
                  $
                  51





The El Chanate concessions are carried
at historical cost and are being amortized using the UOP method. Amortization
expense for the six months ended January 31, 2010 and 2009 was approximately $3
and $5, respectively.




NOTE 12 -
Loans Receivable - Affiliate





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




NOTE 13 -
Investment





On
January 25, 2010, the Company entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it is proposed that the Company will
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for aggregate investment of $2,000.





The
Collateral Agreement required the Company to promptly pay $500 to MRS, with the
Company’s intention to invest the remaining $1,500 being set forth in a letter
of intent (the “LOI”) entered into on January 25, 2010, the material terms of
which are non-binding. The Company’s obligation to invest the remaining $1,500
will only arise if the Company and MRS sign a definitive Investment Agreement
(the “Investment Agreement”) pursuant to which it is contemplated that such
remaining funds will be invested in stages, according to milestones that
MRS is expected to reach in the deployment of a gold recovery technology pilot
program at the Company’s El Chanate mine.


-18-





The
consummation of the Investment Agreement is contingent upon MRS meeting certain
requirements, including requirements with respect to its budget, business plan,
securing the employment of its founders and securing rights to certain
technology. The Investment Agreement is also subject to final approval by the
Board of Directors of the Company and the managers of MRS.  The
Company expects to consummate the Investment Agreement in March 2010; however,
no assurance can be given that the Investment Agreement will be consummated, and
if it is, the final terms may differ from that of the LOI.





In the
event that the Investment Agreement is not consummated, the Collateral Agreement
provides that the $500 payment to MRS will be repaid with interest. Such
repayment is secured by cash flows from MRS’s Consulting / Services Agreement
with a third-party gold mining company, the expected value of which is $1,275 to
MRS (see Note
16).





NOTE 14 -
Reclamations and Remediation Liabilities (“Asset Retirement
Obligations”)




The Company includes environmental and
reclamation costs on an ongoing basis, in our internal revenue and cost
projections.  No assurance can be given that environmental regulations
will not be changed in a manner that would adversely affect the Company’s
planned operations.  As of January 31, 2010, we estimated the
reclamation costs for the El Chanate site to be approximately
$3,766.  Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and abandonment
costs.  The Asset Retirement Obligation is based on when the spending
for an existing environmental disturbance and activity to date will occur. The
Company reviews, on an annual basis, unless otherwise deemed necessary, the
Asset Retirement Obligation at each mine site.  The Company reviewed
the estimated present value of the El Chanate mine reclamation and closure costs
as of January 31, 2010 primarily due to the addition of the new leach
pad.  As of January 31, 2010, approximately $1,854 was accrued for
reclamation obligations relating to mineral properties in accordance with ASC
guidance for asset retirement and environmental obligations.




The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the six months ended January 31, 2010:





(in thousands)Balance
      as of July 31, 2009
                                    
                                    $
                                    1,594Additions,
      changes in estimates and other
                                    
                                    
                                    299Liabilities
      settled
                                    
                                    
                                    (115
                                    )Accretion
      expense
                                    
                                    
                                    76Balance
      as of January 31, 2010
                                    
                                    $
                                    1,854





NOTE 15 –
Accumulated Other Comprehensive Income





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


-19-





Foreign
                      currency items
                    
                    
                    Unrealized gain
                      (loss) on securities
                    
                    
                    Change in fair
                      value of interest
                      rate swaps
                    
                    
                    Accumulated other
                      comprehensive
                      incomeBalance
      as of July 31, 2009
                    
                    $
                    (2,050
                    )
                    
                    $
                    (15
                    )
                    
                    $
                    87
                    
                    
                    $
                    (1,978
                    )Income
      (loss)
                    
                    
                    100
                    
                    
                    
                    -
                    
                    
                    
                    81
                    
                    
                    
                    181Balance
      as of January 31, 2010
                    
                    $
                    (1,950
                    )
                    
                    $
                    (15
                    )
                    
                    $
                    168
                    
                    
                    $
                    (1,797
                    )





The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the year ended July 31, 2009 and the six months ended January 31, 2010 due
to the existence of net operating losses.





NOTE 16 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $4 and $4 in expense reimbursements including office rent from
this entity for the six months ended January 31, 2010, and 2009, respectively
(see Notes 4 and 12).





The Company utilizes Caborca
Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the
Company’s Chief Executive Officer, and another officer and director of the
Company. These services include but are not limited to the payment of mining
salaries and related costs. Caborca Industrial bills the Company for these
services at slightly above cost. Mining expenses charged by Caborca Industrial
and eliminated upon consolidation amounted to approximately $2,578 and $2,387
for the six months ended January 31, 2010 and 2009, respectively.





The
Company incurred approximately $6 and $11 during the six months ended January
31, 2010 and 2009, respectively, for services provided related to marketing
materials. The firm providing the services is owned and operated by relatives of
the Company’s President and COO, John Brownlie.





On
January 19, 2010, the Compensation Committee of the Board of Directors of
the Company approved a new employment agreement (the “Agreement”) for John
Brownlie, the Company’s President, Chief Operating Officer and a Director
of the Company. The term of the agreement is for three years commencing
January 19, 2010, and will automatically extend for consecutive one-year terms
unless Mr. Brownlie or the Company notifies the other party that it does not
wish to extend the Agreement. The Agreement provides for an initial base
salary to Mr. Brownlie of $275 plus an immediate payment of $375 for
reaching certain milestones. The Agreement provides for an additional payment
upon the accomplishment of other goals. The Agreement also grants Mr. Brownlie
500,000 stock options.  The exercise price of the stock options is
$3.60 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 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 500,000 options.  For
the six months ended January 31, 2010, the Company recorded approximately $373
in equity compensation expense on the vested portion of these stock
options.  The grant date fair value of each stock option was
$2.16.  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.


-20-





On
January 25, 2010, the Company entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it is proposed that the Company will
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for aggregate investment of $2,000. The Collateral Agreement required the
Company to promptly pay $500 to MRS, with the Company’s intention to invest the
remaining $1,500 being set forth in a letter of intent (the “LOI”) entered into
on January 25, 2010, the material terms of which are non-binding. As part of the
agreement ORO Recovery Solutions (“ORO Solutions”) will receive a grant of ten
percent of all of the issued and outstanding equity of MRS.





NOTE 17 -
Stockholders' Equity





Common
Stock





The Company received proceeds of
approximately $53 during the six months ended January 31, 2010 from the
exercising of an aggregate of 31,250 options issued to officers and directors.
The Company also issued 44,184 shares upon the cashless exercising of options
during the six months ended January 31, 2010.





As part of the settlement agreement
with the Company’s former Executive Vice-President, upon his termination without
cause, the unvested portion of a previous restricted share grant of 41,667
shares was forfeited.





During the six months ended January 31,
2010 and 2009, the Company recorded approximately $848 and $588 in equity
compensation expense related to the vesting of restricted stock grants and stock
options, respectively.  As of January 31, 2010, the total compensation
cost related to unvested restricted stock granted, but not yet recognized, was
$157.





The Company accounts for non-employee
equity based awards in which goods or services are the consideration received
for the equity instruments issued at their fair value.





