SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-Q





x QUARTERLY REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      quarterly period ended April 30, 2008





OR





 ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      transition period
      from to





Commission
      File Number: 0-13078





CAPITAL
      GOLD CORPORATION


(Exact
      name of 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, 14 th floor, 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 o





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





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filerx
            Smaller
                reporting companyo





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





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





Class
            
            Outstanding at June 1, 2008Common
                Stock, par value $.0001 per share
            
            
            176,214,898







**PART
      I. FINANCIAL INFORMATION**





**Item
      1.**  **Financial
      Statements**





The
      accompanying financial statements are unaudited for the interim periods, but
      include all adjustments (consisting only of normal recurring adjustments),
      which
      we consider necessary for the fair presentation of results for the three and
      nine months ended April 30, 2008.





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, 2007.





The
      results reflected for the three and nine months ended April 30, 2008 are not
      necessarily indicative of the results for the entire fiscal
      year.


-2-


CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED BALANCE SHEET


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





(Unaudited)April 30,
              2008
            
            July 31,
              2007ASSETSCurrent
                Assets:Cash
                and Cash Equivalents
            
            $
            4,936
            
            $
            2,225Accounts
                Receivable
            
            
            1,143
            
            
            -Stockpiles
                and Ore on Leach Pads (Note 4)
            
            
            9,371
            
            
            2,997Material
                and Supply Inventories
            
            
            818
            
            
            174Deposits
                (Note 5)
            
            
            46
            
            
            879Marketable
                Securities (Note 3)
            
            
            50
            
            
            90Prepaid
                Expenses (Note 18)
            
            
            1,009
            
            
            72Loans
                Receivable – Affiliate (Note 10 and 13)
            
            
            40
            
            
            47Other
                Current Assets (Note 6)
            
            
            1,242
            
            
            1,675Total
                Current Assets
            
            
            18,655
            
            
            8,159Mining
                Concessions (Note 9)
            
            
            61
            
            
            68Property
                & Equipment – net (Note 7)
            
            
            20,619
            
            
            18,000Intangible
                Assets – net (Note 8)
            
            
            193
            
            
            577Other
                Assets:Other
                Investments
            
            
            28
            
            
            28Deferred
                Financing Costs
            
            
            463
            
            
            581Mining
                Reclamation Bonds
            
            
            82
            
            
            36Other
            
            
            -
            
            
            42Security
                Deposits
            
            
            61
            
            
            60Total
                Other Assets
            
            
            634
            
            
            747Total
                Assets
            
            $
            40,162
            
            $
            27,551LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Accounts
                Payable
            
            $
            609
            
            $
            617Accrued
                Expenses
            
            
            1,713
            
            
            603Derivative
                Contracts (Note 16)
            
            
            976
            
            
            596Income
                Taxes Payable (Note 18)
            
            
            834
            
            
            -Current
                Portion of Long-term Debt (Note 15)
            
            
            4,125
            
            
            -Total
                Current Liabilities
            
            
            8,257
            
            
            1,816Reclamation
                and Remediation Liabilities (Note 11)
            
            
            1,370
            
            
            1,249Long-term
                Debt (Note 15)
            
            
            8,375
            
            
            12,500Total
                Long-term Liabilities
            
            
            9,745
            
            
            13,749Commitments
                and Contingencies
            
            
            -
            
            
            -Stockholders’
                Equity:Common
                Stock, Par Value $.0001 Per Share;Authorized
                300,000,000 shares; Issued andOutstanding
                175,914,898 and 168,173,148 shares, respectively
            
            
            18
            
            
            17Additional
                Paid-In Capital
            
            
            57,348
            
            
            54,016Accumulated
                Deficit
            
            
            (32,248
            )
            
            (38,861
            )Deferred
                Financing Costs (Note 15)
            
            
            (2,740
            )
            
            (3,438
            )Deferred
                Compensation
            
            
            (573
            )
            
            (52
            )Accumulated
                Other Comprehensive Income (Note 12)
            
            
            355
            
            
            304Total
                Stockholders’ Equity
            
            
            22,160
            
            
            11,986Total
                Liabilities and Stockholders’ Equity
            
            $
            40,162
            
            $
            27,551The
                accompanying notes are an integral part of the financial
                statements.


-3-


CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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











For The Three Months EndedApril 30,2008
            
            2007RevenuesSales
                – Gold, net
            
            $
            8,730
            
            $
            -Costs
                and Expenses:Costs
                Applicable to Sales
            
            
            2,717
            
            
            -Depreciation
                and Amortization
            
            
            800
            
            
            286General
                and Administrative
            
            
            1,072
            
            
            970Exploration
            
            
            19
            
            
            811Equity
                Based Compensation
            
            
            14
            
            
            52Total
                Costs and Expenses
            
            
            4,622
            
            
            2,119Income
                (Loss) from Operations
            
            
            4,108
            
            
            (2,119
            )Other
                Income (Expense):Interest
                Income
            
            
            12
            
            
            64Interest
                Expense
            
            
            (377
            )
            
            (275
            )Other
                Income (Expense)
            
            
            (25
            )
            
            -Loss
                on change in fair value of derivative
            
            
            (337
            )
            
            (319
            )Total
                Other Income (Expense)
            
            
            (727
            )
            
            (530
            )Income
                (Loss) before Income Taxes
            
            
            3,381
            
            
            (2,649
            )Income
                Tax Expense
            
            
            (641
            )
            
            -Net
                Income (Loss)
            
            $
            2,740
            
            $
            (2,649
            )Income
                (Loss) Per Common ShareBasic
            
            $
            0.02
            
            $
            (0.02
            )Diluted
            
            $
            0.01
            
            $
            -Basic
                Weighted Average Common Shares Outstanding
            
            
            175,645,465
            
            
            164,581,950Diluted
                Weighted Average Common Shares Outstanding
            
            
            197,238,688
            
            
            -





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


-4-





CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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








For
                The Nine Months EndedApril
                30,2008
            
            2007RevenuesSales
                – Gold, net
            
            $
            23,299
            
            $
            -Costs
                and Expenses:Costs
                Applicable to Sales
            
            
            7,343
            
            
            -Depreciation
                and Amortization
            
            
            2,630
            
            
            632General
                and Administrative
            
            
            3,186
            
            
            2,151Exploration
            
            
            650
            
            
            1,325Equity
                Based Compensation
            
            
            122
            
            
            153Total
                Costs and Expenses
            
            
            13,931
            
            
            4,261Income
                (Loss) from Operations
            
            
            9,368
            
            
            (4,261
            )Other
                Income (Expense):Interest
                Income
            
            
            63
            
            
            98Interest
                Expense
            
            
            (945
            )
            
            (474
            )Other
                Income (Expense)
            
            
            (30
            )
            
            -Loss
                on change in fair value of derivative
            
            
            (1,037
            )
            
            (847
            )Total
                Other Income (Expense)
            
            
            (1,949
            )
            
            (1,223
            )Income
                (Loss) before Income Taxes
            
            
            7,419
            
            
            (5,484
            )Income
                Tax Expense
            
            
            (806
            )
            
            -Net
                Income (Loss)
            
            $
            6,613
            
            $
            (5,484
            )Income
                (Loss) Per Common ShareBasic
            
            $
            0.04
            
            $
            (0.04
            )Diluted
            
            $
            0.03
            
            $
            -Basic
                Weighted Average Common Shares Outstanding
            
            
            173,722,564
            
            
            143,842,574Diluted
                Weighted Average Common Shares Outstanding
            
            
            194,869,746
            
            
            -





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


-5-


CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


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





AccumulatedAdditional
            
            
            
            Other
            
            Deferred
            
            
            
            TotalCommon
                Stock
            
            paid-in-
            
            Accumulated
            
            Comprehensive
            
            Financing
            
            Deferred
            
            Stockholders’Shares
            
            Amount
            
            capital
            
            Deficit
            
            Income/(Loss)
            
            Costs
            
            Compensation
            
            EquityBalance
                at July 31, 2007
            
            
            168,173,148
            
            $
            17
            
            $
            54,016
            
            $
            (38,861
            )
            $
            304
            
            $
            (3,438
            )
            $
            (52
            )
            $
            11,986Amortization
                of deferred finance costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            698
            
            
            -
            
            
            698Equity
                based compensation
            
            
            -
            
            
            -
            
            
            366
            
            
            -
            
            
            -
            
            
            -
            
            
            169
            
            
            535Common
                stock issued upon the exercising of options and warrants
            
            
            6,646,750
            
            
            1
            
            
            2,276
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,277Issuance
                of restricted common stock
            
            
            1,095,000
            
            
            -
            
            
            690
            
            
            
            
            
            
            
            
            
            
            
            (690
            )
            
            -Change
                in fair value on interest rate swaps
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (209
            )
            
            -
            
            
            -
            
            
            (209
            )Unrealized
                loss on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (40
            )
            
            -
            
            
            -
            
            
            (40
            )Equity
                adjustment from foreign currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            300
            
            
            -
            
            
            -
            
            
            300Net
                income for the nine months ended April 30, 2008
            
            
            -
            
            
            -
            
            
            -
            
            
            6,613
            
            
            -
            
            
            
            
            
            -
            
            
            6,613Balance
                at April 30, 2008
            
            
            175,914,898
            
            $
            18
            
            $
            57,348
            
            $
            (32,248
            )
            $
            355
            
            $
            (2,740
            )
            $
            (573
            )
            $
            22,160





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




-6-


CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


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





For
                TheNine
                Months EndedApril
                30,2008
            
            2007Cash
                Flow From Operating Activities:Net
                Income (Loss)
            
            $
            6,613
            
            $
            (5,484
            )Adjustments
                to Reconcile Net Loss toNet
                Cash Provided by (Used in) Operating Activities:Depreciation
                and Amortization
            
            
            2,611
            
            
            632Accretion
                of Reclamation and Remediation
            
            
            121
            
            
            -Loss
                on change in fair value of derivative, net
            
            
            1,040
            
            
            662Equity
                Based Compensation
            
            
            535
            
            
            472Changes
                in Operating Assets and Liabilities:Increase
                in Accounts Receivable
            
