SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





x
      QUARTERLY REPORT UNDER
      SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the
      quarterly period ended October 31, 2006





OR




o
      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 small business issuer as specified in its charter)





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





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


(Address
      of principal executive offices)





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







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





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





Yes  x   No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes 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 December 15, 2006Common
                  Stock, par value $.0001 per share
              133,482,854


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











**PART
      I. FINANCIAL INFORMATION**





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





The
      accompanying financial statements are unaudited for the interim periods, but
      include all adjustments (consisting only of normal recurring adjustments),
      which
      we consider necessary for the fair presentation of results for the three months
      ended October 31, 2006.





Moreover,
      these financial statements do not purport to contain complete disclosure in
      conformity with U.S. generally accepted accounting principles and should be
      read
      in conjunction with our audited financial statements at, and for the fiscal
      year
      ended July 31, 2006.





The
      results reflected for the three months ended October 31, 2006 are not
      necessarily indicative of the results for the entire fiscal year.




-2-




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




October
                31,2006ASSETSCurrent
                Assets:Cash
                and Cash Equivalents
            
            $
            1,936,828Loans
                Receivable - Affiliate (Note 8 and 11)
            
            
            43,995Prepaid
                Assets
            
            
            35,525Marketable
                Securities (Note 3)
            
            
            140,000Deposits
                (Note 18)
            
            
            1,679,110Other
                Current Assets
            
            
            338,374Total
                Current Assets
            
            
            4,173,832Mining
                Concessions (Note 6)
            
            
            70,104Property
                & Equipment - net (Note 4)
            
            
            4,499,160Intangible
                Assets - net (Note 5)
            
            
            512,900Other
                Assets:Other
                Investments (Note 9)
            
            
            28,052Deferred
                Financing Costs (Note 13)
            
            
            683,849Mining
                Reclamation Bonds (Note 6)
            
            
            35,550Other
            
            
            42,285Security
                Deposits
            
            
            9,599Total
                Other Assets
            
            
            799,335Total
                Assets
            
            $
            10,055,331LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                Liabilities:Accounts
                Payable
            
            $
            289,934Accrued
                Expenses
            
            
            584,116Derivative
                Contracts (Note 16)
            
            
            115,424Total
                Current Liabilities
            
            
            989,474Note
                Payable
            
            
            1,250,000Total
                Long-term Liabilities (Note 13)
            
            
            1,250,000Commitments
                and ContingenciesStockholders’
                Equity:Common
                Stock, Par Value $.0001 Per Share;Authorized
                200,000,000 shares; Issued andOutstanding
                132,785,129 Shares
            
            
            13,278Additional
                Paid-In Capital
            
            
            44,433,022Deficit
                Accumulated in the Development Stage
            
            
            (32,549,272
            )Deferred
                Financing Costs (Note 13)
            
            
            (4,136,015
            )Deferred
                Compensation
            
            
            (52,500
            )Accumulated
                Other Comprehensive Loss (Note 10)
            
            
            107,344Total
                Stockholders’ Equity
            
            
            7,815,857Total
                Liabilities and Stockholders’ Equity
            
            $
            10,055,331




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




-3-




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




For
                the PeriodFor
                The Three Months Ended
            
            September
                17, 1982October
                31,
            
            (Inception)
                To2006
            
            2005
            
            October
                31, 2006Revenues
            
            $
            -
            
            $
            -
            
            $
            -Costs
                and Expenses:Mine
                Expenses
            
            
            212,227
            
            
            540,551
            
            
            9,816,940Write-Down
                of Mining, Milling and Other Property and Equipment
            
            
            -
            
            
            -
            
            
            1,299,445Selling,
                General and Administrative Expenses
            
            
            632,237
            
            
            289,347
            
            
            12,630,697Stocks
                and Warrants issued forServices
            
            
            -
            
            
            -
            
            
            9,499,238Depreciation
                and Amortization
            
            
            73,445
            
            
            8,570
            
            
            487,571Total
                Costs and Expenses
            
            
            917,909
            
            
            838,468
            
            
            33,733,891Loss
                from Operations
            
            
            (917,909
            )
            
            (838,468
            )
            
            (33,733,891
            )Other
                Income (Expense):Interest
                Income
            
            
            21,578
            
            
            25,506
            
            
            1,001,295Interest
                Expense
            
            
            (22,581
            )
            
            -
            
            
            (22,581
            )Miscellaneous
            
            
            -
            
            
            -
            
            
            36,199Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            -
            
            
            (155,713
            )Gain
                on Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            1,907,903Option
                Payment
            
            
            -
            
            
            -
            
            
            70,688Loss
                on change in fair value of derivative
            
            
            (241,857
            )
            
            
            
            
            (823,781
            )Loss
                on Write-Off of Investment
            
            
            -
            
            
            -
            
            
            (10,000
            )Loss
                on Joint Venture
            
            
            -
            
            
            -
            
            
            (901,700
            )Loss
                on Option
            
            
            -
            
            
            -
            
            
            (50,000
            )Gain
                (Loss) on Other Investments
            
            
            -
            
            
            -
            
            
            (3,697
            )Loss
                on Write -Off of Minority Interest
            
            
            -
            
            
            -
            
            
            (150,382
            )Total
                Other Income (Expense)
            
            
            (242,860
            )
            
            25,506
            
            
            898,231Loss
                Before Minority Interest
            
            
            (1,160,769
            )
            
            (812,962
            )
            
            (32,835,660
            )Minority
                Interest
            
            
            -
            
            
            -
            
            
            286,388Net
                Loss
            
            $
            (1,160,769
            )
            $
            (812,962
            )
            $
            (32,549,272
            )Net
                Loss Per Common Share - Basic and Diluted
            
            $
            (0.01
            )
            $
            (0.01
            )Weighted
                Average Common Shares Outstanding
            
            
            132,597,627
            
            
            95,969,218




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




CAPITAL
                GOLD CORPORATION(A
                DEVELOPMENT STAGE ENTERPRISE)CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR
                THE THREE MONTHS ENDED OCTOBER 31, 2006
              (UNAUDITED)




Deficit
            
            AccumulatedAccumulated
            
            OtherAdditional
            
            in
                the
            
            Comprehensive
            
            Deferred
            
            Deferred
            
            TotalCommon
                Stock
            
            paid-in-
            
            Development
            
            Income/
            
            Financing
            
            Compensation
            
            StockholderShares
            
            Amount
            
            capital
            
            Stage
            
            (Loss)
            
            Costs
            
            Costs
            
            EquityBalance
                at July 31, 2006
            
            
            131,635,129
            
            
            13,163
            
            
            40,733,825
            
            
            (31,388,503
            )
            
            146,493
            
            
            (522,541
            )
            
            (52,500
            )
            
            8,929,937Deferred
                Financing Costs
            
            
            1,150,000
            
            
            115
            
            
            350,635
            
            
            -
            
            
            -
            
            
            (350,750
            )
            
            -
            
            
            -Deferred
                Financing Costs
            
            
            -
            
            
            -
            
            
            3,314,449
            
            
            -
            
            
            -
            
            
            (3,314,449
            )
            