Stock
Split





On
January 25, 2010, the Company announced that, to meet minimum share price
requirements in connection with its NYSE Amex listing, it effected a reverse
stock split, with every four (4) shares of common stock of the Company issued
and outstanding being converted into one (1) share of common stock. The reverse
split was originally approved by shareholders at the Annual Shareholders Meeting
held on October 31, 2008 and subsequently ratified by shareholders at the recent
Annual Shareholders Meeting held on January 19, 2010.    No fractional
common shares will be issued in connection with the reverse split. A holder of
common shares, who otherwise would have been entitled to receive a fractional
share as a result of the reverse split, will receive an amount in cash equal to
the dollar amount multiplied by such fractional entitlement.





On
February 1, 2010, the securities of Capital Gold Corporation were approved by
the NYSE Amex LLC (the “Exchange”) for listing and
registration.


-21-





2006
Equity Incentive Plan





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





The Plan authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights and
restricted stock awards (each, an “Award”). A maximum of 4,375,000 shares of
common stock are reserved for potential issuance pursuant to Awards under the
Plan.  Unless sooner terminated, the Plan will continue in effect for
a period of 10 years from its effective date.





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





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





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





On January 19, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 500,000, 50,000, 50,000,
50,000 and 37,500 options to John Brownlie, Leonard J. Sojka, John Cutler Steven
Cooper and Trey Wasser, respectively, aggregating 687,500 stock options under
our 2006 Equity Incentive Plan. The stock options for John Brownlie and Trey
Wasser 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
stock options for Leonard J. Sojka, John Cutler, and Steven Cooper have a term
of five years and vest 25,000 on January 19, 2010, 12,500 on January 19, 2011
and 12,500 on January 19, 2012.  The exercise price of the stock options is
$3.60 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 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 687,500 options received by
these individuals totaling $1,486.  For the six months ended January 31,
2010, the Company recorded approximately $566 in equity compensation expense on
the vested portion of these stock options. The grant date fair value of each
stock option was $2.16.


-22-





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





NOTE 18 -
Debt





Long
      term debt consists of the following:
                  
                  (in
      thousands)January
      31,
                    2010
                  
                  
                  July
      31,
                    2009Total
      long-term debt
                  
                  $
                  6,200
                  
                  
                  $
                  8,000Less
      current portion
                  
                  
                  3,600
                  
                  
                  
                  3,600Long-term
      debt
                  
                  $
                  2,600
                  
                  
                  $
                  4,400





In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank, as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006.  Under the Credit Agreement, MSR and Oro
borrowed money in an aggregate principal amount of up to US$12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico.  The Company guaranteed
the repayment of the Term Loan and the performance of the obligations under the
Credit Agreement.  As of January 31, 2010 and 2009, the accrued
interest on the Term Loan was approximately $14 and $34,
respectively.




-23-


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





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





As of
January 31, 2010, the Company and its related entities were in compliance with
all debt covenants and default provisions.  The accounts of Caborca
Industrial are not subject to the debt covenants and default
provisions.





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





On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period.





In December 2009, the Company executed
a mandate letter with Standard Bank which set forth terms and conditions for
amending the Credit Agreement to add a revolving loan of $15,000 to the existing
Term Loan.  The revolving loan would have a term of one year and shall bear
interest at a rate per annum equal to the LIBOR Rate, as defined in the Credit
Agreement, for the applicable Interest Period plus the Applicable Margin. The
Applicable Margin for the revolving loan is 3.0% per annum. There were
no significant changes to the existing Term Loan. The revolving loan is subject
to credit and regulatory approval as well as legal, regulatory, technical and
financial due diligence.  We incurred an arrangement fee of $150 in
connection with executing the mandate letter which will be amortized over the
term of the revolving loan.





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





Fiscal
      Years Ending July 31,2010
                      
                      $
                      1,8002011
                      
                      
                      3,6002012
                      
                      
                      800$
                      6,200





NOTE 19 -
Sales Contracts, Commodity and Financial Instruments





Interest
Rate Swap Agreements





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


-24-





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




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




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





(in
      thousands)Liability
      balance as of July 31, 2009
                  
                  $
                  193Change
      in fair value of swap agreement
                  
                  
                  25Net
      cash settlements
                  
                  
                  (106
                  )Liability
      balance as of January 31, 2010
                  
                  $
                  112





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





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





Quarter
                          Ended
                        
                        Derivatives in Cash
                          Flow Hedging
                          Relationships
                        
                        Effective
                          Results
                          Recognized
                          in OCI
                        
                        Location of Results
                          Reclassified from AOCI
                          to Earnings
                        
                        Amount
                          Reclassified
                          from AOCI
                          to Income
                        
                        
                        Ineffective
                          Results
                          Recognized
                          in Earnings
                        
                        
                        Location
                          of
                          Ineffective
                          Results7/31/08
                        
                        Interest
      Rate contracts
                        
                        $
                        19
                        
                        Interest
      Income (Expense)
                        
                        
                        (49
                        )
                        
                        
                        -
                        
                        
                        N/A10/31/08
                        
                        Interest
      Rate contracts
                        
                        $
                        (38
                        )
                        Interest
      Income (Expense)
                        
                        
                        (38
                        )
                        
                        
                        -
                        
                        
                        N/A1/31/09
                        
                        Interest
      Rate contracts
                        
                        $
                        (95
                        )
                        Interest
      Income (Expense)
                        
                        
                        (35
                        )
                        
                        
                        -
                        
                        
                        N/A4/30/09
                        
                        Interest
      Rate contracts
                        
                        $
                        (16
                        )
                        Interest
      Income (Expense)
                        
                        
                        (55
                        )
                        
                        
                        -
                        
                        
                        N/A7/31/09
                        
                        Interest
      Rate contracts
                        
                        $
                        (19
                        )
                        Interest
      Income (Expense)
                        
                        
                        (55
                        )
                        
                        
                        -
                        
                        
                        N/A10/31/09
                        
                        Interest
      Rate contracts
                        
                        $
                        (53
                        )
                        Interest
      Income (Expense)
                        
                        
                        (53
                        )
                        
                        
                        -
                        
                        
                        N/A1/31/10
                        
                        Interest
      Rate contracts
                        
                        $
                        (8
                        )
                        Interest
      Income (Expense)
                        
                        
                        (48
                        )
                        
                        
                        -
                        
                        
                        N/A




-25-





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





Liability DerivativesJuly 31, 2008
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            192Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            738Liability DerivativesOctober 31, 2008
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            199Derivatives
      designated as non- hedging instrumentsGold
      derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            734Liability DerivativesJanuary 31, 2009
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            268Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            719Liability DerivativesApril 30, 2009
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            228Liability DerivativesJuly 31, 2009
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            193Liability DerivativesOctober 31, 2009
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            154January 31, 2010
                                                                            
                                                                            Balance Sheet Location
                                                                            
                                                                            Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                            
                                                                            Current
      Liabilities
                                                                            
                                                                            $
                                                                            112




-26-





NOTE 20 –
Accrued Expenses





Accrued
      expenses consist of the following:(in thousands)January 31,
                                  2010
                                
                                
                                July 31,
                                  2009Net
      smelter return
                                
                                $
                                204
                                
                                
                                $
                                212Mining
      contract
                                
                                
                                280
                                
                                
                                
                                30Income
      tax payable
                                
                                
                                2,348
                                
                                
                                
                                507Utilities
                                
                                
                                141
                                
                                
                                
                                128Interest
                                
                                
                                14
                                
                                
                                
                                21Legal
      and professional
                                
                                
                                100
                                
                                
                                
                                125Salaries,
      wages and related benefits
                                
                                
                                756
                                
                                
                                
                                533Leach
      pad expansion
                                
                                
                                375
                                
                                
                                