            
            (1,143
            )
            
            -Increase
                in Prepaid Expenses
            
            
            (937
            )
            
            (289
            )Increase
                in Inventory
            
            
            (6,309
            )
            
            (446
            )Decrease
                in Other Current Assets
            
            
            433
            
            
            3,366Decrease
                (Increase) in Other Deposits
            
            
            832
            
            
            (610
            )Decrease
                in Other Assets
            
            
            1
            
            
            1Increase
                in Mining Reclamation Bond
            
            
            (46
            )
            
            -Decrease
                in Accounts Payable
            
            
            (8
            )
            
            (20
            )Decrease
                in Derivative Liability
            
            
            (869
            )
            
            -Increase
                in Reclamation and Remediation
            
            
            -
            
            
            1,228Increase
                in Accrued Expenses
            
            
            1,944
            
            
            244Net
                Cash Provided By (Used in) Operating Activities
            
            
            4,818
            
            
            (244
            )Cash
                Flow From Investing Activities:(Increase)
                in Other Investments
            
            
            -
            
            
            (6
            )Purchase
                of Mining, Milling and Other Property andEquipment
            
            
            (4,601
            )
            
            (15,032
            )Purchase
                of Intangibles
            
            
            (90
            )
            
            (570
            )Net
                Cash Used in Investing Activities
            
            
            (4,691
            )
            
            (15,608
            )





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


-7-


CAPITAL
      GOLD CORPORATION


CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)


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





For
                TheNine
                Months EndedApril
                30,2008
            
            2007Cash
                Flow From Financing Activities:Advances
                to Affiliate
            
            
            7
            
            
            (4
            )Proceeds
                from Borrowing on Credit Facility
            
            
            -
            
            
            12,000Proceeds
                From Issuance of Common Stock
            
            
            2,277
            
            
            8,655Deferred
                Finance Costs
            
            
            -
            
            
            (257
            )Net
                Cash Provided By Financing Activities
            
            
            2,284
            
            
            20,394Effect
                of Exchange Rate Changes
            
            
            300
            
            
            262Increase
                (Decrease) In Cash and Cash Equivalents
            
            
            2,711
            
            
            4,804Cash
                and Cash Equivalents - Beginning
            
            
            2,225
            
            
            2,741Cash
                and Cash Equivalents – Ending
            
            $
            4,936
            
            $
            7,545Supplemental
                Cash Flow Information:Cash
                Paid For Interest
            
            $
            973
            
            $
            686Cash
                Paid For Income Taxes
            
            $
            806
            
            $
            21Non-Cash
                Financing Activities:Issuance
                of common stock and warrants as payment of financing costs
            
            $
            -
            
            $
            3,665Change
                in Fair Value of Derivative Instrument
            
            $
            209
            
            $
            76





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




-8-


CAPITAL
      GOLD CORPORATION


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





NOTE
      1 -
      Basis of Presentation





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





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





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





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





In
      January 2008, pursuant to the terms of the agreement, the Company made a good
      faith determination and notified AngloGold that the drill indicated resources
      at
      the El Chanate gold mine exceeded two million ounces of contained gold. The
      term
      "drill indicated resources" is defined in the agreement. A drill indicated
      resource number does not rise to the level of, and should not be considered
      proven and probable reserves as those terms are defined under SEC guidelines.
      AngloGold has 180 days from the date of notification, or July 28, 2008, to
      determine whether or not it will choose to exercise the Option for the Back-In
      Right.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles for
      interim financial information and with instructions to Form 10-Q. 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 Industriale”), a Mexican corporation 100% owned by two of the
      Company’s officers and directors for mining support services. These services
      include, but are not limited to, the payment of mining salaries and related
      costs. Caborca Industrial bills the Company for these services at slightly
      above
      cost. This entity is considered a variable interest entity under accounting
      rules provided under FIN 46, “Consolidation of Variable Interest Entities”. All
      significant intercompany accounts and transactions are eliminated in
      consolidation. Certain items in these financial statements have been
      reclassified to conform to the current period presentation. These
      reclassifications had no impact on the Company’s results of operations,
      stockholders’ equity or cash flows


-9-


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





NOTE
      2 -
      Equity Based Compensation





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





Such
      options and warrants may be exercisable at varying exercise prices currently
      ranging from $0.24 to $0.63 per share of common stock with certain of these
      grants becoming exercisable immediately upon grant. Certain grants vested or
      are
      vesting for a period of five years, respectively. Also, certain grants contain
      a
      provision whereby they become immediately exercisable upon a change of
      control.





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





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





The
      fair
      value of each option award is estimated on the date of grant using a
      Black-Scholes option valuation model. Expected volatility is based on the
      historical volatility of the price of the Company stock. The risk-free interest
      rate is based on U.S. Treasury issues with a term equal to the expected life
      of
      the option. The Company uses historical data to estimate expected dividend
      yield, expected life and forfeiture rates. The estimated per share weighted
      average grant-date fair values of stock options and warrants granted during
      the
      nine months ended April 30, 2008 and 2007, were $0.60 and $0.32, respectively.
      The fair values of the options and warrants granted were estimated based on
      the
      following weighted average assumptions:


-10-







Nine months ended April 30,2008
            
            2007Expected volatility
            
            
            47.60 – 58.69%
            
            
            82%Risk-free
                interest rate
            
            
            3.74%
            
            
            6.24%Expected
                dividend yield
            
            
            -
            
            
            -Expected
                life
            
            
            6.3
                years
            
            
            4.2
                years




Stock
      option and warrant activity for employees during the nine months ended April
      30,
      2008 is as follows:




Number
                of
              Options
            
            Weighted
              Average
              exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              intrinsic
              valueOutstanding
                at July 31, 2006
            
            
            5,570,454
            
            $
            .16
            
            
            1.17
            
            $
            702,250Options
                granted
            
            
            1,050,000
            
            
            .36Options
                exercised
            
            
            (3,570,909
            )
            
            .08
            
            
            -
            
            
            -Options
                expired
            
            
            (549,545
            )
            
            .22
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2007
            
            
            2,500,000
            
            $
            .34
            
            
            1.20
            
            $
            255,000Options
                granted*
            
            
            2,500,000
            
            
            .63
            
            
            -
            
            
            -Options
                exercised
            
            
            (250,000
            )
            
            .32
            
            
            -
            
            
            -Options
                expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warrants
                and options outstanding at April 30, 2008
            
            
            4,750,000
            
            $
            .49
            
            
            2.90
            
            $
            748,000Warrants
                and options exercisable at April 30, 2008
            
            
            2,916,750
            
            $
            .41
            
            
            2.90
            
            $
            711,000




*
      Issuances under 2006 Equity Incentive Plan.


-11-




Unvested
                stock option and warrant balances for employees at April 30, 2008
                are as
                follows:




Number of
              Options
            
            Weighted
              Average
              Exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term (years)
            
            Aggregate
              Intrinsic
              valueOutstanding at August 1, 2007
            
            
            150,000
            
            $
            .32
            
            
            0.67
            
            $
            18,000Options
                granted
            
            
            2,500,000
            
            $
            .63
            
            
            -
            
            
            -Options
                vested
            
            
            (816,750
            )
            $
            .57
            
            
            -
            
            
            -Unvested
                Options outstanding at April 30, 2008
            
            
            1,833,250
            
            $
            .63
            
            
            5.89
            
            $
            86,000




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




Number
                of
              Options
            
            Weighted
              Average
              Exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              Intrinsic
              valueWarrants
                and options outstanding at July 31, 2006
            
            
            25,561,000
            
            $
            .29
            
            
            1.33
            
            $
            1,939,530Options
                granted
            
            
            16,982,542
            
            
            .33Options
                exercised
            
            
            (18,633,000
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            (1,375,000
            )
            
            .31
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2007
            
            
            22,535,542
            
            $
            .33
            
            
            1.48
            
            $
            2,577,734Options
                granted*
            
            
            1,115,000
            
            $
            .55
            
            
            -
            
            
            -Options
                exercised
            
            
            (6,396,750
            )
            
            .34
            
            
            -
            
            
            -Options
                expired
            
            
            (680,000
            )
            
            .30
            
            
            -
            
            
            -Warrants
                and options outstanding at April 30, 2008
            
            
            16,573,792
            
            $
            .34
            
            
            2.40
            
            $
            5,218,000Warrants
                and options exercisable at April 30, 2008
            
            
            16,380,042
            
            $
            .33
            
            
            2.40
            
            $
            5,209,000




*
      Issuances under 2006 Equity Incentive Plan.




-12-




Unvested
                stock option and warrant balances for non-employees at April 30,
                2008 are
                as follows:




Number of
              Options
            
            Weighted
              Average
              Exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term (years)
            
            Aggregate
              Intrinsic
              valueOutstanding at
                August 1, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                granted
            
            
            650,000
            
            $
            .63
            
            
            -
            
            
            -Options
                vested
            
            
            (173,355
            )
            $
            .63
            
            
            -
            
            
            -Unvested
                Options outstanding at April 30, 2008
            
            
            476,645
            
            $
            .63
            
            
            6.74
            
            $
            10,000




The
      impact on the Company’s results of operations of recording equity based
      compensation for the nine months ended April 30, 2008, for employees and
      non-employees was approximately $535,000 and reduced earnings per share by
      $0.00
      per basic and diluted share.




As
      of
      April 30, 2008, there was approximately $752,000 of unrecognized equity based
      compensation cost related to options granted to executives and employees which
      have not yet vested.