            -
            
            
            -Amortization
                of Deferred Finance Costs
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            51,725
            
            
            -
            
            
            51,725Options
                and warrants issued for services
            
            
            -
            
            
            -
            
            
            34,113
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            34,113Unrealized
                loss on marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            50,000
            
            
            -
            
            
            -
            
            
            50,000Change
                in fair value on interest rate swaps
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (91,682
            )
            
            -
            
            
            -
            
            
            (91,682
            )Equity
                adjustment from foreign currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,533
            
            
            -
            
            
            -
            
            
            2,533Net
                loss for the three months ended October 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,160,769
            )
            
            -
            
            
            
            
            
            -
            
            
            (1,160,769
            )Balance
                - October 31, 2006
            
            
            132,785,129
            
            $
            13,278
            
            $
            44,433,022
            
            $
            (32,549,272
            )
            $
            107,344
            
            $
            (4,136,015
            )
            $
            (52,500
            )
            $
            7,815,857





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




-5-




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




For
                    The
                  Three
                    Months Ended
            
            For
                    The Period
                  September
                    17, 1982October
                31,
            
            (Inception)
                To2006
            
            2005
            
            October
                31, 2006Cash
                Flow From Operating Activities:Net
                Loss
            
            $
            (1,160,769
            )
            $
            (812,962
            )
            $
            (32,549,272
            )Adjustments
                to Reconcile Net Loss toNet
                Cash Provided by (Used in) Operating Activities:Depreciation
                and Amortization
            
            
            73,445
            
            
            8,570
            
            
            496,141Gain
                on Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            (1,907,903
            )Minority
                Interest in Net Loss of Subsidiary
            
            
            -
            
            
            -
            
            
            (286,388
            )Write-Down
                of Impaired Mining, Milling and Other
            
            
            -Property
                and Equipment
            
            
            -
            
            
            -
            
            
            1,299,445Loss
                on Sale of Property and Equipment
            
            
            -
            
            
            -
            
            
            155,713Loss
                on change in fair value of derivative
            
            
            241,858
            
            
            
            
            
            823,782Loss
                on Write-Off of Investment
            
            
            -
            
            
            -
            
            
            10,000Loss
                on Joint Venture
            
            
            -
            
            
            -
            
            
            901,700Loss
                on Write-Off of Minority Interest
            
            
            -
            
            
            -
            
            
            150,382Value
                of Common Stock and Warrants Issued forServices
            
            
            34,115
            
            
            -
            
            
            12,619,730Changes
                in Operating Assets and Liabilities:(Increase)
                Decrease in Prepaid Expenses
            
            
            4,507
            
            
            18,991
            
            
            (16,575
            )(Increase)
                Decrease in Other Current Assets
            
            
            4,145,478
            
            
            18,013
            
            
            (1,120,361
            )(Increase)
                in Other Deposits
            
            
            (1,429,110
            )
            
            (18,000
            )
            
            (1,697,110
            )Increase
                (Decrease) in Other Assets
            
            
            768
            
            
            -
            
            
            (41,900
            )(Increase)
                in Security Deposits
            
            
            -
            
            
            -
            
            
            (9,605
            )Increase
                (Decrease) in Accounts Payable
            
            
            30,962
            
            
            55,030
            
            
            373,146Increase
                (Decrease) in Accrued Expenses
            
            
            227,445
            
            
            (46,819
            )
            
            364,374Net
                Cash Provided by (Used in) Operating Activities
            
            
            2,168,699
            
            
            (777,177
            )
            
            (20,434,701
            )Cash
                Flow From Investing Activities:(Increase)
                in Other Investments
            
            
            (6,572
            )
            
            (260
            )
            
            (28,312
            )Purchase
                of Mining, Milling and Other Property andEquipment
            
            
            (3,475,456
            )
            
            (17,524
            )
            
            (6,666,738
            )Purchase
                of Concessions
            
            
            -
            
            
            -
            
            
            (25,324
            )Investment
                in Intangibles
            
            
            (500,000
            )
            
            -
            
            (518,620)Proceeds
                on Sale of Mining, Milling and Other Propertyand
                Equipment
            
            
            -
            
            
            -
            
            
            275,638Proceeds
                From Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            2,131,616Expenses
                of Sale of Subsidiary
            
            
            -
            
            
            -
            
            
            (101,159
            )Advance
                Payments - Joint Venture
            
            
            -
            
            
            -
            
            
            98,922Investment
                in Joint Venture
            
            
            -
            
            
            -
            
            
            (101,700
            )Investment
                in Privately Held Company
            
            
            -
            
            
            -
            
            
            (10,000
            )Net
                Assets of Business Acquired (Net of Cash)
            
            
            -
            
            
            -
            
            
            (42,130
            )Investment
                in Marketable Securities
            
            
            -
            
            
            -
            
            
            (50,000
            )




The
        accompanying notes are an integral part of the financial
        statements.
  -6-




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




For
                    The
                  Three
                    Months Ended
            
            For
                    The Period
                  September
                    17, 1982October
                31,
            
            (Inception)
                To2006
            
            2005
            
            October
                31, 2006Net
                Cash Used in Investing Activities
            
            
            (3,982,028
            )
            
            (17,784
            )
            
            (5,037,807
            )Cash
                Flow From Financing Activities:Advances
                to Affiliate
            
            
            (2,250
            )
            
            (3,577
            )
            
            (47,572
            )Proceeds
                from Borrowing on Credit Facility
            
            
            1,250,000
            
            
            
            
            
            1,250,000Proceeds
                of Borrowings - Officers
            
            
            -
            
            
            -
            
            
            18,673Repayment
                of Loans Payable - Officers
            
            
            -
            
            
            -
            
            
            (18,673
            )Proceeds
                of Note Payable
            
            
            -
            
            
            -
            
            
            11,218Payments
                of Note Payable
            
            
            -
            
            
            -
            
            
            (11,218
            )Proceeds
                From Issuance of Common Stock, net
            
            
            -
            
            
            -
            
            
            26,850,844Commissions
                on Sale of Common Stock
            
            
            -
            
            
            -
            
            
            (5,250
            )Deferred
                Finance Costs
            
            
            (241,624
            )
            
            -
            
            
            (692,401
            )Expenses
                of Initial Public Offering
            
            
            -
            
            
            -
            
            
            (408,763
            )Capital
                Contributions - Joint Venture Subsidiary
            
            
            -
            
            
            -
            
            
            304,564Purchase
                of Certificate of Deposit - Restricted
            
            
            -
            
            
            -
            
            
            (5,000
            )Purchase
                of Mining Reclamation Bonds
            
            
            -
            
            
            -
            
            
            (30,550
            )Net
                Cash Provided By (Used In) Financing Activities
            
            
            1,006,126
            
            
            (3,577
            )
            
            27,215,872Effect
                of Exchange Rate Changes
            
            
            2,533
            
            
            (7,138
            )
            
            193,464Increase
                (Decrease) In Cash and Cash Equivalents
            
            
            (804,670
            )
            
            (805,676
            )
            