                                -Deferred
      Financing Costs
                                
                                
                                150
                                
                                
                                
                                -Other
      liabilities
                                
                                
                                67
                                
                                
                                
                                77$
                                4,435
                                
                                
                                $
                                1,633





NOTE 21 -
Income Taxes





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





(in
      thousands)
                  
                  
                  (in
      thousands)For
      The Three Months Ended
                  
                  
                  For
      The Six Months EndedJanuary 31,
                    2010
                  
                  
                  January 31,
                    2009
                  
                  
                  January 31,
                    2010
                  
                  
                  January 31,
                    2009Current:United
      States
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  (2,278
                  )
                  
                  
                  (997
                  )
                  
                  
                  (3,997
                  )
                  
                  
                  (1,924
                  )(2,278
                  )
                  
                  
                  (997
                  )
                  
                  
                  (3,997
                  )
                  
                  
                  (1,924
                  )Deferred:United
      States
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
                  
                  
                  -
                  
                  
                  
                  (785
                  )
                  
                  
                  -
                  
                  
                  
                  (785
                  )-
                  
                  
                  
                  (785
                  )
                  
                  
                  -
                  
                  
                  
                  (785
                  )Total
                  
                  $
                  (2,278
                  )
                  
                  $
                  (1,782
                  )
                  
                  $
                  (3,997
                  )
                  
                  $
                  (2,709
                  )




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





(in
      thousands)
                      
                      
                      (in
      thousands)For
      The Three Months Ended
                      
                      
                      For
      The Six Months EndedJanuary
      31,
                        2010
                      
                      
                      January
      31,
                        2009
                      
                      
                      January
      31,
                        2010
                      
                      
                      January
      31,
                        2009United
      States
                      
                      $
                      (2,317
                      )
                      
                      $
                      (1,442
                      )
                      
                      $
                      (4,224
                      )
                      
                      $
                      (2,965
                      )Foreign
                      
                      
                      7,539
                      
                      
                      
                      6,420
                      
                      
                      
                      14,105
                      
                      
                      
                      10,807Total
                      
                      $
                      5,222
                      
                      
                      $
                      4,978
                      
                      
                      $
                      9,881
                      
                      
                      $
                      7,842




-27-


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





On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  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 for tax year 2010, which increased from 17%
for tax year 2009.  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.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.





On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.





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





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





NOTE 22 -
Fair Value Measurements





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





Level 1
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities;





Level 2
            Quoted
      prices in markets that are not active, or inputs that are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability; and





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).




-28-





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





Fair Value at January 31, 2010
                  (in thousands)Total
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Assets:Cash
      equivalents
                
                $
                2,792
                
                
                $
                2,792
                
                
                $
                -
                
                
                $
                -Marketable
      securities
                
                
                35
                
                
                
                35
                
                
                
                -
                
                
                
                -$
                2,827
                
                
                $
                2,827
                
                
                $
                -
                
                
                $
                -Liabilities:Interest
      rate swap
                
                
                112
                
                
                
                -
                
                
                
                112
                
                
                
                -$
                112
                
                
                $
                -
                
                
                $
                112
                
                
                $
                -





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





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





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





NOTE 23 –
Subsequent Events





On
February 10, 2010, Capital Gold Corporation (the “Company”) entered into a
business combination agreement (the “Business Combination Agreement”) with
Nayarit Gold Inc., (“Nayarit”), a corporation organized under the Ontario
Business Corporation Act (“OBCA”).  Pursuant to the terms of the
Business Combination Agreement, the Company and Nayarit intend to effect an
amalgamation (the “Amalgamation”) of Nayarit and a corporation, to be organized
under the OBCA as a wholly-owned subsidiary of the Company (“Merger Sub”), to
form a combined entity (“AmalgSub” or “Surviving Company”), with AmalgSub
continuing as the surviving entity following the Amalgamation.  By
virtue of the Amalgamation, the separate existence of each of Nayarit and Merger
Sub shall thereupon cease, and AmalgSub, as the surviving company in the
Amalgamation, shall continue its corporate existence under the OBCA as a
wholly-owned subsidiary of the Company. Pursuant to the terms of the Business
Combination Agreement, by virtue of the Amalgamation and without any action on
the part of Nayarit or the holders of any securities of Nayarit, all of the
Nayarit shares of common stock (the “Nayarit Common Shares”) issued and
outstanding immediately prior to the consummation of the Business Combination
Agreement (other than Nayarit Common Shares held by dissenting stockholders of
Nayarit) shall become exchangeable into the Company’s common stock on the
basis of 0.134048 shares of Company common stock for each one (1) Nayarit
Common Share (the “Amalgamation Consideration”).  The Company
anticipates closing this transaction in May 2010; however, no assurance can be
given that the transaction will be consummated.





On
February 1, 2010, the securities of Capital Gold Corporation were approved by
the NYSE Amex LLC for listing and registration.




On March
11, 2010, the Company entered into an agreement with Gifford A.
Dieterle , the Chief Executive Officer (“CEO”) of the
Company  and Chairman of the Board, pursuant to which Mr. Dieterle
resigned his position as CEO and Chairman of the Board, effective March 18,
2010. Pursuant to the agreement, Mr. Dieterle is to receive lump sum
payments totaling approximately $376 in September 2010, and additional
payments totaling approximately $288 during 2011. In addition, Mr. Dieterle will
receive $100 in shares of the Company's common stock in September
2010.
  -29-




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 “forward-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, inventory, production and recovery rates,
strip ratio, permitting, financing needs and the availability of financing on
acceptable terms or other sources of funding are all forward-looking in
nature.





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





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





General





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





On
February 1, 2010, the securities of Capital Gold Corporation were approved by
the NYSE Amex LLC for listing and registration.


-30-





Receipt of Technical Report
for Updated Reserves at El Chanate





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





Our
proven and probable reserve tonnage has increased to 70.6 million metric tonnes
with an average gold grade of 0.66 grams per tonne (77.8 million US short
tons at 0.0193 ounces per ton). The proven and probable reserve has 1,504,000
contained ounces of gold. The open pit strip ratio for the life of mine is
2.88:1 (2.88 tonnes of waste to one tonne of ore).  For the next three
years, we anticipate the open pit strip ratio will be consistent with our strip
ratio experienced for the fiscal year ended July 31, 2009 (1.12:1).
Determination of operational pre-stripping (increase in strip ratio) will be
made after further geological drilling and determination of corporate strategy
within the three year window of opportunity. There is also the potential to
improve the life of mine strip ratio as the report identifies material within
the pit design classified as waste that with additional drilling could be
reclassified as ore. The updated pit design for the revised mine plan is based
on a plant recovery of gold that varies by rock types, but is expected to
average 58.25%. A gold price of US$800 (SEC three year average as of October 1,
2009) per ounce was used to re-estimate the reserves compared with a gold price
of $750 per ounce used in the previous reserve estimate.  The stated
proven and probable mineral reserves have been prepared in accordance with the
Canadian Institute of Mining, Metallurgy and Petroleum (CIM).  CIM
definitions for proven and probable reserves convert directly from measured and
indicated mineral resources with the application of appropriate economic
parameters. These reserves are equivalent to proven and probable reserves as
defined by the United States Securities and Exchange Commission (SEC) Industry
Guide 7.