NOTE
      3 -
      Marketable Securities





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





(in
                thousands)April 30,
              2008
            
            July 31,
              2007Marketable
                equity securities, at cost
            
            $
            50
            
            $
            50Marketable
                equity securities, at fair value (See Notes 10 & 13)
            
            $
            50
            
            $
            90




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




(in thousands)April 30,
              2008
            
            July 31,
              2007Current:Stockpiles
                & Ore on leach pads
            
            $
            9,371
            
            $
            2,997Total
            
            $
            9,371
            
            $
            2,997




-13-




Costs
      that are incurred in or benefit the productive process are accumulated and
      allocated to ore on leach pads and inventories. Stockpiles, ore on leach pads
      and inventories are carried at the lower of average cost or net realizable
      value. Net realizable value represents the estimated future sales price of
      the
      product based on current and long-term metals prices, less the estimated costs
      to complete production and bring the product to sale. Write-downs of stockpiles,
      ore on leach pads and inventories, resulting from net realizable value
      impairments, will be reported as a component of *Costs
      applicable to sales* .
      The
      current portion of stockpiles, ore on leach pads and inventories is determined
      based on the expected amounts to be processed within the next 12 months.





NOTE
      5 – Deposits





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





(in thousands)April 30,
              2008
            
            July 31,
              2007Advance
                payments on mining contract
            
            $
            -
            
            $
            684Equipment
                deposits
            
            
            46
            
            
            193Other
            
            
            -
            
            
            2Total
                Deposits
            
            $
            46
            
            $
            879





NOTE
      6 – Other Current Assets





Other
      current assets consist of the following:





(in thousands)April 30,
              2008
            
            July 31,
              2007Value added
                tax to be refunded
            
            $
            1,072
            
            $
            1,475Asset
                held for resale
            
            
            -
            
            
            166Other
            
            
            170
            
            
            34Total
                Other Current Assets
            
            $
            1,242
            
            $
            1,675





-14-





NOTE
      7 – Property and Equipment





Property
      and Equipment consist of the following:





(in thousands)April 30,
              2008
            
            July 31,
              2007Process
                equipment and facilities
            
            $
            17,682
            
            $
            16,285Asset
                retirement obligation
            
            
            1,218
            
            
            1,218Mining
                equipment
            
            
            973
            
            
            863Mineral properties
            
            
            141
            
            
            141Construction
                in progress
            
            
            2,986
            
            
            -Computer
                and office equipment
            
            
            307
            
            
            212Improvements
            
            
            16
            
            
            16Furniture
            
            
            36
            
            
            23Total
            
            
            23,
                359
            
            
            18,758Less:
                accumulated depreciation
            
            
            (2,740
            )
            
            (758
            )Property
                and equipment, net
            
            $
            20,619
            
            $
            18,000




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




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





Depreciation
      expense for the nine months ended April 30, 2008 and 2007 was approximately
      $1,983,000 and $131,000, respectively.





NOTE
      8 -
      Intangible Assets





Intangible
      assets consist of the following:





(in thousands)April 30,
              2008
            
            July31,
              2007Repurchase of
                Net Profits Interest
            
            $
            500
            
            $
            500Water
                Rights
            
            
            134
            
            
            -Mobilization
                Payment to Mineral Contractor
            
            
            70
            
            
            70Investment
                in Right of Way
            
            
            18
            
            
            18Total
            
            
            722
            
            
            588Accumulated
                Amortization
            
            
            (529
            )
            
            (11
            )Intangible
                assets, net
            
            $
            193
            
            $
            577




Purchased
      intangible assets consisting of rights of way, water rights, easements and
      net
      profit interests are carried at cost less accumulated amortization. Amortization
      is computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the UOP method. It is the
      Company’s policy to assess periodically the carrying amount of its purchased
      intangible assets to determine if there has been an impairment to their carrying
      value. Impairments of other intangible assets are determined in accordance
      with
      SFAS 144. There was no impairment at April 30, 2008.





-15-




Amortization
      expense for the nine months ended April 30, 2008 and 2007 was approximately
      $521,000 and $4,000, respectively. The Repurchase of Net Profits Interest from
      FG was fully amortized as of April 30, 2008.





NOTE
      9 -
      Mining Concessions





Mining
      concessions consist of the following:





(in thousands)April 30,
              2008
            
            July 31,
              2007El
                Chanate
            
            $
            45
            
            $
            45El
                Charro
            
            
            25
            
            
            25Total
            
            
            70
            
            
            70Less:
                accumulated amortization
            
            
            (9
            )
            
            (3
            )Total
            
            $
            61
            
            $
            67





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




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





Amortization
      expense for the nine months ended April 30, 2008 and 2007 was approximately
      $6,000 and $0, respectively.





NOTE
      10 -
      Loans Receivable - Affiliate





Loans
      receivable - affiliate consist of expense reimbursements due from a
      publicly-owned corporation in which the Company has an investment. The Company's
      president and chairman of the board of directors was an officer and director
      of
      that corporation. On March 10, 2008, the Company’s president and 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 Notes 3 &
13).




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




In
      accordance with SFAS No. 143, Accounting for Asset Retirement Obligations,
      reclamation costs are allocated to expense over the life of the related assets
      and are periodically adjusted to reflect changes in the estimated present value
      resulting from the passage of time and revisions to the estimates of either
      the
      timing or amount of the reclamation and abandonment costs. The Asset Retirement
      Obligation is based on when the spending for an existing environmental
      disturbance and activity to date is expected to occur. The Company reviews,
      on
      an annual basis, unless otherwise deemed necessary, the Asset Retirement
      Obligation at each mine site.




-16-




The
      following is a reconciliation of the liability for long-term Asset Retirement
      Obligation:




(in thousands)Balance
                at July 31, 2007
            
            $
            1,249Additions,
                changes in estimates and other
            
            
            -Liabilities
                settled
            
            
            -Accretion
                expense
            
            
            121Balance
                at April 30, 2008
            
            $
            1,370





NOTE
      12 -
      Other Comprehensive Income (Loss)-Supplemental Non-Cash Investing
      Activities





Other
      comprehensive income (loss) consists of changes in the fair value of
      derivatives, accumulated foreign translation gains and losses and unrealized
      gains and losses on marketable securities and is summarized as
      follows:





(in thousands)Balance
                at July 31, 2007
            
            $
            304Equity
                Adjustments from Foreign Currency Translation
            
            
            300Change
                in fair value of derivative instrument
            
            
            (209
            )Unrealized
                Gains (loss) on Marketable Securities
            
            
            (40
            )Balance
                at April 30, 2008
            
            $
            355





NOTE
      13 -
      Related Party Transactions





In
      August
      2002, the Company purchased marketable equity securities of a related company
      (see Note 3). The Company recorded approximately $4,750 and $6,750,
      respectively, in expense reimbursements including office rent from this entity
      for the nine months ended April 30, 2008 and 2007, respectively (see Notes
      10).





The
      Company utilizes a Mexican Corporation 100% owned by two officers/Directors
      and
      stockholders of the Company for mining support services. These services include
      but are not limited to the payment of mining salaries and related costs. The
      Mexican Corporation bills the Company for these services at slightly above
      cost.
      Mining expenses charged by the Mexican Corporation and eliminated upon
      consolidation amounted to approximately $2,525,000 and $240,000 for the nine
      months ended April 30, 2008 and 2007, respectively.




NOTE
      14 -
      Stockholders' Equity





Common
      Stock





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





During
      the nine months ended April 30, 2008, the Company received proceeds of
      approximately $2,277,000 from the exercising of an aggregate of 6,646,750
      warrants issued in past private placements.




-17-




On
      January 25, 2008, the Company amended its Certificate of Incorporation to
      increase the Company’s authorized shares of capital stock from 250,000,000 to
      300,000,000 shares.





2006
      Equity Incentive Plan





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





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





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. As of April 30, 2008, 6,260,000
      options and shares have been granted under the Plan leaving 3,740,000 available
      for issuance.





In
      August
      2007, the Company issued two year options to purchase the Company’s common stock
      at exercise prices ranging from $0.38 to $0.50 per share for professional
      services rendered. These options are for the purchase of 465,000 shares and
      were
      issued under the Plan. The Company utilized the Black-Scholes Method to fair
      value these options and recorded approximately $58,000 as equity based
      compensation expense.





On
      December 20 2007, the Company’s executive officers and directors were granted
      stock options and restricted stock under the Plan. Executive officers and
      directors were granted an aggregate of 3,000,000 stock options and executive
      officers were granted an aggregate 1,075,000 shares of restricted stock. All
      of
      the stock options have a term of seven years and vest as follows: 20% vested
      upon issuance and the balance vest 20% annually thereafter. The exercise price
      of the stock options is $0.63 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). The restricted shares granted vest
      equally over three years from the date of grant. 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 and unvested restricted stock grants
      shall terminate and, with regard to vested stock options, the exercise period
      shall be the lesser of the original expiration date or one year from the date
      continuous service terminates. Upon the happening of a change of control, all
      unvested stock options and unvested restricted stock grants immediately vest.
      The Company utilized the Black-Scholes Pricing Model to fair value the stock
      options and recorded approximately $231,000 as Equity Based Compensation during
      the period. The Company also recorded approximately $690,000 as deferred
      compensation expense within the Company’s statement of stockholders equity upon
      the issuance of the restricted stock. Approximately $116,000 of this restricted
      stock vested during the nine months ended April 30, 2008.


-18-


NOTE
      15 -
      Debt


Long
        term
        debt consists of the following:




(in thousands)April 30,
              2008
            
            July 31,
              2007Total
                long-term debt
            
            $
            12,500
            
            $
            12,500Less
                current portion
            
            
            4,125
            
            
            -Long-term
                debt
            
            $
            8,375
            
            $
            12,500





The
      Company entered into a credit facility (the “Credit Facility”) in 2006 involving
      its wholly-owned subsidiaries MSR and Oro, as borrowers, us, as guarantor,
      and
      Standard Bank plc (“Standard Bank”), as the lender and the offshore account
      holder. Under the Credit Facility, MSR and Oro borrowed money in an aggregate
      principal amount of US$12,500,000 (the “Loan”) for the purpose of constructing,
      developing and operating the Company’s El Chanate Project (the “Mine”). The
      Company guaranteed the repayment of the loan and the performance of the
      obligations under the Credit Facility. The Loan is scheduled to be repaid in
      fourteen quarterly payments with the first principal payment due after certain
      Mine start-up production and performance criteria are satisfied, which the
      Company believes occurred during the current quarter. Our first principal
      payment is anticipated to be due June 30, 2008. The Loan bears interest at
      LIBOR
      plus 4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months and with interest
      payable at the end of the applicable interest period. As of April 30, 2008,
      the
      outstanding amount on the credit facility was $12,500,000 and accrued interest
      on this facility was approximately $72,000 (see Note 21)




The
      Credit Facility contains covenants customary for a project financing loan,
      including but not limited to restrictions (subject to certain exceptions) on
      incurring additional debt, creating liens on its property, disposing of any
      assets, merging with other companies and making any investments. The Company
      will be required to meet and maintain certain financial covenants once repayment
      begins, scheduled to initiate June 30, 2008, including (i) a debt service
      coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt service
      coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage ratio
      of
      at least 1.6 to 1.0, (iv) a project life coverage ratio of at least 2.0 to
      1.0
      and (v) a minimum reserve tail. The Company also is required to maintain a
      certain minimum level of unrestricted cash and maintain a specified amount
      of
      cash ($1,800,000) as a reserve for debt repayment. The Loan is secured by all
      of
      the tangible and intangible assets and property owned by MSR and Oro.