            1,936,828Cash
                and Cash Equivalents - Beginning
            
            
            2,741,498
            
            
            4,281,548
            
            
            -Cash
                and Cash Equivalents - Ending
            
            $
            1,936,828
            
            $
            3,475,872
            
            $
            1,936,828Supplemental
                Cash Flow Information:Cash
                Paid For Interest
            
            $
            -
            
            $
            -
            
            $
            -Cash
                Paid For Income Taxes
            
            $
            557
            
            $
            6,315
            
            $
            46,531Non-Cash
                Financing Activities:Issuances
                of Common Stock as Commissionson
                Sales of Common Stock
            
            $
            -
            
            $
            -
            
            $
            440,495Issuance
                of common stock and warrants as payment of financing costs
            
            $
            3,665,199
            
            $
            -
            
            $
            4,187,740Change
                in fair value of derivative instrument
            
            $
            91,682
            
            
            
            
            $
            91,682Issuance
                of common stock and warrants as payment for Expenses
            
            $
            -
            
            $
            -
            
            $
            192,647Issuance
                of Common Stock as Payment for Mining,Milling
                and Other Property and Equipment
            
            $
            -
            
            $
            -
            
            $
            4,500Exercise
                of Options as Payment of Accounts Payable
            
            $
            -
            
            $
            -
            
            $
            36,000The
                accompanying notes are an integral part of the financial
                statements.




-7-




CAPITAL
      GOLD CORPORATION


(A
      DEVELOPMENT STAGE ENTERPRISE)


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


October
      31, 2006





NOTE
      1 -
      Basis of Presentation





The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of Capital Gold Corporation and its subsidiaries, which are wholly
      and
      majority owned. All significant inter-company accounts and transactions have
      been eliminated in consolidation.





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





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





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





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





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles for
      interim financial information and with instructions to Form 10-QSB. Accordingly,
      they do not include all of the information and footnotes required by U.S.
      generally accepted accounting principles for complete financial statements.
      In
      the opinion of the Company's management, the accompanying condensed consolidated
      financial statements reflect all adjustments (which include only normal
      recurring adjustments) necessary to present fairly the condensed consolidated
      financial position and results of operations and cash flows for the periods
      presented.




-8-





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





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





NOTE
      2 -
      Equity Based Compensation





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





Such
      options and warrants may be exercisable at varying exercise prices currently
      ranging from $0.02 to $0.41 per share of common stock with certain of these
      grants becoming exercisable immediately upon grant subject to shareholder
      approval. Certain grants vest for a period of five months to two years
      (generally concurrent with service periods for grants to employees/consultants
      -
      See Note 15 - Employee and Consulting Agreements). Certain grants contain a
      provision whereby they become immediately exercisable upon a change of
      control.





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





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





The
      fair
      value of each option award is estimated on the date of grant using a
      Black-Scholes option valuation model. Expected volatility is based on the
      historical volatility of the price of the Company stock. The risk-free interest
      rate is based on U.S. Treasury issues with a term equal to the expected life
      of
      the option. The Company uses historical data to estimate expected dividend
      yield, expected life and forfeiture rates. The estimated per share weighted
      average grant-date fair values of stock options and warrants granted during
      the
      three months ended October 31, 2006 and 2005, were $0.31 and $0, respectively.
      The fair values of the options and warrants granted were estimated based on
      the
      following weighted average assumptions:


Three
                  Months ended October 31,2006
              
              2005Expected
                  volatility
              
              
              134
              %
              
              -Risk-free
                  interest rate
              
              
              6.25
              %
              
              -Expected
                  dividend yield
              
              
              -
              
              
              -Expected
                  life
              
              
              4.5
                  years
              
              
              -




-9-


Stock
        option and warrant activity for employees during the three months ended October
        31, 2006 is as follows:




Number
                of
              Options
            
            Weighted
              Average
              exercise
              price
            
            Weighted
              average
              remaining
              contracted
              term
                (years)
            
            Aggregate
              intrinsic
              valueOutstanding
                at July 31, 2005
            
            
            4,711,363
            
            $
            .30
            
            
            0.30
            
            $
            1,277,977Options
                granted
            
            
            4,611,363
            
            
            .13
            
            
            -
            
            
            -Options
                exercised
            
            
            (590,909
            )
            
            .05
            
            
            -
            
            
            -Options
                expired
            
            
            (3,161,363
            )
            
            .05
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            5,570,454
            
            $
            .16
            
            
            1.17
            
            $
            702,250Options
                granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warrants
                and options outstanding at October 31, 2006
            
            
            5,570,454
            
            $
            .16
            
            
            0.92
            
            $
            702,250Warrants
                and options exercisable at October 31, 2006
            
            
            4,120,454
            
            $
            .10
            
            
            0.46
            
            $
            680,250




Unvested
                stock option and warrant balances for employees at October 31, 2006
                are as
                follows:




WeightedWeighted
            
            averageNumber
            
            Average
            
            remaining
            
            Aggregateof
            
            Exercise
            
            contracted
            
            IntrinsicOptions
            
            price
            
            term
                (years)
            
            valueOutstanding
                at August 1, 2005
            
            
            -
            
            
            -
            
            
            -
            
            $
            -Options
                granted
            
            
            150,000
            
            $
            .32
            
            
            1.58
            
            
            16,500Unvested
                Options outstanding at October 31, 2006
            
            
            150,000
            
            $
            .32
            
            
            1.58
            
            $
            16,500




-10-




Stock
                option and warrant activity for non-employees during the three months
                ended October 31, 2006 is as
                follows:




WeightedWeighted
            
            averageNumber
            
            Average
            
            remaining
            
            Aggregateof
            
            Exercise
            
            contracted
            
            IntrinsicOptions
            
            price
            
            term
                (years)
            
            valueOutstanding
                at July 31, 2005
            
            
            31,902,004
            
            $
            .30
            
            
            1.13
            
            $
            3,430,120Options
                granted
            
            
            6,844,000
            
            
            .28
            
            
            -
            
            
            -Options
                exercised
            
            
            (12,835,004
            )
            
            .29
            
            
            -
            
            
            -Options
                expired
            
            
            (350,000
            )
            
            .10
            
            
            -
            
            
            -Warrants
                and options outstanding at July 31, 2006
            
            
            25,561,000
            
            $
            .29
            
            
            1.33
            
            $
            1,939,530Options
                granted
            
            
            12,600,000
            
            $
            .317
            
            
            -
            
            
            -Options
                exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warrants
                and options outstanding at October 31, 2006
            
            
            38,161,000
            
            $
            .30
            
            
            1.74
            
            $
            1,787,330Warrants
                and options exercisable at October 31, 2006
            
            
            37,911,000
            
            $
            .29
            
            
            1.44
            
            $
            1,786,430




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




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




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




-11-




NOTE
      3 -
      Marketable Securities





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


October
                  31,2006Marketable
                  equity securities, at cost
              
              $
              50,000Marketable
                  equity securities, at fair value
              
              $
              140,000(See
                  Notes 8 & 10)




NOTE
      4 -
      Property and Equipment





Property
      and Equipment consist of the following at October 31, 2006:


Construction
                  in progress
              
              
              4,101,478Water
                  Well
              
              
              141,242Building
              
              
              116,922Equipment
              
              
              75,756Vehicle
              
              
              80,200Improvements
              
              
              15,797Office
                  Equipment
              
              
              14,893Furniture
              
              
              1,843Total
              
              $
              4,548,131Less:
                  accumulated depreciation
              
              
              (
                  48,971
              )Property
                  and equipment, net
              
              $
              4,499,160





The
      Company issued purchase orders on material and equipment regarding its El
      Chanate Project amounting to approximately $6,200,000 as of October 31, 2006,
      and had paid approximately $3,200,000 on these commitments.