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


-31-





Production
Summary




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













(1)
              “g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
      metric tonnes per day and “t/d” means tons per
  day.
 (2)
              The
      reserve estimates are mainly based on a gold cutoff grade of 0.15 g/t for
      sandstone and 0.19 grams for siltstone and latite within the pit
      design.




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





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


-32-





Cutoff
      Grade Calculation
                        
                        Internal
      Cutoff Grade
                        
                        Break
      Even Cutoff GradeBasic
      ParametersGold
      Price
                        
                        US$800/oz
                        
                        US$800/ozGold
      Selling Cost (4% Royalty,
                        
                        $25.258/oz
                        
                        $25.258/ozRefining,
      Transport, Silver Credit, etc)
                        
                        58.25%
                        
                        58.25%Gold
      Recovery*Operating
      Costs per Tonne of OreMining
                        
                        
                        
                        $1.08/tonneProcessing
      – Heap leach
                        
                        $2.357/tonne
                        
                        $2.357/tonneTotal
                        
                        $2.357/tonne
                        
                        $3.44/tonneCutoff
      Grade
                        
                        Grams
      per Tonne
                        
                        Grams
      per TonneHead
      Grade Cutoff (58.25% averagerecovery)
                        
                        0.15
      g/t gold
                        
                        0.24
      g/t goldRecovered
      Gold Grade Cutoff0.09
      g/t gold
                        
                        0.14
      g/t
gold





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




In August
2009, we initiated the construction of an additional leach pad area with
capacity for eight million tonnes of ore, at a cost of approximately
$3,300.  Permitting and site clearing has been completed, the
construction contractor has completed the earthworks and the geomembrane liners
have been applied to nearly all of the new leach pad area.  We
initiated leaching of ore on the new leach pad as of December 31,
2009.  Golder Engineering of Tucson, Arizona is overseeing
construction activities and quality control and assurance for the project. The
construction schedule anticipates that construction will be complete in March
2010.  As of January 31, 2010, approximately half of these
construction costs have been incurred.





In
December 2009, we completed the procurement and commissioning of a new tertiary
crusher for the El Chanate mine.  The cost for this equipment was
approximately $1,075.





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





Proven and probable mineral reserve (Ktonnes of ore)
                  
                  January 31,
                    2010
                  
                  
                  July 31,
                    2009Ore
                  
                  
                  -
                  
                  
                  
                  -Beginning
      balance (Ktonnes)
                  
                  
                  40,911
                  
                  
                  
                  35,417Additions
                  
                  
                  30,388
                  
                  
                  
                  9,342Reductions
                  
                  
                  (2,234
                  )
                  
                  
                  (3,848
                  )Ending
      Balance
                  
                  
                  69,065
                  
                  
                  
                  40,911Contained
      goldBeginning
      balance (thousand of ounces)
                  
                  
                  859
                  
                  
                  
                  719Additions
                  
                  
                  662
                  
                  
                  
                  239Reductions
                  
                  
                  (54
                  )
                  
                  
                  (99
                  )Ending
      Balance
                  
                  
                  1,467
                  
                  
                  
                  859




-33-




El
Oso Project - Saric Properties – Sonora, Mexico





In April
2008, we leased 12 mining concessions totaling 1,789 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,233 additional
hectares adjacent to this property. The approximate 4,022 hectare area is
accessible by paved roads and has cellular phone service from
hilltops.  These concessions and this claim are about 60 miles
northeast of the El Chanate project. Mineralization is evident throughout the
concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. We have completed exploration work consisting of
geological mapping, systematic geochemical sampling of rock and soils,
geophysical surveys, trenching and 73 reverse circulation drill holes totaling
6,121 meters and more recently a one meter interval topographic survey over the
concession area.  SRK of Lakewood, Colorado has visited the site and
has monitored the quality assurance and quality control during these drill
campaigns.  SRK will also assist on the next phase of the exploration
program.  All of the drill hole samples have been assayed by ALS
Chemex.  The ALS Chemex facility in Hermosillo does the sample
preparation, and the assays are performed at the ALS Chemex’s Vancouver
laboratory.





In
January 2010, we initiated an additional drill campaign at Saric that consisted
of 13 core holes totaling approximately 1,100 meters.  The drilling
was completed on February 23, 2010 and targeted the existing mineralized
structure to confirm the geologic interpretation and confirm the accuracy of
previous reverse circulation drilling. The drill hole samples are being assayed
by ALS Chemex.





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





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





Result
of Operations





As
discussed more fully in Note 1 to the accompanying condensed consolidated
financial statements, the financial information as of the fiscal year ended July
31, 2009 and for the three and six months ended January 31, 2009 has been recast
so that the basis of presentation is consistent with that of the financial
information as of January 31, 2010 and for the three and six months ended
January 31, 2010. This recast reflects a 1-for-4 reverse stock split of the
Company’s common stock that became effective on January 25, 2010.





Three months ended January
31, 2010 compared to three months ended January 31, 2009





Net
income for the three months ended January 31, 2010 and 2009 was approximately
$2,944 and $3,196, respectively, representing a decrease of approximately $252
or 8% over the prior period.  Income before taxes was $5,222 and
$4,978 for the three months ended January 31, 2010 and 2009, respectively, which
represented an increase of 5%.  Income before taxes increased
primarily as a result of higher revenues from a higher gold price being realized
from ounces sold during the three months ended January 31, 2010, as compared to
the same period a year ago.


-34-




Revenues & Costs
Applicable to Sales





Gold
sales for the three months ended January 31, 2010 totaled approximately $13,228
as compared to $11,369 in the prior period representing an increase of
approximately $1,859 or 16%.  We sold 11,816 ounces at an average
realizable price per ounce of approximately $1,119 in the current
period.  We sold 13,277 ounces at an average realizable price per
ounce of $856 during the same period last year.





Costs
applicable to sales were approximately $4,625 and $3,655, respectively, for the
three months ended January 31, 2010 and 2009, an increase of approximately $970
or 27%.  Cash costs were $372 per ounce of gold sold for the three
months ended January 31, 2010 as compared to $251 for the three months ended
January 31, 2009.   The primary reasons for this increase in cash
cost per ounce sold in the current period is attributable to: 1) higher mining
costs primarily due to an increase in tonnage mined, higher diesel fuel
consumption and explosive costs as well as the impact of a price escalation
within our mining contract with Sinergia, 2) higher leaching and ADR plant costs
mainly due to an increase in consumption of certain chemicals, water and
electricity as well as a price increase in cost of lime.  This
increased consumption was mainly the result of increasing the solution flow
through to the leach pad as we increased the level of lifts or height of the
leach pad, 3) higher crushing costs due to an increased consumption of crushing
supplies and parts.  This resulted from the addition of the new
crushers as well as the increased tonnage put through the circuit, and 4) higher
heavy equipment maintenance due to an increase in wear parts and tires for our
equipment during the current quarter.  Total costs were $425 per ounce
of gold sold for the three months ended January 31, 2010 as compared to $290
total cost in the prior period.  The primary reason for this increase
in total costs was attributed to the same reason as detailed above for the
increase in cash costs per ounce sold.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $290 and $225 for the
three months ended January 31, 2010 and 2009, on silver ounces sold of 16,400
and 20,000, respectively.





Depreciation and
Amortization





Depreciation
and amortization expense during the three months ended January 31, 2010 and 2009
was approximately $866 and $755, respectively.  The primary reason for
the increase of approximately $111, or 15%, in the current period was due to an
increase in depreciation and amortization charges related to property, plant and
equipment additions. Depreciation and amortization also includes amortization of
deferred financing costs resulting from the credit arrangements entered into
with Standard Bank.  This accounted for approximately $233 and $247 of
depreciation and amortization expense during the three months ended January 31,
2010 and 2009, respectively.