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





-19-




Amortization
      of deferred financing costs related to these issuances was $698,000 and $517,000
      for the nine months ended April 30, 2008 and 2007, respectively.





The
      Company received a mandate letter, dated February 27, 2008, from Standard Bank
      to refinance the existing project finance facility on the El Chanate mine.
      The
      key anticipated amendments to the refinance include: 1) removal of cash
      restrictions and covenants, 2) reduction of the finance interest rate by 1.5%,
      3) addition of a five million dollar line of credit at an interest rate of
      LIBOR
      + 2%, and 4) exercise of a portion of the warrants currently held by Standard
      Bank to provide additional support for El Chanate expansion plans and to fully
      fund the debt service reserve account. The Company anticipates a closing date
      for this refinance by the end of our fiscal year end, July 31, 2008. ****





NOTE
      16 -
      Sales Contracts, Commodity and Financial Instruments





In
      March
      2006, in conjunction with the Company’s credit facility, the Company entered
      into two identically structured derivative contracts with Standard Bank (See
      Note 15). Each derivative consisted of a series of forward sales of gold and
      a
      purchase gold cap. The Company agreed to sell a total volume of 121,927 ounces
      of gold forward to Standard Bank at a price of $500 per ounce on a quarterly
      basis during the period from March 2007 to September 2010. The Company also
      agreed to purchase a gold cap, enabling the company to buy gold on a quarterly
      basis during this same period and at identical volumes covering a total volume
      of 121,927 ounces of gold at a price of $535 per ounce. Under FASB Statement
      No.
      133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as Other Income or
      Expense. These contracts, together, served to put a floor on the sales price
      of
      gold for the above stated volume of gold sales, however, the contracts were
      not
      designated as hedging derivatives, and therefore special hedge accounting does
      not apply.





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





(in thousands)Balance as
                of July 31, 2007
            
            $
            548Loss
                on change in fair value of derivative
            
            
            1,040Net
                cash settlements
            
            
            (886
            )Balance
                as of April 30, 2008
            
            $
            702





Rather
      than modifying the original Gold Price Protection agreement with Standard Bank
      to satisfy these forward sale obligations, the Company has opted for a net
      cash
      settlement between the call option purchase price of $535 and the forward sale
      price of $500, or $35.00 per oz. The Company has paid Standard Bank
      approximately $1,346,000 on the settlement of 38,455 ounces with corresponding
      reductions in the Company’s derivative liability ($886,000 or 25,329 ounces of
      gold during the nine months ended April 30, 2008). These expenses were incurred
      concurrently with sales revenues that reflected actual sales of physical gold
      at
      market prices well above the option strike price of $535 per ounce. The
      remaining ounces to settle with regard to this agreement amounted to 83,472
      as
      of April 30, 2008.





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





-20-




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, 2008
      from
      these two swaps was determined to be immaterial.




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




(in thousands)Balance as
                of July 31, 2007
            
            $
            48Change
                in fair value of swap agreement
            
            
            209Interest
                expense (income)
            
            
            28Net
                cash settlements
            
            
            (11
            )Balance
                as of April 30, 2008
            
            $
            274




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




NOTE
      17 -
      Employee and Consulting Agreements





On
      August
      29, 2007, the Board increased the salaries of the Company’s executive officers
      to be commensurate with industry standards as follows: Gifford A.
      Dieterle, President, Treasurer and Chairman of the Board, $250,000; John
      Brownlie, Chief Operating Officer, $225,000; Christopher Chipman, Chief
      Financial Officer, $175,000 (consulting fee); Jeffrey W. Pritchard, Vice
      President - Investor Relations and Secretary, $195,000; Roger A. Newell, Vice
      President - Development, $135,000; and J. Scott Hazlitt, Vice President - Mine
      Development, $135,000. The salary increase for Mr. Brownlie and the consulting
      fee increase for Mr. Chipman were retroactive to May 1, 2007 and the salary
      increase for Mr. Pritchard was retroactive to August 1, 2007. The Board also
      increased directors’ compensation to the Company’s independent directors and to
      Robert Roningen by $1,000 per month.





-21-




On
      September 10, 2007, Roger A. Newell resigned as our Vice President of
      Development.





NOTE
      18 – Income Taxes




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




Companies
      are required to prepay income taxes on a monthly basis based on the greater
      of
      the flat tax or regular income tax as calculated for each monthly period. 
Accordingly, the Company has recorded a prepayment requirement of approximately
      $845,000 as of April 30, 2008, on net income earned during the first four
      calendar months in 2008. This amount is slightly greater than the anticipated
      regular income tax of approximately $806,000 due to certain credits factored
      into the Company’s tax accrual.  Annualized income projections indicate
      that the Company will not be liable for any excess flat tax for calendar year
      2008 and, accordingly, has recorded a $834,000 Mexican income tax provision
      as
      of April 30, 2008.




As
      the
      new legislation was recently enacted, it remains subject to ongoing varying
      interpretations.  There is the possibility of implementation amendments by
      the Mexican Government and the estimated future income tax liability recorded
      at
      the balance sheet date may change.





NOTE
      19 - Concentrations of Credit Risk





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist principally of cash and cash equivalents and marketable
      securities. The Company maintains cash balances at financial institutions which
      exceed the Federal Deposit Insurance Corporation limit of $100,000 at times
      during the year.





NOTE
      20 – Recently Issued Accounting Pronouncements




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. The provisions of FAS 157 were adopted January 1, 2008. In
      February 2008, the FASB staff issued Staff Position No. 157-2 “Effective
      Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed
      the effective date of FAS 157 for nonfinancial assets and nonfinancial
      liabilities, except for items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually). The
      provisions of FSP FAS 157-2 are effective for the Company’s fiscal year
      beginning August 1, 2009. The Company is currently evaluating the potential
      impact of adopting this statement.




-22-




In
      February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159
      permits entities to choose to measure many financial instruments and certain
      other items at fair value, with the objective of improving financial reporting
      by mitigating volatility in reported earnings caused by measuring related assets
      and liabilities differently without having to apply complex hedge accounting
      provisions. The provisions of FAS 159 were adopted January 1, 2008. The
      Company did not elect the Fair Value Option for any of its financial assets
      or
      liabilities, and therefore, the adoption of FAS 159 had no impact on the
      Company’s consolidated financial position, results of operations or cash flows.




In
      June
      2007, the EITF reached consensus on Issue No. 06-11, “Accounting for Income
      Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF
      06-11 requires that the tax benefit related to dividend and dividend equivalents
      paid on equity-classified nonvested shares and nonvested share units, which
      are
      expected to vest, be recorded as an increase to additional paid-in capital.
      EITF
      06-11 is to be applied prospectively for tax benefits on dividends declared
      in
      the Company’s fiscal year beginning August 1, 2008. The Company believes
      that the adoption of EITF 06-11 will not have a material impact on the Company’s
      consolidated financial position, results of operations or cash flows.





In
      December 2007, the FASB issued FASB Statement No. 141(R), “Business
      Combinations” (“FAS 141(R)”) which amends FAS 141, and provides revised
      guidance for recognizing and measuring identifiable assets and goodwill
      acquired, liabilities assumed, and any noncontrolling interest in the acquiree.
      It also provides disclosure requirements to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. FAS 141(R) is effective for the Company’s fiscal year beginning
      August 1, 2009 and is to be applied prospectively. The Company does not
      believe the adoption of this statement will have a material impact on the
      Company’s consolidated financial position, results of operations or cash
      flows.




In
      December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling
      Interests in Consolidated Financial Statements—an amendment of ARB No. 51”
(“FAS 160”) which establishes accounting and reporting standards pertaining to
      (i) ownership interests in subsidiaries held by parties other than the
      parent, (ii) the amount of net income attributable to the parent and to the
      noncontrolling interest, (iii) changes in a parent’s ownership interest,
      and (iv) the valuation of any retained noncontrolling equity investment
      when a subsidiary is deconsolidated. FAS 160 also requires that the
      reporting company clearly identify and distinguish between the interests of
      the
      parent and the interests of the noncontrolling owners. FAS 160 is effective
      for the Company’s fiscal year beginning August 1, 2009. The Company does
      not believe the adoption of this statement will have a material impact on the
      Company’s consolidated financial position, results of operations or cash flows.





In
      March
      2008, the FASB issued FASB Statement No. 161, “Disclosure about
      Derivative Instruments and Hedging Activities—an amendment of FASB Statement
      No. 133” (“FAS 161”) which provides revised guidance for enhanced
      disclosures about how and why an entity uses derivative instruments, how
      derivative instruments and the related hedged items are accounted for under
      FAS
      133, and how derivative instruments and the related hedged items affect an
      entity’s financial position, financial performance and cash flows. FAS 161 is
      effective for the Company’s fiscal year beginning August 1, 2009. The
      Company is currently evaluating the potential impact of adopting this statement
      on the Company’s derivative instrument disclosures.