Depreciation
      expense for the three months ended October 31, 2006 and 2005 was $12,267 and
      $7,538, respectively.





-12-




NOTE
      5 -
      Intangible Assets





Intangible
      assets consist of the following as of October 31, 2006:


Repurchase
                  of Net Profits Interest from FG
              
              $
              500,000Investment
                  in Right of way
              
              
              18,620Less:
                  accumulated amortization
              
              
              (
                  5,720
              )Intangible
                  assets, net
              
              $
              512,900




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





Amortization
      expense for the three months ending October 31, 2006 and 2005 was $900 and
      $1,032, respectively.




NOTE
      6 -
      Mining Reclamation Bonds





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





NOTE
      7 -
      Mining Concessions





Mining
      concessions consists of the following:


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




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





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





-13-





NOTE
      8 -
      Loans Receivable - Affiliate





Loans
      receivable - affiliate consist of expense reimbursements from a publicly-owned
      corporation in which the Company has an investment. The Company's president
      and
      chairman of the board of directors is an officer and director of that
      corporation. These loans are non-interest bearing and due on demand (see Note
      3
& 11).





NOTE
      9 -
      Other Investments





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





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





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


Balance
                  - July 31, 2005
              
              $
              157,714Equity
                  Adjustments from Foreign Currency Translation
              
              
              48,779Unrealized
                  Gains (loss) on Marketable Securities
              
              
              (60,000
              )Balance
                  - July 31, 2006
              
              
              146,493Change
                  in fair value of derivative instrument
              
              
              (91,682
              )Equity
                  Adjustments from Foreign Currency Translation
              
              
              2,533Unrealized
                  Gains (loss) on Marketable Securities
              
              
              50,000Balance
                  - October 31, 2006
              
              $
              107,344




NOTE
      11 -
      Related Party Transactions





In
      August
      2002, the Company purchased marketable equity securities of a related company.
      The Company recorded approximately $2,250 and $3,600 in expense reimbursements
      including office rent from this entity for the three months ended October 31,
      2006 and 2005, respectively (see Notes 3 and 8). The Company utilizes a Mexican
      Corporation 100% owned by two officers/Directors and stockholders of the Company
      for mining support services. These services include but are not limited to
      the
      payment of mining salaries and related costs. The Mexican Corporation bills
      the
      Company for these services at cost. Mining expenses charged by the Mexican
      Corporation and reported on the statement of operations amounted to
      approximately $113,000 and $25,000 for the three months ended October 31, 2006
      and 2005, respectively.





During
      the three months ended October 31, 2006 and 2005, the Company paid its V.P.
      Development and Director $0 and $17,000, respectively, for professional
      geologist and management services rendered to the Company. This individual
      also
      earned wages of $30,000 during the three months ended October 31, 2006. During
      the three months ended October 31, 2006 and 2005, the Company paid its V.P.
      Exploration and Director consulting fees of $0 and $17,000, respectively. In
      addition, this individual earned wages of $30,000 during the three months ended
      October 31, 2006. During the three months ended October 31, 2006 and 2005,
      we
      paid a director legal and consulting fees of $6,000 and $0,
      respectively. ****





The
      Company’s V.P. Development and Director has, since 1995, been a senior
      consultant in the Minerals Advisory Group LLC, Tucson, Arizona, an entity that
      provided $3,000 for services to the Company for the three months ended October
      31, 2006.





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




-14-





NOTE
      12 -
      Stockholders' Equity





Common
      Stock





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




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





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





The
      Company issued 1,150,000 shares of common stock and 12,600,000 common stock
      purchase warrants to Standard Bank as part of a commitment fee to entering
      into
      the credit facility on August 15, 2006, with its wholly-owned subsidiaries
      MSR
      and Oro. The Company recorded the issuance of the 1,150,000 shares of common
      stock and 12,600,000 warrants as deferred financing costs of approximately
      $351,000 and $3,314,000, respectively, as a reduction of stockholders' equity
      on
      the Company's balance sheet. The issuance of 1,150,000 shares was recorded
      at
      the fair market value of the Company's common stock at the closing date or
      $0.305 per share. The warrants were valued at approximately $3,314,000 using
      the
      Black-Scholes option pricing model and were reflected as deferred financing
      costs as a reduction of stockholders' equity on the Company’s balance sheet (See
      Note 13). The balance of deferred financing costs net of amortization as of
      October 31, 2006, as a reduction of stockholders' equity, was approximately
      $4,136,000. Amortization expense for the three months ended October 31, 2006,
      was $60,000.





Recapitalization





On
      September 22, 2005, The Board of Directors recommended an amendment to the
      Company's Certificate of Incorporation to increase the Company's authorized
      shares of capital stock from 150,000,000 to 200,000,000 shares. In addition,
      the
      Board of Directors recommended that the Company reincorporate in the State
      of
      Delaware. These amendments were approved by the stockholders on November 18,
      2005 and the Company effected the reincorporation in Delaware and the authorized
      share increase on November 21, 2005. In addition, the par value was decreased
      from $0.001 per share to $0.0001 per share.





Warrant
      Re-pricing





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




-15-





Rights
      Agreement





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





NOTE
      13 -
      Project Finance Facility





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




The
      Credit Agreement 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
      is
      required to meet and maintain certain financial covenants, including (i) a
      debt
      service coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt
      service coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage
      ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio of at least
      2.0
      to 1.0 and (v) a minimum reserve tail. The Company is also required to maintain
      a certain minimum level of unrestricted cash, and upon meeting certain Mine
      start-up production and performance criteria, MSR and Oro will be required
      to
      maintain a specified amount of cash as a reserve for debt
      repayment.





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





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




-16-





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





On
      October 11, 2006, The Company completed the initial draw down on our credit
      facility from Standard Bank receiving proceeds of $1,250,000. The Company used
      these proceeds for the repurchase of the 5% net profits interest formerly held
      by FG and to continue the mine development at the El Chanate Project (See Note
      17 “Subsequent Events” for additional information on draw downs).





On
      October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
      the Company entered into interest rate swap agreements in accordance with the
      terms of the Credit Facility, which requires that the Company hedge at least
      50
      percent of our outstanding debt under this facility. The agreements entered
      into
      cover $9,375,000 or 75% of the outstanding debt. Both swaps covered this same
      notional amount of $9,375,000, but over different time horizons. The first
      covered the six months commencing October 11, 2006 and a termination date of
      March 31, 2007 and the second covering the period from March 30, 2007 with
      a
      termination date of December 31, 2010. We intend to use discretion in
      managing this risk as market conditions vary over time, allowing for the
      possibility of adjusting the degree of hedge coverage as we deem appropriate.
      However, any use of interest rate derivatives will be restricted to use for
      risk
      management purposes (See Note 16).