General and Administration
Expense





General
and administrative expenses during the three months ended January 31, 2010 were
approximately $2,031, an increase of approximately $970, or 91%, from the three
months ended January 31, 2009. This increase resulted primarily from: 1) higher
salaries and wages mainly due to a bonus payment during the current quarter to a
Company executive, 2) higher legal fees in conjunction with the Nayarit
transaction, and 3) higher equity compensation expense in the current period in
conjunction with the issuance of stock options.


-35-





On
January 19, 2010, at the recommendation of the Compensation Committee of the
Board of Directors, our Board of Directors approved the issuance of 500,000,
50,000, 50,000, 50,000 and 37,500 options to John Brownlie, Leonard J. Sojka,
John Cutler Steven Cooper and Trey Wasser, respectively, aggregating 687,500
stock options under our 2006 Equity Incentive Plan. The stock options for John
Brownlie and Trey Wasser 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 stock options for Leonard J. Sojka, John Cutler, and
Steven Cooper have a term of five years and vest 25,000 on January 19, 2010,
12,500 on January 19, 2011 and 12,500 on January 19, 2012.  The exercise
price of the stock options is $3.60 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 a
change of control, all unvested stock options and unvested restricted stock
grants immediately vest.  We utilized the Black-Scholes method to fair
value the 687,500 options received by these individuals totaling $1,486. 
For the three months ended January 31, 2010, we recorded approximately $566 in
equity compensation expense on the vested portion of these stock options. The
grant date fair value of each stock option was $2.16.





Exploration
Expense





Exploration
expense during the three months ended January 31, 2010 and 2009 was
approximately $349 and $406, respectively, or a decrease of $57, or
14%.  The primary reason for the decrease can be attributed to the
prior year containing exploration expense associated with a 10 hole, deep core
drilling campaign at our El Chanate mine totaling 2,500 meters.  Both
periods presented include activity associated with on-going exploration,
drilling and geochemical work being conducted on our leased and owned
concessions located northwest of Saric, Sonora.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended January 31, 2010 and 2009, was approximately $0 and $274, respectively,
and was reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.





Interest
expense was approximately $102 for the three months ended January 31, 2010
compared to approximately $227 for the same period a year
earlier.  This decrease was due to lower interest charges incurred
during the current period, based on a lower average debt balance compared to the
prior period.  As of January 31, 2010 and 2009, there was $6,200 and
$10,250, respectively, outstanding on our term note with Standard
Bank.





Six months ended January 31,
2010 compared to six months ended January 31, 2009





Net
income for the six months ended January 31, 2010 and 2009 was approximately
$5,884 and $5,133, respectively, representing an increase of approximately 15%
over the prior period.  Income before taxes was $9,881 and $7,842 for
the six months ended January 31, 2010 and 2009, respectively, which represented
an increase of 26%.  Income before taxes increased primarily as a
result of higher revenues from a higher gold price being realized from ounces
sold during the six months ended January 31, 2010, as compared to the same
period a year ago. Income tax expense increased in conjunction with the increase
in net income before tax, which was anticipated.


-36-




Revenues & Costs
Applicable to Sales





Gold
sales for the six months ended January 31, 2010 totaled approximately $24,955 as
compared to $20,544 in the prior period representing an increase of
approximately $4,411 or 21%.  We sold 23,549 ounces at an average
realizable price per ounce of approximately $1,060 in the current
period.  We sold 24,690 ounces at an average realizable price per
ounce of $832 during the same period last year.





Costs
applicable to sales were approximately $8,735 and $6,697, respectively, for the
six months ended January 31, 2010 and 2009, an increase of approximately $2,038
or 30%.  Cash costs were $355 per ounce of gold sold for the six
months ended January 31, 2010 as compared to $260 for the six months ended
January 31, 2009.   The primary reasons for this increase in cash
cost per ounce sold in the current period is attributable to:
1)  higher leaching and ADR plant costs mainly due to an increase in
consumption of certain chemicals, water and electricity as well as an increase
in the price of lime.  This increased consumption was mainly the
result of increasing the solution flow through to the leach pad as we increased
the level of lifts or height of the leach pad, 2) higher mining costs primarily
due to an increase in tonnage mined, higher diesel fuel consumption and
explosive costs as well as the impact of a price escalation within our mining
contract with Sinergia , and 3) higher crushing costs due to an increased
consumption of crushing supplies and parts.  This resulted from the
addition of the new crushers as well as the increased tonnage put through the
circuit.  Total costs were $407 per ounce of gold sold for the six
months ended January 31, 2010 as compared to $299 total cost in the prior
period.  The primary reason for this increase in total costs was
attributed to the same reason as detailed above for the increase in cash costs
per ounce sold.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $544 and $524 for the six
months ended January 31, 2010 and 2009, on silver ounces sold of 32,160 and
45,334, respectively.





Depreciation and
Amortization





Depreciation
and amortization expense during the six months ended January 31, 2010 and 2009
was approximately $1,709 and $1,458, respectively.  The primary reason
for the increase of approximately $251, or 17%, in the current period was due to
an increase in depreciation and amortization charges related to property, plant
and equipment additions. Depreciation and amortization also includes
amortization of deferred financing costs resulting from the credit arrangements
entered into with Standard Bank.  This accounted for approximately
$467 and $484 of depreciation and amortization expense during the six months
ended January 31, 2010 and 2009, respectively.





General and Administration
Expense





General
and administrative expenses during the six months ended January 31, 2010 were
approximately $3,660, an increase of approximately $1,222, or 50%, from the six
months ended January 31, 2009. This increase resulted primarily from: 1) a
one-time charge of $426 related to the termination of an employment agreement of
an executive officer without cause pursuant to a restructuring of our corporate
investor relations function, 2) higher salaries and wages mainly due to a bonus
payment during the current quarter to a Company executive of $375, and 3) higher
equity compensation expense of $260 as compared to prior period due primarily
from the issuance of stock options to officers and directors.


-37-





On
January 19, 2010, at the recommendation of the Compensation Committee of the
Board of Directors, our Board of Directors approved the issuance of 500,000,
50,000, 50,000, 50,000 and 37,500 options to John Brownlie, Leonard J. Sojka,
John Cutler Steven Cooper and Trey Wasser, respectively, aggregating 687,500
stock options under our 2006 Equity Incentive Plan. The stock options for John
Brownlie and Trey Wasser 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 stock options for Leonard J. Sojka, John Cutler, and
Steven Cooper have a term of five years and vest 25,000 on January 19, 2010,
12,500 on January 19, 2011 and 12,500 on January 19, 2012.  The exercise
price of the stock options is $3.60 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 a
change of control, all unvested stock options and unvested restricted stock
grants immediately vest.  We utilized the Black-Scholes method to fair
value the 687,500 options received by these individuals totaling $1,486. 
For the six months ended January 31, 2010, we recorded approximately $566 in
equity compensation expense on the vested portion of these stock options. The
grant date fair value of each stock option was $2.16.