In
      September 2007, the FASB published Proposed FSP No. APB 14-a “Accounting for
      Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)” (the “Proposed FSP”). The Proposed FSP
      applies to convertible debt instruments that, by their stated terms, may be
      settled in cash (or other assets) upon conversion, including partial cash
      settlement, unless the embedded conversion option is required to be separately
      accounted for as a derivative under FASB Statement No. 133. Convertible
      debt instruments within the scope of the Proposed FSP are not addressed by
      the
      existing APB 14. The Proposed FSP would require that the liability and equity
      components of convertible debt instruments within the scope of the Proposed
      FSP
      shall be separately accounted for in a manner that reflects the entity’s
      nonconvertible debt borrowing rate. This will require an allocation of the
      convertible debt proceeds between the liability component and the embedded
      conversion option (i.e., the equity component). The difference between the
      principal amount of the debt and the amount of the proceeds allocated to the
      liability component would be reported as a debt discount and subsequently
      amortized to earnings over the instrument’s expected life using the effective
      interest method. The Company does not believe the adoption of this statement
      will have a material impact on the Company’s consolidated financial position,
      results of operations or cash flows.





-23-





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





Cautionary
      Statement on Forward-Looking Statements





Certain
      statements in this report constitute “forwarding-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities and Exchange Act of 1934. Certain, but not necessarily all, of such
      forward-looking statements can be identified by the use of forward-looking
      terminology such as “believes,” “expects,” “may,” “will,” “should,” or
“anticipates” or the negative thereof or other variations thereon or comparable
      terminology, or by discussions of strategy that involve risks and uncertainties.
      All statements other than statements of historical fact, included in this report
      regarding our financial position, business and plans or objectives for future
      operations are forward-looking statements. Without limiting the broader
      description of forward-looking statements above, we specifically note that
      statements regarding exploration, costs, grade, production and recovery rates,
      permitting, financing needs and the availability of financing on acceptable
      terms or other sources of funding are all forward-looking in nature.





Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors, including but not limited to, the factors discussed below in
      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.


-24-


**General**





Through
      wholly-owned subsidiaries, Capital Gold Corporation owns 100% of 16 mining
      concessions located in the Municipality of Altar, State of Sonora, Republic
      of
      Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square miles).
      We 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. Our results of operations differ from preceding periods because we
      now
      are realizing revenue from operations.





In
      May
      2007, we completed an expanded 72-hole reverse circulation drilling campaign
      to
      identify additional proven and probable gold reserves at the El Chanate Project.
      The 72 holes totaled approximately 8,300 meters, and were positioned to fill
      in
      gaps in the ore body and test the outer limits of the currently known ore zones.
      We updated the assay database and digital geologic model and contracted
      Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ to update our ore
      reserve and our mine plan. On August 30, 2007, IMC delivered to us an updated
      resource block model and an updated mine plan and mine production schedule
      (the
“2007 Report”). The original feasibility study (the “2003 Study”) on the El
      Chanate Project was prepared by M3 Engineering of Tucson in August 2003. M3
      updated the 2003 Study in October 2005 (the “2005 Study”). An August 2006
      technical report from SRK Consulting, Denver, Colorado (the “2006 Update”)
      further updated the feasibility study.





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





The
      following Summary is extracted from the 2007 Report. Please note that the
      reserves as stated are an estimate of what can be economically and legally
      recovered from the mine and, as such, incorporate losses for dilution and mining
      recovery. **** The
      832,280 ounces of contained gold 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 555,960 ounces, or approximately 66.8% of
      the
      contained gold. The gold recovery rate is expected to average approximately
      66.8% for the entire ore body. Individual portions of the ore body may
      experience varying recovery rates ranging from about 73% to 48%. Oxidized and
      sandstone ore types may have recoveries of about 73%; fault zone ore type
      recoveries may be about 64%; siltstone ore types recoveries may be about 48%
      and
      latite intrusive ore type recoveries may be about 50%.




-25-





El
      Chanate Project





**Production
      Summary**





Metric
            
            U.S.**Materials**
              **Reserves**
              ****Proven
              Probable
              Total
                Reserves
              **Waste**
              Total
              
              Contained Gold
              
              **Production**
              Ore
                Crushed**
              
              Operating
                Days/Year
              Gold
                Plant Average Recovery
              Average
                Annual Production**
              Total
                Gold Produced
            
            26.7
                Million Tonnes @ 0.68 g/t*
              12.8
                Million Tonnes@0.61g/t*
              39.5
                Million Tonnes @ 0.66 g/t*
              24.1
                Million Tonnes
              63.6
                Million Tonnes
              
              25.89
                Million grams
              
              2.6
                Million Tonnes /Year7,500
                Mt/d
              
              365
                Days per year
              66.8
                %
              1.35
                Million grams
              17.29
                Million grams
            
            29.4
                Million Tons @ 0.0198 opt*
              14.1
                Million Tons@0.0179opt*
              43.5
                Million Tons @ 0.0192 opt*
              26.6
                Million Tons
              70.1
                Million tons
              
              832,280
                Oz
              
              2.87
                Million Tons/Year8,267
                t/d
              
              365
                Days per year
              66.8
                %
              43,414
                Oz
              555,960
                Oz





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





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





Through
      April 30, 2008, approximately 2.80 million tonnes of ore had been placed on
      the
      leach pad containing an estimated 73,985 ounces of gold. As of April 30, 2008,
      we estimate that we have 33,769 recoverable ounces on the leach pad. Gold
      production for the nine months ended April 30, 2008, totaled approximately
      28,774 ounces of Gold.





Gold
      production at El Chanate is currently near the feasibility study rate of 4,000
      ounces per month. We have started to ramp up daily tonnage levels from 7,500
      tonnes per day (“tpd”) to 10,000 tpd. This should boost our gold production
      toward 5,000 ounces per month (60,000 ounces per year). We anticipate that
      the
      increased plant throughput at these levels will not require any capital since
      additional ore crushing and stacking capacity was factored into the original
      design.


-26-





With
      the
      reserve increase, we are analyzing what steps are necessary to effectively
      increase production rates to a range of 70,000 to 80,000 ounces per year by
      2009
      and improve gold recoveries by conducting further metallurgical test work at
      our
      laboratory facilities at the mine. We will continue our ongoing studies to
      possibly increase production levels to 100,000 ounces per year thereafter.
      To
      this end, we engaged Golder Engineering and its Mexican associates to supply
      engineering services for leach pad expansion. The leach pad expansion was
      completed in April 2008. In addition, we discussed options available with the
      crusher manufacturer, Excel Machinery, with regards to adding an additional
      secondary crusher into the crushing circuit, to enable the system to handle
      increased tonnage. We anticipate that another crusher should move daily tonnage
      up closer to 15,000 tpd. We are still evaluating whether an additional secondary
      crusher is necessary at this time. The estimated cost to achieve these increased
      production rates will be approximately $7,000,000 over a two year period.
      Management has been and will continue to fund these expansion costs with its
      cash on hand as well as through revenues from gold sales.





In
      addition, we identified certain restrictions related to our ADR plant capacity
      which limited the amount of solution that can be processed. We have addressed
      these issues by doubling the installed pumping capacity to increase solution
      flow to the leach pad and added additional carbon capacity to the system. We
      have also purchased an additional set of carbon columns and a strip vessel
      to
      process an additional two tonnes of carbon per strip. We believe the additional
      carbon columns will be completed by the end of our current fiscal year (July
      31,
      2008), thereby lifting the limitations on our current gold production.





For
      the
      nine months ended April 30, 2008, our capital expenditure cost related to the
      leach pad and ADR Plant expansion totaled approximately $3,000,000. This was
      fully funded from cash flow from operations. We anticipate total capital
      expenditures for the leach pad expansion and the ADR plant upgrade will amount
      to approximately $3,750,000.





In
      December 2007, we completed an additional 26 hole reverse circulation drilling
      program amounting to 4,912 meters. The drill holes were mainly positioned to
      test the outer limits of the currently known ore zones. The results of this
      drilling campaign have not been included in our resource model as we continue
      to
      receive assay results.





We
      recently leased 12 mining concessions totaling 1,790 hectares located northwest
      of Saric, Sonora. Also, a claim has been filed for approximately 2,200
      additional hectares adjacent to this property. These concessions and this claim
      are about a sixty mile drive northeast of the El Chanate project. Mineralization
      is evident throughout and is hosted by shear zones and quartz veins in granite
      intrusive. A short drill program, along with some geochemical work, is currently
      underway.





In
      January 2008, pursuant to the terms of our agreement with AngloGold Ashanti
      North America, the entity from which we acquired our rights to the El Chanate
      concessions, we made a good faith determination and notified AngloGold that
      the
      drill indicated resources at the El Chanate gold mine exceeded two million
      ounces of contained gold. The term "drill indicated resources" is defined in
      the
      agreement. A drill indicated resource number does not rise to the level of,
      and
      should not be considered proven and probable reserves as those terms are defined
      under SEC guidelines. We utilized an independent third party consultant,
      Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ, to assist us in the
      good faith determination. AngloGold has until July 28, 2008, or 180 days from
      the date of notification, to determine whether or not it will choose to exercise
      it’s one time back-in right to acquire a 51% interest in the El Chanate project,
      for a purchase price equal to two times the total project costs, as defined
      in
      the agreement, since 2001. As of the date of this report, we have not received
      a
      formal response from Anglo concerning this option to back-in.


-27-





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





**Results
      of Operations**





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





Three
      months ended April 30, 2008 compared to Three months ended April 30,
      2007





Net
      income for the three months ended April 30, 2008 was approximately $2,740,000
      compared to a net loss, of approximately $2,649,000 for the three months ended
      April 30, 2007. The principal reason for this transition was our realizing
      revenue from operations during the current quarter. Net income per common share
      was $0.02 for the three months ended April 30, 2008, on a basic basis and $0.01
      on a diluted basis. The net loss per share for the same period in 2007 was
      $0.01
      on a basic basis.





Revenues
      & Costs Applicable to Sales





Gold
      sales in the current period totaled approximately $8,730,000. We sold 9,466
      ounces at an average realizable price per ounce of $922. Costs applicable to
      sales were approximately $2,717,000 for the current period. There were no metal
      sales in 2006. Our cash cost and total cost per ounce sold was $250 and $305,
      respectively, for the current period.