NOTE
      14 -
      Mining and Engineering Contracts





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





On
      August
      2, 2006, the Company amended the November 24, 2005 Mining Contract between
      its
      subsidiary, MSR, and Sinergia. Pursuant to the amendment, MSR's right to deliver
      the Notice to Proceed to Sinergia is extended to November 1, 2006. Provided
      that
      this Notice is delivered to Sinergia on or before that date, with a specified
      date of commencement of the Work (as defined in the contract) not later than
      February 1, 2007, the mining rates set forth in the Mining Contract will still
      apply; subject to adjustment for the rate of inflation between
      September 23, 2005 and the date of commencement of the work. As
      consideration for these changes, the Company paid Sinergia $200,000 of the
      requisite advance payment discussed below. On November 1, 2006, MSR delivered
      the Notice of Award specifying January 25, 2007, as the date of commencement
      of
      Work.





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




-17-





In
      June
      2006, the Company's Mexican operating subsidiary retained the contracting
      services of Mexican subsidiary of M3 Engineering & Technology Corporation
      ("M3M") to provide EPCM (engineering procurement construction management)
      services. M3M will supervise the construction and integration of the various
      components necessary to commence production at the El Chanate Project. The
      contracted services shall not exceed $1,200,000 and the contract is based on
      the
      EPCM services to be provided by M3M. As of October 31, 2006, the Company has
      incurred approximately $346,000 pursuant to this contract.





NOTE
      15 -
      Employee and Consulting Agreements





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





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





Effective
      July 31, 2006, the last day of the Company’s fiscal year, the Company entered
      into employment agreements with the following executive officers: Gifford A.
      Dieterle, the Company’s President and Treasurer, Roger A. Newell, the Company’s
      Vice President of Development, Jack V. Everett, the Company’s Vice President of
      Exploration, and Jeffrey W. Pritchard, the Company’s Vice President of Investor
      Relations.




-18-





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





Mr.
      Dieterle is entitled to a base annual salary of at least $180,000 and each
      of
      the other executives is entitled to a base annual salary of at least $120,000.
      Each executive is entitled to a bonus or salary increase in the sole discretion
      of the Company’s board of directors. In addition, each of the executives
      received two year options to purchase an aggregate of 250,000 shares of the
      Company’s common stock at an exercise price of $0.32 per share (the closing
      price on July 31, 2006). The Company utilized the Black-Scholes method to fair
      value the 1,000,000 options received by the executives as part of these
      employment agreements. The Company recorded approximately $204,000 as stock
      compensation expense as of July 31, 2006.





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





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





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


-19-





NOTE
      16 -
      Sales Contracts, Commodity and Financial Instruments





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





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply during the period March 1, 2006 through July 31, 2006 and
      was
      the primary reason for the decrease in premium on the derivative contracts.
      As
      of October 31, 2006, the carrying value of this derivative liability was
      approximately $24,000. The change in fair value on these derivative contracts
      was approximately $242,000 for the three months ended October 31, 2006, and
      was
      recorded as an other expense.





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




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




The
      interest rate swap agreements are accounted for as cash flow hedges, whereby
      “effective” hedge gains or losses are initially recorded in other comprehensive
      income and later reclassified to the interest expense component of earnings
      coincidently with the earnings impact of the interest expenses being hedged.
      “Ineffective” hedge results are immediately recorded in earnings also under
      interest expense. No component of hedge results will be excluded from the
      assessment of hedge effectiveness. The amount expected to be reclassified from
      OCI to earnings during the 12 months ending July 31 2007 from these two swaps
      was determined to be immaterial. As of October 31, 2006, the Company recorded
      $91,643 as a derivative liability with the offset going to other comprehensive
      income.




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





NOTE
      17 -
      Subsequent Events





On
      November 1, 2006, and December 1, 2006, the Company completed the second and
      third draw down on its credit facility from Standard Bank receiving proceeds
      of
      $3,500,000 and $2,250,000, respectively. The Company is using and anticipates
      using these proceeds mainly for the remaining balances on the Crushing and
      conveyor system purchase orders and site work for the leach pad and ponds at
      its
      El Chanate Project.




-20-





On
      November 30, 2006, the Company’s board of directors granted 100,000 common stock
      options to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, the Company’s
      independent directors. The options are to purchase shares of the Company’s
      common stock at an exercise price of $0.33 per share (the closing price of
      our
      common stock on that date) for a period of two years. The options cannot be
      exercised unless and until they have been approved by our stockholders. The
      Company utilized the Black-Scholes method to fair value the 300,000 options
      received by the directors. The Company will record approximately $52,800 as
      stock compensation expense in the following fiscal quarter ended January 31,
      2007.





On
      December 5, 2006, effective January 1, 2007, the Company entered into an
      employment agreement with J. Scott Hazlitt, its Vice President of Mine
      Development. The agreement runs for a period of three years and automatically
      renews for successive one-year periods unless the Company or Mr. Hazlitt
      provides the other party with written notice of the Company’s or his intent not
      to renew at least 30 days prior to the expiration of the then current employment
      period. Mr. Hazlitt is entitled to a base annual salary of at least $105,000.
      He
      is entitled to a bonus or salary increase in the sole discretion of our board
      of
      directors. The Company has the right to terminate Mr. Hazlitt’s employment for
      cause or on 30 days’ prior written notice without cause or in the event of his
      disability (as defined in the agreement). The agreement automatically terminates
      upon his death. “Cause” is defined in the agreement as (1) a failure or refusal
      to perform the services required under the agreement; (2) a material breach
      by
      executive of any of the terms of the agreement; or (3) executive’s conviction of
      a crime that either results in imprisonment or involves embezzlement,
      dishonesty, or activities injurious to us or our reputation. In the event that
      we terminate his employment without cause or due to the disability of the
      executive, the executive will be entitled to a lump sum severance payment equal
      to one month’s salary, in the case of termination for disability, and up to 12
      month’s salary (depending upon years of service), in the case of termination
      without cause.





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





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




-21-





On
      December 13, 2006, subsequent to the end of the quarter, the Company issued
      two
      year options to purchase our common stock at an exercise price of $0.36 per
      share to its V.P. of Operations and CFO and the Company’s Canadian counsel.
      These options are for the purchase of 250,000 shares, 100,000 shares and 100,000
      shares, respectively. These
      options cannot be exercised unless and until they are approved by the Toronto
      Stock Exchange and Stockholders.