Exploration
Expense





Exploration
expense during the six months ended January 31, 2010 and 2009 was approximately
$681 and $896, respectively, or a decrease of $215, or 24%.  The
primary reason for the decrease can be attributed to the prior year containing
exploration expense associated with a 10 hole, deep core drilling campaign at
our El Chanate mine totaling 2,500 meters.  Both periods presented
include activity associated with on-going exploration, drilling and geochemical
work being conducted on our leased and owned concessions located northwest of
Saric, Sonora.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the six months
ended January 31, 2010 and 2009, was approximately $0 and $578, respectively,
and was reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.





Interest
expense was approximately $235 for the six months ended January 31, 2010
compared to approximately $427 for the same period a year
earlier.  This decrease was due to lower interest charges incurred
during the current period, based on a lower average debt balance compared to the
prior period.  As of January 31, 2010 and 2009, there was $6,200 and
$10,250, respectively, outstanding on our term note with Standard
Bank.





Changes in Foreign Exchange
Rates





During
the six months ended January 31, 2010 and 2009, we recorded equity adjustments
from foreign currency translations of approximately $100 and $3,530,
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, 2010 was
13.1154.  As of July 31, 2009, such exchange rate was
12.9933.


-38-




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,
                    2010
                  
                  
                  January 31,
                    2009
                  
                  
                  January 31,
                    2010
                  
                  
                  January 31,
                    2009Revenues
                  
                  
                  13,228
                  
                  
                  
                  11,369
                  
                  
                  
                  24,955
                  
                  
                  
                  20,544Net
      Income
                  
                  
                  2,944
                  
                  
                  
                  3,196
                  
                  
                  
                  5,884
                  
                  
                  
                  5,133Basic
      net income per share
                  
                  
                  0.06
                  
                  
                  
                  0.07
                  
                  
                  
                  0.12
                  
                  
                  
                  0.11Diluted
      net income per share
                  
                  
                  0.06
                  
                  
                  
                  0.06
                  
                  
                  
                  0.12
                  
                  
                  
                  0.10Gold
      ounces sold
                  
                  
                  11,816
                  
                  
                  
                  13,277
                  
                  
                  
                  23,549
                  
                  
                  
                  24,690Average
      price received
                  
                  $
                  1,119
                  
                  
                  $
                  856
                  
                  
                  $
                  1,060
                  
                  
                  $
                  832Cash
      cost per ounce sold(1)
                  
                  $
                  372
                  
                  
                  $
                  251
                  
                  
                  $
                  355
                  
                  
                  $
                  260Total
      cost per ounce sold(1)
                  
                  $
                  425
                  
                  
                  $
                  290
                  
                  
                  $
                  407
                  
                  
                  $
                  299





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





Summary of Results of
Operations





For the three
                  
                  
                  For the three
                  
                  
                  For the six
                  
                  
                  For the sixmonths ended
                  
                  
                  months ended
                  
                  
                  months ended
                  
                  
                  months endedJanuary 31,
                    2010
                  
                  
                  January 31,
                    2009
                  
                  
                  January 31,
                    2010
                  
                  
                  January 31,
                    2009Tonnes
      of ore mined
                  
                  
                  1,097,645
                  
                  
                  
                  879,584
                  
                  
                  
                  2,233,537
                  
                  
                  
                  1,904,680Tonnes
      of waste removed
                  
                  
                  1,113,353
                  
                  
                  
                  1,040,942
                  
                  
                  
                  2,326,179
                  
                  
                  
                  2,254,382Ratio
      of waste to ore
                  
                  
                  1.03
                  
                  
                  
                  1.18
                  
                  
                  
                  1.04
                  
                  
                  
                  1.18Tonnes
      of ore processed
                  
                  
                  1,090,184
                  
                  
                  
                  946,445
                  
                  
                  
                  2,212,367
                  
                  
                  
                  1,954,126Grade
      (grams/tonne)
                  
                  
                  0.74
                  
                  
                  
                  0.90
                  
                  
                  
                  0.72
                  
                  
                  
                  0.88Gold
      (ounces)-Produced(1)
                  
                  
                  12,045
                  
                  
                  
                  13,646
                  
                  
                  
                  23,953
                  
                  
                  
                  25,534-Sold
                  
                  
                  11,816
                  
                  
                  
                  13,277
                  
                  
                  
                  23,549
                  
                  
                  
                  24,690


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





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the six months ended January 31, 2010 and 2009 was
$5,210 and $7,014, respectively.  Cash provided by operating
activities decreased $1,804 as compared to the six months ended January 31,
2009, primarily due to higher net income resulting from an increase in the
average gold price received for ounces sold, an increase in inventory balances
during the current period of $5,323, and an increase in accounts payable and
accrued expenses of $1,580.


-39-




Investing
Activities





Cash used in investing
activities during the six months ended January 31, 2010, amounted to
approximately $4,922, primarily for the acquisition of an additional tertiary
crusher and screen plant, additional water rights, as well as costs incurred for
leach pad expansion.  In August 2009, we initiated the construction of
an additional leach pad area with capacity for an additional eight million
tonnes of ore at an approximate cost of $3,300.  Permitting and site
clearing has been completed. The construction contractor has completed the
earthworks and the application of the geomembrane liners is nearly
complete.  Golder Engineering of Tucson, Arizona is overseeing
construction activities and quality control and assurance for the project. We
initiated leaching of ore on the new pad as of December 31, 2009.  As
of January 31, 2010, approximately half of these construction costs have been
incurred.




In
addition, on January 25, 2010, the Company entered into a Collateral Agreement
(the “Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it is proposed that the Company will
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for aggregate investment of $2,000.  The Collateral Agreement required
the Company to promptly pay $500 to MRS, with the Company’s intention to invest
the remaining $1,500 being set forth in a letter of intent (the “LOI”) entered
into on January 25, 2010, the material terms of which are non-binding. The
Company’s obligation to invest the remaining $1,500 will only arise if the
Company and MRS sign a definitive Investment Agreement (the “Investment
Agreement”) pursuant to which it is contemplated that such remaining funds will
be invested in stages, according to milestones that MRS is expected to
reach in the deployment of a gold recovery technology pilot program at the
Company’s El Chanate mine. The consummation of the Investment Agreement is
contingent upon MRS meeting certain requirements, including requirements with
respect to its budget, business plan, securing the employment of its founders
and securing rights to certain technology. In the event that the Investment
Agreement is not consummated, the Collateral Agreement provides that the $500
payment to MRS will be repaid with interest. Such repayment is secured by cash
flows from MRS’s Consulting / Services Agreement with a third-party gold mining
company, the expected value of which is $1,275 to MRS.  The Investment
Agreement is also subject to final approval by the Board of Directors of the
Company and the managers of MRS. The Company expects to consummate the
Investment Agreement in March 2010.





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 and ADR plant equipment, including the carbon regeneration
kiln.




Financing
Activities




Cash used in financing
activities during the six months ended January 31, 2010 amounted to
approximately $1,893, primarily from the repayment of our term loan of
$1,800.  We also received proceeds of approximately $53 in the current
period from the issuance of common stock upon the exercising of 125,000
options.  In addition, we incurred $150 in finance costs to amend our
Amended and Restated Credit Agreement with Standard Bank (See “Term loan and Revolving Credit
Facility” section below).  Cash used in financing
activities during the six months ended January 31, 2009 amounted to
approximately $2,125, primarily from the repayment of the term loan of
$2,250.