Revenues
      from by-product sales (silver) are credited to *Costs
      applicable to sales* as a
      by-product credit. Silver sales totaled 10,190 ounces at a price of $19.73
      amounting to approximately $201,000 for the three months ended April 30, 2008.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the three months ended April 30, 2008 and 2007
      was approximately $800,000 and $286,000, respectively. The primary reason for
      the increase of approximately $514,000 was depreciation and amortization charges
      related to the El Chanate capital costs being incurred in the current period.
      There were minimal charges during the same period in the prior year as most
      of
      these assets were placed in service in April 2007. Depreciation and amortization
      also represents deferred financing costs resulting from the Credit Facility
      entered into in August 2006 with Standard Bank Plc. This accounted for
      approximately $272,000 of the amortization expense during the three months
      ended
      April 30, 2008 and 2007, respectively.





General
      and Administration Expense





General
      and administrative expenses during the three months ended April 30, 2008 were
      approximately $1,072,000, an increase of approximately $102,000 or 11% from
      the
      three months ended April 30, 2007. The increase in general and administrative
      expenses resulted primarily from higher investor relations fees, higher
      accounting and auditing fees, and an increase in insurance costs versus the
      same
      period a year earlier as we initiated production in April 2007.





Exploration
      Expense





Exploration
      expense during the three months ended April 30, 2008 and 2007 was approximately
      $19,000 and $811,000, respectively, or a decrease of $792,000. Exploration
      expense for the quarter ended April 30, 2007 included costs incurred related
      to
      our 72-hole reverse circulation drilling campaign to identify additional proven
      and probable gold reserves at the El Chanate Project. The 72 holes totaled
      approximately 8,300 meters, and were positioned to fill in gaps in the ore
      body
      and test the outer limits of the currently known ore zones. We anticipate
      incurring higher exploration expenditures for the remainder of the calendar
      year
      as we complete the results of our short drill program, along with some
      geochemical work, at our new leased concessions in Saric, Sonora.


-28-





Equity
      Based Compensation





Equity
      based compensation during the three months ended April 30, 2008 was
      approximately $14,000 as compared to $52,000 in costs for the same period a
      year
      earlier. These costs primarily represent the equity compensation expense from
      the issuance of stock options for professional services provided by
      non-employees during the current and prior period.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the three months
      ended April 30, 2008 and 2007, was approximately $336,000 and $319,000,
      respectively, and was reflected as an other expense. **** This
      was
      primarily due to the change in fair value of our two identically structured
      derivative contracts with Standard Bank which correlates to fluctuations in
      the
      gold price. These contracts were not designated as hedging derivatives; and
      therefore, special hedge accounting does not apply.





Interest
      expense was approximately $377,000 for the three months ended April 30, 2008
      compared to approximately $275,000 for the same period a year earlier. This
      increase was mainly due to higher interest charges incurred during the current
      period related to our fully outstanding Credit Facility with Standard Bank.
      As
      of April 30, 2008 and 2007, there was $12,500,000 outstanding, respectively,
      on
      this credit facility.





Nine
      months ended April 30, 2008 compared to Nine months ended April 30,
      2007





Net
      income for the nine months ended April 30, 2008 was approximately $6,613,000
      compared to a net loss, of approximately $5,484,000 for the nine months ended
      April 30, 2007. The principal reason for this transition was our realizing
      revenue from operations during the nine months ended April 30, 2008. The
      Company’s first gold sale occurred in August 2007. Net income per common share
      was $0.04 for the nine months ended April 30, 2008, on a basic basis and $0.03
      on a diluted basis. The net loss per share for the same period in 2007 was
      $0.04
      on a basic basis.





Revenues
      & Costs Applicable to Sales





Gold
      sales for the nine months ended April 30, 2008 totaled approximately
      $23,299,000. We have sold 28,210 ounces at an average realizable price per
      ounce
      of $826. Costs applicable to sales were approximately $7,343,000 for the current
      period. There were no metal sales in the prior period. Our cash cost and total
      cost per ounce sold was $247 and $310, respectively, for the nine months ended
      April 30, 2008.





Revenues
      from by-product sales (silver) are credited to *Costs
      applicable to sales* as a
      by-product credit. Silver sales totaled 20,190 ounces at an average price of
      $17.20 amounting to approximately $347,000 for the nine months ended April
      30,
      2008.


-29-





Depreciation
      and Amortization





Depreciation
      and amortization expense during the nine months ended April 30, 2008 and 2007
      was approximately $  2,630,000
      and $632,000, respectively. The increase of approximately $1,998,000 was
      primarily due to depreciation and amortization charges related to the El Chanate
      capital costs being incurred in the current period. The charges during the
      same
      period in the prior year were significantly lower as most of these assets were
      placed in service in April 2007. Depreciation and amortization also represents
      deferred financing costs resulting from the Credit Facility. This accounted
      for
      approximately $816,000 and $632,000 of the amortization expense during the
      nine
      months ended April 30, 2008 and 2007, respectively.





General
      and Administration Expense





General
      and administrative expenses during the nine months ended April 30, 2008 were
      approximately $3,186,000, an increase of approximately $1,035,000 or 48% from
      the nine months ended April 30, 2007. The
      increase in general and administrative expenses resulted primarily from: 1)
      higher salaries and wages including the awarding of cash bonuses to officers
      and
      employees of approximately $315,000 and the granting of stock options and
      restricted stock to our officers and employees under our 2006 Equity Incentive
      Plan amounting to approximately $477,000, 2) higher investor relations fees
      and
      travel fees of approximately $230,000, and 3) an increase in insurance costs
      of
      approximately $77,000 versus the same period a year earlier as we were not
      yet
      in full production in the prior period. The above mentioned increases in
      compensation were granted based upon recommendations from an independent report
      on executive compensation. This independent report, requested by our
      Compensation Committee, was obtained in order to assist us in attracting and
      retaining individuals of experience and ability, to provide incentive to our
      employees and directors, to encourage employee and director proprietary
      interests in the Company, and to encourage employees to remain in our employ.





Exploration
      Expense





Exploration
      expense during the nine months ended April 30, 2008 and 2007 was approximately
      $650,000 and $1,325,000, respectively, or a decrease of $675,000 or 51%. The
      primary reason for the decrease in exploration expense was the result of higher
      engineering and planning costs related to our El Chanate Project being expensed
      in the prior period as well as the costs incurred from our 72-hole reverse
      circulation drilling campaign to identify additional proven and probable gold
      reserves at the El Chanate Project which was completed in May 2007. The current
      period includes costs from our completed 26 hole reverse circulation drilling
      program in December 2007 amounting to 4,912 meters at El Chanate. The drill
      holes were mainly positioned to test the outer limits of the currently known
      ore
      zones.





Equity
      Based Compensation





Equity
      based compensation during the nine months ended April 30, 2008 was approximately
      $122,000 as compared to $153,000 in costs for the same period a year earlier.
      These costs primarily represent the equity compensation expense from the
      issuance of stock options for professional services provided to non-employees
      during the current and prior period.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the nine months
      ended April 30, 2008 and 2007, was approximately $1,037,000 and $847,000,
      respectively, and was reflected as an other expense. **** This
      was
      primarily due to the change in fair value of our two identically structured
      derivative contracts with Standard Bank which correlates to fluctuations in
      the
      gold price. These contracts were not designated as hedging derivatives; and
      therefore, special hedge accounting does not apply.


-30-





Interest
      expense was approximately $945,000 for the nine months ended April 30, 2008
      compared to approximately $474,000 for the same period a year earlier. This
      increase was mainly due to higher interest charges incurred during the current
      period related to our fully outstanding credit facility with Standard Bank.
      As
      of April 30, 2008 and 2007, there was $12,500,000 outstanding, respectively, on
      this credit facility.




Changes
      in Foreign Exchange Rates







During
      the nine months ended April 30, 2008, we recorded equity adjustments from
      foreign currency translations of approximately $300,000. These translation
      adjustments are related to changes in the rates of exchange between the Mexican
      Peso and the US dollar and are included as a component of other comprehensive
      income.





Summary
      of Quarterly Results


(000’s
      except per share Data)





For
                the three
            
            For
                the three
            
            For
                the Nine
            
            For
                the NineMonths
                ended
            
            Months
                ended
            
            Months
                ended
            
            Months
                endedApril
                30,
              2008
            
            April
                30,
              2007
            
            April
                30,
              2008
            
            April
                30,
              2007Revenues
            
            
            8,730
            
            
            -
            
            
            23,299
            
            
            -Net
                Income (loss)
            
            
            2,740
            
            
            (2,649
            )
            
            6,613
            
            
            (5,484
            )Basic
                net income (loss)per
                share
            
            
            0.02
            
            
            (0.02
            )
            
            0.04
            
            
            (0.04
            )Diluted
                net income (loss)per
                share
            
            
            0.01
            
            
            -
            
            
            0.03
            
            
            -





**Liquidity
      and Capital Resources**





As
      of
      April 30, 2008, we had approximately $4,936,000 in cash and cash equivalents,
      an
      increase of $2,711,000 over July 31, 2007. Working capital was approximately
      $10,398,000, an increase of $4,055,000 over July 31, 2007. Cash
      provided by operating activities during the nine months ended April 30, 2008
      was
      approximately $4,818,000, which primarily represents cash flows resulting from
      our realization
      of revenue from operations during the nine months ended April 30, 2008. Cash
      used
      in investing activities during the nine months ended April 30, 2008, amounted
      to
      approximately $4,691,000, primarily from the leach pad expansion and the
      acquisition of equipment, including additional conveyors and ADR plant
      equipment, as well as additional water rights related to our El Chanate Project.
      Cash provided by financing activities during the nine months ended April 30,
      2008 amounted to approximately $2,284,000, primarily from the exercising of
      6,646,750 warrants for gross proceeds of approximately $2,277,000. We
      believe that our available funds in conjunction with anticipated revenues from
      gold sales will be adequate to cover operating activities at El Chanate for
      the
      life of mine as well as our leach pad and ADR plant expansion activities. We
      anticipate total capital expenditures related to the leach pad expansion and
      the
      ADR plant upgrade will amount to approximately $3,750,000.