On
      December 13, 2006, the Company’s Board of Directors adopted the 2006 Equity
      Incentive Plan. Stockholder approval of the plan will be sought at the Annual
      Meeting. The Equity Incentive Plan authorizes the grant of non-qualified and
      incentive stock options, stock appreciation rights and restricted stock awards
      (each, an “Awards”). A maximum of 10,000,000 shares of common stock will be
      reserved for potential issuance pursuant to Awards under the Equity Incentive
      Plan. Unless sooner terminated, the Equity Incentive Plan will continue in
      effect for a period of 10 years from its effective date. The Equity Incentive
      Plan is administered by the Board of Directors or a committee thereof. The
      Equity Incentive Plan provides for awards to be made to such employees,
      directors and consultants of the Company and its affiliates as the Board may
      select. As of the date hereof, 450,000 options have been granted under the
      Equity Incentive Plan to two of the Company’s officers and its Canadian counsel.
      These options cannot be exercised unless and until they are approved by the
      Toronto Stock Exchange and Stockholders.





NOTE
      18 -
      Deposits





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


October
                  31,2006Advance
                  payment on Mining Contract to Sinergia
              
              $
              520,000Crushing
                  system
              
              
              923,370Laboratory
                  Building & Equipment
              
              
              150,000Other
              
              
              85,740Total
                  Deposits
              
              $
              1,679,110





NOTE
      19 -
      New Accounting Pronouncements




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




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


-22-




**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 and mine development and construction plans,
      costs, grade, production and recovery rates, permitting, financing needs, the
      availability of financing on acceptable terms or other sources of funding,
      and
      the timing of additional tests, feasibility studies and environmental permitting
      are all forward-looking in nature.





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





**Results
      of Operations**





**General**





Sonora,
      Mexico





During
      and subsequent to the quarter ended October 31, 2006, we continued to make
      progress towards commencement of mining operations at the El Chanate concessions
      in Mexico. In this regard, as discussed in greater detail below and in Part
      II,
      Item 5, during and subsequent to the end of the quarter:





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





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





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





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


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


·
            use
                of a mining contractor,




-23-




·
            revised
                mining, processing and support
                costs,


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


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


·
            a
                revised process of equipment selection
                and


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





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





·
            a
                33% increase in proven and probable gold
                reserves,


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


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


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





Pursuant
      to the 2005 Study, as updated by the 2006 Update using a $450 per ounce gold
      price, our estimated mine life is now seven years as opposed to five years
      and
      the ore reserve is 490,000 ounces of gold present in the ground (up 122,000
      ounces or 33%). Of this, we anticipate recovering approximately 332,000 ounces
      of gold (up 74,000 ounces or 29%) over a seven year life of the mine. The
      targeted cash cost (which include mining, processing and on-property general
      and
      administrative expenses) per the 2005 Study is $259 per ounce (up $29 per
      ounce). The 2005 Study contains the same mining rate as the 2003 Study of 7,500
      metric tonnes per day of ore. It should be noted that, during the preliminary
      engineering phase of the project it was decided to design the crushing screening
      and ore stacking system with the capability of processing 10,000 tonnes per
      day
      of ore. This will make allowances for any possible increase in production and
      for operational flexibility. It was found that the major components in the
      feasibility study would be capable of handling the increase in tonnage. Design
      changes were made where necessary to accommodate the increased tonnage. The
      2005
      Study takes into consideration a more modern crushing system than the one
      contemplated in the 2003 Study. The crushing system referred to in the 2005
      Study is a new system, that, we believe will be faster to install and provide
      more efficient processing capabilities than the used equipment referred to
      in
      the 2003 Study. In March 2006, we made a $250,000 down payment to a US Supplier
      to acquire a portion of a new crushing system. In October 2006, we paid an
      additional $230,000 towards this equipment and we now have purchase orders
      for
      all of the new crushing system.




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





The
      following Summary is extracted from the 2005 Study, as updated by the 2006
      Update. Please note that the reserves as stated are an estimate of what can
      be
      economically and legally recovered from the mine and, as such, incorporate
      losses for dilution and mining recovery. The 489,952 ounces of contained gold
      represents ounces of gold contained in ore in the ground, and therefore does
      not
      reflect losses in the recovery process. Total gold produced is estimated to
      be
      approximately 339,047 ounces, or approximately 69% of the contained gold. The
      gold recovery rate is expected to average approximately 69% for the entire
      ore
      body. Individual portions of the ore body may experience varying recovery rates
      ranging from about 73% to 48%. Oxidized and sandstone ore types may have
      recoveries of about 73%; fault zone ore type recoveries may be about 64%; and
      siltstone ore types recoveries may be about 48%.


-24-


El
      Chanate Project


**Production
      Summary**







Metric
            U.S.**Materials**
              Reserves
              Other
                Mineralized Materials
              Waste
              Total
              
              Contained
                Gold
              
              **Production**
              Ore
                Crushed
              
              
              Operating
                Days/Year
              Gold
                Plant Average Recovery
              Average
                Annual Production
              Total
                Gold Produced
            19.9
                Tonnes @ 0.767 g/t*
              0
                Million Tonnes
              19.9
                Million Tonnes
              39.8
                Million Tonnes
              
              15.24
                Million grams
              
              
              2.6
                Million Tonnes /Year
              7,500
                Mt/d*
              
              365
                Days per year
              69.2
                %
              1.38
                Million grams
              10.55 Million grams
            21.9
                Million Tons @ 0.022 opt*
              0
                Million Tons
              21.9
                Million Tons
              43.8
                Million tons
              
              489,952
                Oz
              
              
              2.86
                Million Tons/Year
              8,250
                t/d
              
              365
                Days per year
              69.2
                %
              44,395
                Oz
              339,047 Oz







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





Pursuant
      to the 2005 Study, as updated by the 2006 Update, based on the current reserve
      calculations, the mine life is estimated to be approximately seven years, and
      at
      least another year will likely be required to perform required reclamation.
      The
      2005 Study forecasts initial capital costs of $17.9 million, which includes
      $1.7
      million of working capital. Annual production is planned at approximately 44,000
      to 48,000 ounces per year at an average operating cash cost of $259 per ounce.
      We believe that cash costs may decrease as the production rate increases. Total
      costs (which include cash costs as well as off-property costs such as property
      taxes, royalties, refining, transportation and insurance costs and exclude
      financing costs) will vary depending upon the price of gold (due to the nature
      of underlying payment obligations to the original owner of the property). Total
      costs are estimated in the 2005 Study to be $339 per ounce at a gold price
      of
      $417 per ounce (the three year average gold price as of the date of the study).
      We will be working on measures to attempt to reduce costs going forward. Ore
      reserves and production rates are based on a gold price of $375 per ounce,
      which
      is the Base Case in the 2005 Study. During 2005, the spot price for gold on
      the
      London Exchange has fluctuated between $411.10 and $537.50 per ounce. Between
      January 1, 2006 and December 1, 2006, the spot price for gold on the London
      Exchange has fluctuated between $524.75 and $725.00 per ounce.





Management
      believes that the capital costs to establish a surface, heap leach mining
      operation at El Chanate will be between $17.5 and $18.5 million. For more
      information on the capital costs and our funding activities, please see *“Liquidity
      and Capital Resources; Plan of Operation” b* elow.