-40-





Business
Combination Agreement





On February 10, 2010, Capital Gold
Corporation (the “Company”) entered into a business  combination
agreement (the “Business Combination Agreement”) with Nayarit Gold Inc.,
(“Nayarit”), a corporation organized under the Ontario Business Corporation Act
(“OBCA”).  Pursuant to the terms of the Business Combination
Agreement, the Company and Nayarit intend to effect an amalgamation (the
“Amalgamation”) of Nayarit and a corporation, to be organized under the OBCA as
a wholly-owned subsidiary of the Company (“Merger Sub”), to form a combined
entity (“AmalgSub” or “Surviving Company”), with AmalgSub continuing as the
surviving entity following the Amalgamation.  By virtue of the
Amalgamation, the separate existence of each of Nayarit and Merger Sub shall
thereupon cease, and AmalgSub, as the surviving company in the Amalgamation,
shall continue its corporate existence under the OBCA as a wholly-owned
subsidiary of the Company. Pursuant to the terms of the Business Combination
Agreement, by virtue of the Amalgamation and without any action on the part of
Nayarit or the holders of any securities of Nayarit, all of the Nayarit shares
of common stock (the “Nayarit Common Shares”) issued and outstanding immediately
prior to the consummation of the Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) shall become
exchangeable into the Company’s common stock on the basis of 0.134048
shares of Company common stock for each one (1) Nayarit Common Share (the
“Amalgamation Consideration”).  The Company anticipates
closing this transaction in May 2010.




Term
loan and Revolving Credit Facility





In
September 2008, we closed an Amended And Restated Credit Agreement (the “Credit
Agreement”) involving our wholly-owned Mexican subsidiaries MSR and Oro, as
borrowers (“Borrowers”), us, as guarantor, and Standard Bank PLC (“Standard
Bank”), as the lender.  The Credit Agreement amends and restates the
prior credit agreement between the parties dated August 15,
2006.  Under the Credit Agreement, MSR and Oro borrowed money in an
aggregate principal amount of up to $12,500 (the “Term Loan”) for the purpose of
constructing, developing and operating the El Chanate gold mining project in
Sonora State, Mexico.  We guaranteed the repayment of the Term Loan
and the performance of the obligations under the Credit Agreement.  As
of January 31, 2010, the outstanding amount on the term note was $6,200 and
accrued interest on this agreement was approximately $14.





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





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





On
September 17, 2009, our $5,000 revolving loan contained within the Credit
Agreement expired. The Company had not drawn on this facility during the term
period.


-41-





In
December 2009, the Company executed a mandate letter from Standard Bank which
set forth terms and conditions for amending the Credit Agreement to add a
revolving loan of $15,000 to the existing Term Loan.  The revolving
loan would have a term of one year and shall bear interest at a rate per annum
equal to the LIBOR Rate, as defined in the Credit Agreement, for the applicable
Interest Period plus the Applicable Margin. The Applicable Margin for the
revolving loan is 3.0% per annum. There were no significant changes to the
existing Term Loan. The revolving loan is subject to credit and regulatory
approval as well as legal, regulatory, technical and financial due
diligence.  We incurred an arrangement fee of $150 in connection with
the mandate letter which will be amortized over the term of the revolving loan
as, deferred financing costs, upon closing.





Debt
Covenants





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




As of
January 31, 2010, we and our related entities were in compliance with all debt
covenants and default provisions.





Environmental
and Permitting Issues





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





We
received the annual extension to the explosive use permit from the relevant
authorities.  The permit is valid through December 2010.





We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the
future.  As of January 31, 2010, we have estimated the reclamation
costs for the El Chanate site to be approximately $3,766.  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 January 31, 2010 primarily due to the
addition of the new leach pad in accordance with ASC guidance for asset
retirement and environmental obligations.  As of January 31, 2010, our
reclamation and remediation liability was $1,854.





Recently
Issued Accounting Pronouncements





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


-42-




Disclosure
About Off-Balance Sheet Arrangements





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





Critical
Accounting Policies





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





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





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





Ore
on Leach Pads





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





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





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


-43-





In-process
Inventory





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





Materials
and Supplies





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





Mineral
Reserves




Critical
estimates are inherent in the process of determining our reserves. Our reserves
are affected largely by our assessment of future metals prices, as well as by
engineering and geological estimates of ore grade, accessibility and production
cost. Metals prices are estimated at long-term averages. Our assessment of
reserves occurs periodically and we utilize external firms to conduct such
reserve estimates.




Reserves
are a key component in valuation of our properties, plants and equipment.
Reserve estimates are used in determining appropriate rates of
units-of-production depreciation, with net book value of many assets depreciated
over remaining estimated reserves. Reserves are also a key component in
forecasts, with which we compare future cash flows to current asset values to
ensure that carrying values are reported appropriately. Reserves also play a key
role in the valuation of certain assets in the determination of the purchase
price allocations for our acquisitions.  Reserves are a culmination of
many estimates and are not guarantees that we will recover the indicated
quantities of metals.





Property, Plant and Mine
Development





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





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


-44-





Impairment of Long-Lived
Assets





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





Reclamation and Remediation
Costs (Asset Retirement Obligations)





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





Deferred Financing
Costs





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





Intangible
Assets





Purchased
intangible assets consisting of rights of way, easements, net profit interests,
etc. are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic lives of the respective assets,
generally five years or using the units of production method. It is our policy
to assess periodically the carrying amount of our purchased intangible assets to
determine if there has been an impairment to their carrying value. Impairments
of other intangible assets are determined in accordance with ASC guidance for
goodwill and other intangibles. There was no impairment at January 31,
2010.





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.  The carrying
value of long term debt approximates fair value due to the variable nature of
the debt’s interest rates.


-45-





Revenue
Recognition





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




Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $544 and $524 for the six
months ended January 31, 2010 and 2009, on silver ounces sold of 32,160 and
45,334, respectively.





Foreign Currency
Translation





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





Comprehensive Income
(Loss)





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





Income
Taxes





On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  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 for tax year 2010, which increased from 17%
for tax year 2009.  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.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.





On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.





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


-46-





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





Equity Based
Compensation





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





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





Accounting for Derivatives
and Hedging Activities





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





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





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





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


-47-




Use of
Estimates





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





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





Metal
Price


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


Foreign
Currency


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





Interest
Rate Swap Contracts





On
October 11, 2006, prior to our initial draw on the Credit Agreement, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Agreement.  Although the Credit Agreement requires that we hedge at
least 50% of our outstanding debt under this agreement, 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.


-48-





Market
Risk Disclosures


January
31, 2010


(in
thousands)





Instruments
entered into for hedging purposes -





Type of Derivative
                
                Notional Size
                
                
                Fixed Price or
                  Strike Price
                
                Underlying Price
                Termination or
                  Expiration
                
                Fair ValueInterest
      Rate Swaps
                
                $
                3,281
                (1)
                
                
                5.30
                %
                3
      Mo. USD LIBOR
                12/31/2010
                
                $
                (112
                )





(1)The value shown reflects
the notional as of January 31, 2010. Over the term of the swap, the notional
amortizes, dropping to approximately $656.





As of
January 31, 2010, the dollar value of a basis point for this interest rate swap
was approximately $155, suggesting that a one-basis point rise (fall) of the
yield curve would likely foster an increase (decrease) in the interest rate
swaps value by approximately $155.  Because hedge accounting is
applied, the contract serves to lock in a fixed rate of interest for the portion
of the variable rate debt equal to the swap's notional size.  The swap
covers only 75% of our variable rate exposure.





Item
4. Controls and
Procedures.





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





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


-49-





PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.





None.