In
      March
      2006, we entered into a gold price protection arrangement with Standard Bank
      to
      protect us against future fluctuations in the price of gold. We agreed to a
      series of gold forward sales and call option purchases in anticipation of
      entering into the Credit Facility. Under the price protection agreement, we
      have
      agreed to sell a total volume of 121,927 ounces of gold forward to Standard
      Bank
      at a price of $500 per ounce on a quarterly basis during the period from March
      2007 to September 2010. We will also purchase call options from Standard Bank
      on
      a quarterly basis during this same period covering a total volume of 121,927
      ounces of gold at a price of $535 per ounce. To date, rather than modifying
      the
      original Gold Price Protection agreement with Standard Bank to satisfy these
      forward sale obligations, we have opted for a net cash settlement between the
      call option purchase price of $535 and the forward sale price of $500, or $35.00
      per oz. We have paid Standard Bank approximately $1,346,000 on the settlement
      of
      38,455 ounces with corresponding reductions in our derivative liability
      ($887,000 or 25,329 ounces of gold) during the nine months ended April 30,
      2008.
      The remaining ounces to settle with regard to this agreement amounted to 83,472
      as of April 30, 2008.


-31-





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      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
      received a mandate letter, dated February 27, 2008, from Standard Bank to
      refinance the existing project finance facility on the El Chanate mine. The
      key
      anticipated amendments to the refinance include: 1) removal of cash restrictions
      and covenants, 2) reduction of the finance interest rate by 1.5%, 3) addition
      of
      a five million dollar line of credit at LIBOR + 2%, and 4) exercise of a portion
      of the warrants currently held by Standard Bank to provide additional support
      for El Chanate expansion plans and to fully fund the debt service reserve
      account. We anticipate a closing date by the end of fiscal 2008 (July 31,
      2008).





While
      we
      believe that our available funds in conjunction with anticipated revenues from
      gold sales will be adequate to cover operating activities at El Chanate and
      general and administrative expenses for the life of the mine as well as the
      remaining capital costs associated with the ADR plant expansion, if we encounter
      unexpected problems we may need to raise additional capital. We also may need
      to
      raise additional capital for significant property acquisitions and/or
      exploration activities. To the extent that we need to obtain additional capital,
      management intends to raise such funds through the sale of our securities and/or
      joint venturing with one or more strategic partners. We cannot assure that
      adequate additional funding, if needed, will be available. If we need additional
      capital and we are unable to obtain it from outside sources, we may be forced
      to
      reduce or curtail our operations or our anticipated exploration activities.
      Please see “ *We
      just recently started to receive cash flow from operations and, historically,
      have relied on external funding sources. While we believe that we will continue
      to generate cash flow and profits from operations, if we encounter unexpected
      problems, we may need to raise additional capital. If additional capital is
      required and we are unable to obtain it from outside sources, we may be forced
      to reduce or curtail our operations or our anticipated exploration
      activities.* ”
In
      Part
      II; Item 1A. “ *Risk
      Factors”* below.





**Environmental
      and Permitting Issues**





Management
      does not expect that environmental issues will have an adverse material effect
      on our liquidity or earnings. In Mexico, although we must continue to comply
      with laws, rules and regulations concerning mining, environmental, health,
      zoning and historical preservation issues, we are not aware of any significant
      environmental concerns or existing reclamation requirements at the El Chanate
      concessions. We received the required Mexican government permits for
      construction, mining and processing the El Chanate ores in January 2004. The
      permits were extended in June 2005. Pursuant to the extensions, once we file
      a
      notice that work has commenced, we have one year to prepare the site and
      construct the mine and seven years to mine and process ores from the site.
      We
      filed the notice on June 1, 2006. Once we revise our new mine plan based on
      the
      2007 Report, we will work to extend the permits for mining and processing for
      the new life of mine. We received the original explosive permit from the
      government in August 2006. This permit, as extended, expires on December 31,
      2008 and is renewable annually.


-32-





We
      own
      properties in Leadville, Colorado for which we have previously recorded an
      impairment loss. Part of the Leadville Mining District has been declared a
      federal Superfund site under the Comprehensive Environmental Response,
      Compensation and Liability Act of 1980, and the Superfund Amendments and
      Reauthorization Act of 1986. Several mining companies and one individual were
      declared defendants in a possible lawsuit. We were not named a defendant or
      Principal Responsible Party. We did respond in full detail to a lengthy
      questionnaire prepared by the Environmental Protection Agency ("EPA") regarding
      our proposed procedures and past activities in November 1990. To our knowledge,
      the EPA has initiated no further comments or questions. The Division of
      Reclamation, Mining and Safety of the State of Colorado (the “Division”)
      conducted its most recent inspection of our Leadville Mining properties in
      August 2007. The Division concluded that based upon 2007 equipment prices and
      labor costs, an additional $46,000 was necessary to be bonded with the Division
      to reclaim the site to achieve the approved postmining land use. The total
      amount of the bond sufficient to perform reclamation as of April 30, 2008,
      is
      approximately $82,000. We have met this bonding requirement.





We
      do
      include in all our internal revenue and cost projections a certain amount for
      environmental and reclamation costs on an ongoing basis. This amount was
      determined at a fixed amount of $0.13 per metric tonne of material to be mined
      on a continual, ongoing basis to provide primarily for reclaiming tailing
      disposal sites and other reclamation requirements. No assurance can be given
      that environmental regulations will not be changed in a manner that would
      adversely affect our planned operations. We estimated the reclamation costs
      for
      the El Chanate site to be approximately $2,300,000. Reclamation costs are
      allocated to expense over the life of the related assets and are periodically
      adjusted to reflect changes in the estimated present value resulting from the
      passage of time and revisions to the estimates of either the timing or amount
      of
      the reclamation and abandonment costs. The asset retirement obligation is based
      on when the spending for an existing environmental disturbance and activity
      to
      date will occur. We review, on an annual basis, unless otherwise deemed
      necessary, the asset retirement obligation at each mine site.





**New
      Accounting Pronouncements**





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





**Disclosure
      About Off-Balance Sheet Arrangements**





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




**Critical
      Accounting Policies**





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


-33-





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





Costs
      that are incurred in or benefit the productive process are accumulated as
      stockpiles, ore on leach pads and inventories. Stockpiles, ore on leach pads
      and
      inventories are carried at the lower of average cost or net realizable value.
      Net realizable value represents the estimated future sales price of the product
      based on current and long-term metals prices, less the estimated costs to
      complete production and bring the product to sale. Write-downs of stockpiles,
      ore on leach pads and inventories, resulting from net realizable value
      impairments, are reported as a component of *Costs
      applicable to sales* .
      The
      current portion of stockpiles, ore on leach pads and inventories is determined
      based on the expected amounts to be processed within the next 12 months.
      Stockpiles, ore on leach pads and inventories not expected to be processed
      within the next 12 months are classified as long-term. The major
      classifications are as follows:





*Ore
      on Leach Pads*





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




The
      estimates of recoverable gold on the leach pads are calculated from the
      quantities of ore placed on the leach pads (measured tons added to the leach
      pads), the grade of ore placed on the leach pads (based on assay data) and
      a
      recovery percentage (based on ore type). In general, leach pads recover
      approximately 50% to 95% of the recoverable ounces in the first year of
      leaching, declining each year thereafter until the leaching process is complete.





Although
      the quantities of recoverable gold placed on the leach pads are reconciled
      by
      comparing the grades of ore placed on pads to the quantities of gold actually
      recovered (metallurgical balancing), the nature of the leaching process
      inherently limits the ability to precisely monitor inventory levels. As a
      result, the metallurgical balancing process needs to be constantly monitored
      and
      estimates need to be refined based on actual results over time. Our operating
      results may be impacted by variations between the estimated and actual
      recoverable quantities of gold on its leach pads. Variations between actual
      and
      estimated quantities resulting from changes in assumptions and estimates that
      do
      not result in write-downs to net realizable value will be accounted for on
      a
      prospective basis.





*In-process
      Inventory*





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


-34-





*Precious
      Metals Inventory*





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





*Materials
      and Supplies*





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





Property,
      Plant and Mine Development





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





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





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.


-35-





Reclamation
      and Remediation Costs (Asset Retirement Obligations)





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





Deferred
      Financing Costs





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





Intangible
      Assets





Purchased
      intangible assets consisting of rights of way, easements and net profit
      interests are carried at cost less accumulated amortization. Amortization is
      computed using the straight-line method over the economic lives of the
      respective assets, generally five years or using the UOP method. It is our
      policy to assess periodically the carrying amount of our purchased intangible
      assets to determine if there has been an impairment to their carrying value.
      Impairments of other intangible assets are determined in accordance with SFAS
      144. There was no impairment at April 30, 2008.





Fair
      Value of Financial Instruments





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





Revenue
      Recognition





Revenue
      is recognized, net of treatment and refining charges, from a sale when the
      price
      is determinable, the product has been delivered, the title has been transferred
      to the customer and collection of the sales price is reasonably assured.





Equity
      Based Compensation





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





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


-36-





Accounting
      for Derivatives and Hedging Activities





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





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50 percent of our outstanding
      debt under this facility. The agreements entered into cover $9,375,000 or 75%
      of
      the outstanding debt. Both swaps covered this same notional amount of
      $9,375,000, but over different time horizons. The first covered the six months
      that commenced on October 11, 2006 and terminated on March 31, 2007 and the
      second covers the period from March 30, 2007 through December 31, 2010. We
      intend to use discretion in managing this risk as market conditions vary over
      time, allowing for the possibility of adjusting the degree of hedge coverage
      as
      we deem appropriate. However, any use of interest rate derivatives will be
      restricted to use for risk management purposes.





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





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





We
      are
      exposed to credit losses in the event of non-performance by counterparties
      to
      these interest rate swap agreements, but we do not expect any of the
      counterparties to fail to meet their obligations. To manage credit risks, we
      select counterparties based on credit ratings, limit our exposure to a single
      counterparty under defined guidelines, and monitor the market position with
      each
      counterparty as required by SFAS 133.