Leadville,
      Colorado





We
      own or
      lease a number of claims and properties, all of which are located in California
      Mining District, Lake County, Colorado, Township 9 South, Range 79. During
      the
      quarter ended October 31, 2006, activity at our Leadville, Colorado properties
      consisted primarily of mine maintenance. Primarily as a result of our focus
      on
      El Chanate, we ceased activities in Leadville, Colorado. During the year ended
      July 31, 2002, we performed a review of our Leadville mine and mill improvements
      and determined that an impairment loss should be realized. Therefore, we
      significantly reduced the carrying value of certain assets relating to our
      Leadville, Colorado assets by $999,445. During the year ending July 31, 2004,
      we
      again performed a review of our Colorado mine and mill improvements and
      determined that an additional impairment loss should be recognized. Accordingly,
      we further reduced the net carrying value to $0, recognizing an additional
      loss
      of $300,000.




-25-





Three
      Months Ended October 31, 2006 compared to Three Months Ended October 31,
      2005





Net
      Loss





Our
      net
      loss for the three months ended October 31, 2006 and 2005 was approximately
      $1,161,000 and $813,000, respectively, an increase of approximately $348,000
      or
      43% from the three months ended October 31, 2005. The primary reason for the
      increase in loss during the three months ended October 31, 2006 was due to
      1) an
      increase in selling, general and administrative expenses of approximately
      $343,000 as compared to the same period a year ago and 2) losses of
      approximately $242,000in the current period due to the change in fair value
      of
      our derivative instruments. These increases in loss were offset by a decrease
      in
      mine expenses due to higher planning and engineering costs being expensed in
      the
      prior period. Net loss per share was $0.01 and $0.01 for the three months ended
      October 31, 2006 and 2005, respectively.





Revenues





We
      generated no revenues from mining operations during the three months ended
      October 31, 2006 and 2005. There were de minimis non-operating revenues during
      the three months ended October 31, 2006 and 2005 of approximately $22,000 and
      $25,000, respectively. These non-operating revenues primarily represent interest
      income.





Mine
      Expenses





Mine
      expenses during the three months ended October 31, 2006 were $212,000, a
      decrease of $328,000 or 61% from the three months ended October 31, 2005. Mine
      expenses were lower in the current period versus the same period a year earlier
      primarily due to higher engineering and planning costs related to our El Chanate
      Project being expensed in the prior period.





Selling,
      General and Administration Expense





Selling,
      general and administrative expenses during the three months ended October 31,
      2006 were $632,000, an increase of approximately $343,000 or 119% from the
      three
      months ended October 31, 2005. The increase in selling, general and
      administrative expenses resulted primarily from higher salaries and wages,
      higher professional and consulting fees related to investor relations, general
      legal and accounting as well as an increase in stock compensation expense
      incurred during the three months ended October 31, 2006 versus the same period
      a
      year earlier.





Depreciation
      and Amortization





Depreciation
      and amortization expense during the three months ended October 31, 2006 and
      2005
      was approximately $73,000 and $9,000, respectively. The primary reason for
      the
      increase was due to the initiation of amortization charges on deferred financing
      costs resulting from the credit agreement entered into in August 2006 with
      Standard Bank Plc. This accounted for approximately $60,000 of the increase
      in
      the current quarter versus the same period a year ago.





Other
      Income and Expense





Our
      loss
      on the change in fair value of derivative instruments during the three months
      ended October 31, 2006 and 2005, was approximately $242,000 and $0,
      respectively. **** This
      was
      primarily due to us entering into two identically structured derivative
      contracts with Standard Bank in March 2006. Each derivative consisted of a
      series of forward sales of gold and a purchase gold cap. We agreed to sell
      a
      total volume of 121,927 ounces of gold forward to Standard Bank at a price
      of
      $500 per ounce on a quarterly basis during the period from March 2007 to
      September 2010. We also agreed to a purchase gold cap on a quarterly basis
      during this same period and at identical volumes covering a total volume of
      121,927 ounces of gold at a price of $535 per ounce. Under FASB Statement No.
      133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
      these contracts must be carried on the balance sheet at their fair value, with
      changes to the fair value of these contracts reflected as *Other
      Income or Expense.* These
      contracts were not designated as hedging derivatives; and therefore, special
      hedge accounting does *not* apply.




-26-





The
      first
      derivative was entered into on March 1, 2006 for a premium of $550,000; and
      the
      second was entered into on March 30, 2006 for a premium of $250,000. The gold
      price rose sharply in second quarter 2006, and was the primary reason for the
      decrease in premium on the derivative contracts. The change in fair value during
      the three months ended October 31, 2006 reduced the carrying value on these
      derivative contracts by approximately $242,000, and was reflected as an other
      expense during the current period. There was no such transactions entered into
      during the same period in 2005.





Interest
      expense was approximately $23,000 for the three months ended October 31, 2006
      versus no such expense for the same period in 2005. This increase was mainly
      due
      to interest expense associated with the initial draw down from the credit
      agreement entered into in August 2006 with Standard Bank Plc of $1,250,000
      on
      October 11, 2006.





Loss
      from Changes in Foreign Exchange Rates





During
      the three months ended October 31, 2006, we recorded equity adjustments from
      foreign currency translations of approximately $  3,000.
      These translation adjustments are related to changes in the rates of exchange
      between the Mexican Peso and the US dollar.





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





As
      of
      October 31, 2006, we had working capital of approximately $3,184,000 a decrease
      of $3,847,000 from July 31, 2006. This decrease was primarily due to capital
      expenditures associated with our El Chanate Project. Our plans over the next
      12
      months primarily include the construction of the El Chanate open-pit gold mine
      in Mexico, commencement of gold production at this site and continued
      exploration in northern Mexico. Please see the disclosure in our annual report
      on Form 10-KSB for the year ended July 31, 2006 for more detailed information.
      Management believes that the capital costs to establish the mining operation
      will be between $17.5 and $18.5 million, of which we have expended approximately
      $  9,400,000
      as of December 15, 2006. We also anticipate non-mine related operating expenses
      of approximately $1.4 million. The actual activities and the costs may vary
      materially, especially if there are significant increase in costs related to
      such items as fuel, construction materials and labor.





Historically,
      we have not generated any material revenues from operations and have been in
      a
      precarious financial condition. Our consolidated financial statements have
      been
      prepared on a going concern basis, which contemplates the realization of assets
      and satisfaction of liabilities in the normal course of business. We have
      recurring losses from operations. Our primary source of funds used during the
      quarter ended October 31, 2006 was from the sale and issuance of equity
      securities during fiscal 2005 and 2006. We anticipate that our operations
      through fiscal 2007 will be funded from the balance of the proceeds from these
      placements, sale of our securities (possibly through the exercising of certain
      options and warrants) and the loan proceeds from the credit agreement entered
      into in August 2006 with Standard Bank Plc. We do not anticipate achieving
      positive cash flow from our operating activities for some time. Until such
      point, we may need to raise additional capital to fund on-going general and
      administrative expenses and exploration. The private placements of our
      securities and the Standard Bank credit agreement are discussed below.