Item
      1A.
            Risk
      Factors





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





Risks related to our
business and operations





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 fiscal year ended January
31, 2010, the spot price for gold on the London Exchange has fluctuated between
$870.25 and $1,212.50 per ounce.  Gold prices are
affected by numerous factors beyond our control, including:





·
            Industrial
      and commercial demand for gold,


·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





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





We
face inherent risks in acquisitions of other mining companies or properties that
may adversely impact our growth strategy.




Mines
have limited lives, which is an inherent risk in acquiring mining properties. We
are actively seeking to expand our mineral reserves by acquiring other mining
companies or properties. Although we are pursuing opportunities that we feel are
in the best interest of our investors, these pursuits are costly and often
unproductive. Inherent risks in acquisitions we may undertake in the future
could adversely affect our current business and financial condition and our
growth.










There is
a limited supply of desirable mineral lands available in the United States and
foreign countries where we would consider conducting exploration and/or
production activities, and any acquisition we may undertake is subject to
inherent risks. In addition to the risk associated with limited mine lives, we
may not realize the value of the companies or properties that are acquired due
to a possible decline in metals prices, failure to obtain permits, labor
problems, changes in regulatory environment, failure to achieve anticipated
synergies, an inability to obtain financing and other factors previously
described. Acquisitions of other mining companies or properties may also expose
us to new geographic, political, operating, and geological risks. In addition,
we face strong competition for companies and properties from other mining
companies, some of which have greater financial resources than we do, and we may
be unable to acquire attractive companies and mining properties on terms that we
consider acceptable.





Completion
of the Business Combination is subject to a number of conditions.





On
February 10, 2010, we executed a business combination with with Nayarit Gold
Inc., (“Nayarit”). The obligations of the parties to consummate the Business
Combination are subject to the satisfaction or waiver of specified conditions
set forth in the Business Combination Agreement.  Such conditions
include satisfaction by all parties of covenants and obligations contained in
the Business Combination Agreement, the accuracy in all material respects on the
date of the Business Combination Agreement and the closing date of all of the
parties’ representations and warranties, obtaining material consents, approval
of the regulatory authorities, and stockholder approval, as set forth in the
Business Combination Agreement.  It is possible some or all of these
conditions will not be satisfied or waived by parties to the Business
Combination Agreement, and therefore, the Business Combination may not be
consummated.





Failure
to complete the business combination could negatively impact the stock prices
and the future business and financial results of Capital Gold and
Nayarit.





If the
business combination is not completed, the ongoing businesses of Capital Gold
and Nayarit may be adversely affected.  Additionally, if the business
combination is not completed, Capital Gold or Nayarit may be required to pay a
termination fee under the business combination agreement of $1,000,000, and will
have to pay certain costs relating to the business combination, such as legal,
accounting, financial advisor, filing, printing and mailing fees.  Any
of the foregoing, or other risks arising in connection with the failure of the
Business Combination, including the diversion of management attention from
pursuing other opportunities during the pendency of the Business Combination,
may have an adverse effect on the business, financial results and stock prices
of Capital Gold and Nayarit.





Whether
or not the Business Combination is completed, the announcement and pendency of
the Business Combination could cause disruptions in the businesses of Capital
Gold and Nayarit, which could have an adverse effect on their respective
businesses, financial results and stock prices.





Whether
or not the merger is completed, the announcement and pendency of the business
combination could cause disruptions in the businesses of Capital Gold and
Nayarit.  Specifically, managements’ attention has been focused on the
merger, which may have diverted managements’ attention from the core business of
the respective companies and other opportunities that could have been beneficial
to the respective companies.  In addition, current and prospective
employees of Capital Gold and Nayarit may experience uncertainty about their
future roles with Capital Gold following the business combination, which may
materially and adversely affect the ability of each of Capital Gold and Nayarit
to attract and retain key personnel.  These disruptions could be
exacerbated by a delay in the completion of the business combination or
termination of the Business Combination Agreement and could have an adverse
effect on the business, financial results or stock prices of Capital Gold or
Nayarit if the business combination is not completed.





Risks related to ownership
of our stock





The
NYSE AMEX may delist the Company’s securities from quotation on its exchange
which could limit investors’ ability to make transactions in the Company
securities and subject it to additional trading restrictions.








The
Company’s securities are listed on the NYSE AMEX, a national securities
exchange. Although the Company expects to continue to meet the minimum continued
listing standards, we cannot assure you that its securities will continue to be
listed on the NYSE AMEX in the future.





If the
NYSE Amex delists the Company’s securities from trading on its exchange, the
Company could face significant material adverse consequences,
including:




·
                a
      limited availability for market quotations for the Company’s
      securities;
 ·
                reduced
      liquidity with respect to the Company’s securities;
 ·
                a
      determination that the Common Stock are a “penny stock,” which will
      require brokers trading in the Common Stock to adhere to more stringent
      rules and possibly result in a reduced level of trading activity in the
      secondary trading market for the Ordinary Shares;
 ·
                limited
      amount of news and analyst coverage for the Company’s securities;
      and
 ·
              a
      decreased ability to issue additional securities or obtain additional
      financing in the future.




In
addition, the Company would no longer be subject to NYSE AMEX rules, including
rules requiring the Company to have a certain number of independent directors
and to meet other corporate governance standards.





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





None.





Item
      3.
            Defaults Upon Senior
      Securities.





None.





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





We held
our Annual Meeting of Stockholders on January 19, 2010, stockholders approved
the following three items:





1.
            The
      following five persons as
directors:





Votes in Favor
                  
                  
                  Votes WithheldNominees
                  
                  of Nominee
                  
                  
                  for NomineeGifford
      A. Dieterle
                  
                  
                  82,759,448
                  
                  
                  
                  6,712,528John
      Brownlie
                  
                  
                  83,158,818
                  
                  
                  
                  6,313,158Leonard
      J. Sojka
                  
                  
                  84,231,289
                  
                  
                  
                  5,240,687John
      Cutler
                  
                  
                  84,217,288
                  
                  
                  
                  5,254,688Steve
      Cooper
                  
                  
                  86,929,160
                  
                  
                  
                  2,542,816





2.
            To
      amend our Amended and Restated By-laws to provide for the classification
      of the Board of Directors into three classes of directors with staggered
      three year terms did not pass:





For:
      39,873,328
              Against:
      49,007,342
              Abstain:
      591,306





3.
            Ratification
      of the selection of Wolinetz, Lafazan & Company, P.C., as our
      independent auditors for the year ending July 31,
  2010:





For:
      128,445,231
              Against:
      2,339,476
              Abstain:
      549,255





4.
            To
      amend our 2006 Equity Incentive Plan to increase the number of shares of
      common stock authorized for issuance under the Plan from 10,000,000 to
      17,500,000 shares:





For:
      53,623,031
              Against:
      29,444,226
              Abstain:
      6,404,719










5.
            To
      ratify the approval of the Company’s reverse stock split as set forth in
      the minutes of the shareholders’ meeting dated October 31, 2008 at a ratio
      of 1 for 4 and that the Company pay cash in lieu of issuing any fractional
      shares in connection therewith:





For:
      53,623,031
              Against:
      29,444,226
              Abstain:
      6,404,719





Total
shares voted at the meeting: 13,427,262 out of 193,973,949 eligible to
vote.





Item
      5.
            Other
      Information.





None.





Item
      6.
            Exhibits.





10.1
            Severence
      Agreement and Release Between the Company and Gifford A. Dieterle Dated
      March 11, 2010.31.1
            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.