-37-





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**




***Metal
      Prices***





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 strength of the U.S. dollar and global mine production
      levels.





***Gold
      Price Protection Agreement***





In
      March
      2006, we entered into a gold price protection arrangement with Standard Bank
      to
      protect us against future fluctuations in the price of gold. We agreed to a
      series of gold forward sales and call option purchases in anticipation of
      entering into the Credit Facility. Under the price protection agreement, we
      have
      agreed to sell a total volume of 121,927 ounces of gold forward to Standard
      Bank
      at a price of $500 per ounce on a quarterly basis during the period from March
      2007 to September 2010. We also purchased call options from Standard Bank
      enabling the right to purchase gold on a quarterly basis during this same period
      covering a total volume of 121,927 ounces of gold at a price of $535 per ounce.
      Together, these forward sales and call options serve to put a floor on our
      gold
      sales price and thereby protect us from the effects of the market price falling
      below $535 per ounce, while allowing us to enjoy the upside of higher gold
      prices. To date, rather than modifying the original Gold Price Protection
      agreement with Standard Bank to satisfy these forward sale obligations, we
      have
      opted for a net cash settlement between the call option purchase price of $535
      and the forward sale price of $500, or $35.00 per oz. We have paid Standard
      Bank
      approximately $1,346,000 on the settlement of 38,455 ounces with corresponding
      reductions in our derivative liability ($887,000 or 25,329 ounces of gold)
      during the nine months ended April 30, 2008. The remaining ounces to settle
      with
      regard to this agreement amounted to 83,472 as of April 30, 2008. The fair
      value
      of this derivative liability recorded on the balance sheet as of April 30,
      2008,
      was approximately $702,000.





The
      total
      contractual ounces to settle and cash payments remaining on the gold price
      protection agreement are as follows:





Fiscal
                year ending:
            
            Ounces Remaining
            
            Amount2008
            
            
            8,428
            
            $
            295,0002009
            
            
            33,638
            
            $
            1,177,0002010
            
            
            33,176
            
            $
            1,161,0002011
            
            
            8,230
            
            $
            288,000Total
            
            
            83,472
            
            $
            2,921,000





***Interest
      Rate Swap Contracts***





On
      October 11, 2006, prior to our initial draw on the Credit Facility, we entered
      into interest rate swap agreements in accordance with the terms of the Credit
      Facility, which requires that we hedge at least 50% of our outstanding debt
      under this facility. The agreements entered into cover $9,375,000 or 75% of
      the
      outstanding debt. Both swaps covered this same notional amount of $9,375,000,
      but over different time horizons. The first covered the six months 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. The fair value of this
      derivative liability recorded on the balance sheet as of April 30, 2008, was
      approximately $274,000.


-38-





**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.


-39-


**PART
      II - OTHER INFORMATION**





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





None.





**Item
      1A.**  **Risk
      Factors**





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





**Risks
      related to our business and operations**





***We
      have just begun generating operating revenues. If we are unable to sustain
      operating revenues, we will not be able to generate profits and our business
      may
      fail.***





Until
      recently, we had no producing properties and, historically, have operated at
      a
      loss. We only commenced gold producing activities and started to generate
      revenues in August 2007. Our ultimate success will depend on our ability to
      generate profits from our properties. Our viability is largely dependent on
      the
      successful commercial development of our El Chanate gold mining project in
      Sonora, Mexico. While we have commenced revenue producing mining operations,
      we
      cannot assure that revenues will continue to cover cash flow or continue to
      generate profits.





***We
      just recently started to receive cash flow from operations and, historically,
      have relied on external funding sources. While we believe that we will continue
      to generate cash flow and profits from operations, if we encounter unexpected
      problems, we may need to raise additional capital. If additional capital is
      required and we are unable to obtain it from outside sources, we may be forced
      to reduce or curtail our operations or our anticipated exploration
      activities.***





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





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





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


40






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





We
      are
      using reconditioned carbon column collection equipment to recover gold and
      Sinergia, our mining contractor, is using equipment **** that
      is
      not new. Such equipment is subject to the risk of more frequent breakdowns
      and
      need for repair than new equipment. If the equipment that we or Sinergia uses
      breaks down and needs to be repaired or replaced, we will incur additional
      costs
      and operations may be delayed resulting in lower amounts of gold recovered.
      In
      such event, our capital and operating cost assumptions may be inaccurate and
      our
      ability to economically and successfully mine the project may be hampered,
      resulting in decreased revenues and, possibly, a loss from
      operations.





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





The
      gold
      deposit we have identified at our El Chanate Project is relatively low-grade.
      If
      the estimates of ore grade or recovery rates turn out to be lower than the
      actual ore grade and recovery rates, if costs are higher than expected, or
      if we
      experience problems related to the mining, processing, or recovery of gold
      from
      ore at the El Chanate Project, our results of operation and financial condition
      could be materially adversely affected. Moreover, it is possible that actual
      costs and economic returns may differ materially from our best estimates. It
      is
      not unusual in the mining industry for new mining operations to experience
      unexpected problems during the initial production phase and to require more
      capital than anticipated. There can be no assurance that our operations at
      El
      Chanate will continue to be profitable.





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





Our
      only
      current properties are the El Chanate concessions. Accordingly, we are dependent
      upon the success of the El Chanate concessions.





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





The
      profitability of any gold mining operations in which we have an interest will
      be
      significantly affected by changes in the market price of gold. Gold prices
      fluctuate on a daily basis. During the fiscal quarter ended April 2008, the
      spot
      price for gold on the London Exchange has fluctuated between $867.00 and
      $1,011.30 per ounce. During calendar 2007, the spot price for gold on the London
      Exchange fluctuated between $608.40 and $841.10 per ounce. Gold prices are
      affected by numerous factors beyond our control, including:





·
            the
                level of interest rates,


·
            the
                rate of inflation,


·
            central
                bank sales,


·
            world
                supply of gold and


·
            stability
                of exchange rates.





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




41




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





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




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





To
      date,
      rather than modifying the original Gold Price Protection agreement with Standard
      Bank to satisfy these forward sale obligations, we have opted for a net cash
      settlement between the call option purchase price of $535 and the forward sale
      price of $500, or $35.00 per oz. We have paid Standard Bank approximately
      $1,346,000 on the settlement of 38,455 ounces with corresponding reductions
      in
      our derivative liability ($887,000 or 25,329 ounces of gold during the nine
      months ended April 30, 2008). The remaining ounces to settle with regard to
      this
      agreement amounted to 83,472 as of April 30, 2008. We believe we will be able
      to
      deliver the quantity of gold required by our forward sales on a going forward
      basis; however, we may continue to opt to net cash settle these forward sale
      obligations if it remains the most cost effective option for us. If we are
      unable for any reason to produce the quantity of gold required by our forward
      sales and generate sufficient cash flow to settle these forward sales in gold
      or
      cash, it could have a material adverse effect on our financial condition and
      cash flows.





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





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





·
            labor
                disputes,


·
            invalidity
                of governmental orders,


·
            uncertain
                or unpredictable political, legal and economic
                environments,


·
            war
                and civil disturbances,


·
            changes
                in laws or policies,


·
            taxation,






42




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


·
            governmental
                seizure of land or mining claims,


·
            limitations
                on ownership,


·
            limitations
                on the repatriation of earnings,


·
            increased
                financial costs,


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


·
            foreign
                exchange controls.





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





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





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





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





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





·
            ownership
                of assets,


·
            land
                tenure,


·
            mining
                policies,


·
            monetary
                policies,


·
            taxation,


·
            rates
                of exchange,


·
            environmental
                regulations,


·
            labor
                relations,


·
            repatriation
                of income and/or


·
            return
                of capital.





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





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





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





·
            stricter
                standards and enforcement,


·
            increased
                fines and penalties for non-compliance,






43




·
            more
                stringent environmental assessments of proposed projects and


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





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





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





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





·
            environmental
                hazards,


·
            industrial
                accidents,


·
            metallurgical
                and other processing,


·
            acts
                of God, and/or


·
            mechanical
                equipment and facility performance problems.





Such
      risks could result in:





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


·
            personal
                injury or death,


·
            environmental
                damage,


·
            delays
                in mining,


·
            monetary
                losses and /or


·
            possible
                legal liability.





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





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





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




44




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





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





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





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





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





Gold
      properties are wasting assets. They eventually become depleted or uneconomical
      to continue mining. The acquisition of gold properties and their exploration
      and
      development are subject to intense competition. Companies with greater financial
      resources, larger staffs, more experience and more equipment for exploration
      and
      development may be in a better position than us to compete for such mineral
      properties. If we are unable to find, develop and economically mine new
      properties, we most likely will not be able to be profitable on a long-term
      basis.





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





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





·
            the
                location of economic ore bodies,


·
            development
                of appropriate metallurgical processes,






45




·
            receipt
                of necessary governmental approvals and


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





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





·
            the
                price of gold,


·
            the
                particular attributes of the deposit, such as its


o
            size,


o
            grade
                and


o
            proximity
                to infrastructure,


·
            financing
                costs,


·
            taxation,


·
            royalties,


·
            land
                tenure,


·
            land
                use,


·
            water
                use,


·
            power
                use,


·
            importing
                and exporting gold and


·
            environmental
                protection.





The
      effect of these factors cannot be accurately predicted.





**Risks
      related to ownership of our stock**





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





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





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





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




46




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





We
      received proceeds of approximately $120,500 during the quarter ended April
      30,,
      2008 from the exercising of an aggregate of 326,250 warrants issued in past
      private placements.





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





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





None.





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





None.





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




None.





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





31.1
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer.


31.2
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer.


32.1
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Executive Officer.


32.2
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
                Company's Chief Financial Officer.




47




**SIGNATURES**




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




**CAPITAL
                GOLD CORPORATION**RegistrantBy:
            /s/
                Gifford A. DieterleGifford
                A. DieterlePresident/TreasurerDate:
                June 11, 2008




48