**2006
      Private Placements & Warrant Exercises**





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




-27-





**February
      2005 Private Placement**





In
      the
      private placement that closed in February 2005, we issued 27,200,004 units,
      each
      unit consisting of one shares of our Common Stock and one Common Stock Purchase
      Warrant for an aggregate gross purchase price of approximately $6.8 million
      and
      we received approximately $6.2 million in net proceeds. The Warrant issued
      to
      each purchaser was originally exercisable for one share of our Common Stock,
      at
      an exercise price equal to $0.30 per share. We temporarily lowered the exercise
      price of the Warrants to $0.20 per shares for the period commencing on November
      28, 2005 and ending on January 31, 2006, after which time the exercise price
      increased back to $0.30 per share   Each Warrant has a term of two years
      and is fully exercisable from the date of issuance. We issued to the placement
      agent two year warrants to purchase up to 2,702,000 shares of our Common Stock
      at an exercise price of $0.25 per share. Such placement agent warrants are
      valued at approximately $414,000 using the Black-Scholes option pricing
      method.





Pursuant
      to our agreement with the purchasers we registered the foregoing shares and
      shares issuable upon the exercise of the foregoing Warrants for public resale.
      We also agreed to prepare and file all amendments and supplements necessary
      to
      keep the registration statement effective until the earlier of the date on
      which
      the selling stockholders may resell all the registrable shares covered by the
      registration statement without volume restrictions pursuant to Rule 144(k)
      under the Securities Act or any successor rule of similar effect and the date
      on
      which the selling stockholders have sold all the shares covered by the
      registration statement. If, subject to certain exceptions, sales of all shares
      registered cannot be made pursuant to the registration statement, we will be
      required to pay to these selling stockholders in cash or, at our option, in
      shares, their pro rata share of 0.0833% of the aggregate market value of the
      registrable shares held by these selling stockholders for each month thereafter
      until sales of the registrable shares can again be made pursuant to the
      registration statement. In this regard, we paid $7,100 to the purchasers
      representing liquidated damages.





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





**Project
      Finance Credit Facility**





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




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




-28-





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





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





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





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





On
      October 11, 2006, we completed the initial draw down on our credit facility
      from
      Standard Bank receiving proceeds of $1,250,000. We are using these proceeds
      for
      the repurchase of the 5% net profits interest formerly held by FG and to
      continue the mine development at the El Chanate Project. On November 1, 2006,
      and December 1, 2006, we completed the second and third draw down on our credit
      facility from Standard Bank receiving proceeds of $3,500,000 and $2,250,000,
      respectively. We are using and anticipate using these proceeds mainly for the
      remaining balances on the Crushing and conveyor system purchase orders and
      site
      work for the leach pad and ponds at our El Chanate Project.





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




-29-





To
      the
      extent that the balance of funds from the private placements and the proceeds
      from the credit facility are not adequate for our needs and we need to obtain
      additional capital to complete the mine, commence operations, cover any material
      cost overruns, cover ongoing general and administrative expenses and/or fund
      exploration, management intends to raise such funds through the sale of our
      securities (including, possibly, from the exercise of outstanding warrants),
      the
      sale of a royalty interest in the future production from the Chanate properties
      and/or joint venturing with one or more strategic partners. We cannot assure
      that, if we need additional funding, such funding will be available. If we
      need
      additional funding but are unable to obtain it from outside sources, we will
      be
      forced to reduce or curtail our operations. Please see “ *We
      lack operating cash flow and rely on external funding sources. If we are unable
      to continue to obtain needed capital from outside sources until we are able
      to
      generate positive cash flow from operations, we will be forced to reduce or
      curtail our operations* ”
in
      “ *Risk
      Factors.”*





**Environmental
      and Permitting Issues**





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





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





We
      do
      include in all our internal revenue and cost projections a certain amount for
      environmental and reclamation costs on an ongoing basis. This amount is
      determined at a fixed amount of $0.13 per metric tonne of material to be milled
      on a continual, ongoing basis to provide primarily for reclaiming tailing
      disposal sites and other reclamation requirements. At this time, there do not
      appear to be any environmental costs to be incurred by us beyond those already
      addressed above. No assurance can be given that environmental regulations will
      not be changed in a manner that would adversely affect our planned operations.
      Although, we have not yet initiated production, we have estimated the
      reclamation costs for the El Chanate site to be approximately $2.1 million.
      These costs would be accrued proportionately over the estimated mine life of
      7
      years.





**New
      Accounting Pronouncements**




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




-30-




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





**Disclosure
      About Off-Balance** **Sheet Arrangements**





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





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





**Critical
      Accounting Policies**





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





Impairment
      of Long-Lived Assets





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





Environmental
      Remediation Costs





Environmental
      remediation costs are accrued based on estimates of known environmental
      remediation exposure. Such accruals are recorded even if significant
      uncertainties exist over the ultimate cost of the remediation. It is reasonably
      possible that our estimates of reclamation liabilities, if any, could change
      as
      a result of changes in regulations, extent of environmental remediation
      required, means of reclamation or cost estimates. Ongoing environmental
      compliance costs, including maintenance and monitoring costs, are expensed
      as
      incurred. There were no environmental remediation costs incurred or accrued
      at
      October 31, 2006 .





Stock
      Based Compensation





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




-31-





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





Accounting
      for Derivatives and Hedging Activities





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





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







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






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, limits our exposure to a single
      counterparty under defined guidelines, and monitor the market position with
      each
      counterparty as required by SFAS 133.




-32-




**Risk
      Factors**





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





**Risks
      related to our business and operations**





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





To
      date,
      we have no producing properties. As a result, we have no current source of
      operating revenue and we have historically operated and continue to operate
      at a
      loss. Our ultimate success will depend on our ability to generate profits from
      our properties. Our viability is largely dependent on the successful commercial
      development of our El Chanate gold mining project in Sonora,
      Mexico.





***We
      lack operating cash flow and rely on external funding sources. If we are unable
      to continue to obtain needed capital from outside sources until we are able
      to
      generate positive cash flow from operations, we will be forced to reduce or
      curtail our operations.***





We
      do not
      generate any positive cash flow from operations and we do not anticipate that
      any positive cash flow will be generated for some time. Until such point, we
      may
      need to raise additional capital to fund on-going general and administrative
      expenses and exploration. Our primary focus is the development of our El Chanate
      Project which, we anticipate, will cost between $17.5 and $18.5 million. We
      also
      anticipate non-mine related operating expenses of approximately $1.4 million.
      During the fiscal year ended July 31, 2006, we raised approximately $8,115,000
      through private placements of our shares and warrants and from the exercise
      of
      warrants and options. Also, in August 2006, we and two of our Mexican
      subsidiaries entered into a credit agreement (the “Credit Agreement”) with
      Standard Bank PLC (“Standard Bank”) to borrow up to US$12.5 million for the
      purpose of constructing, developing and operating the El Chanate Project. To
      the
      extent that we need to obtain additional capital to commence operations, cover
      any material cost overruns, cover ongoing general and administrative expenses
      and/or fund exploration, management intends to raise such funds through the
      sale
      of our securities, the sale of a royalty interest in the future production
      from
      the Chanate properties and/or joint venturing with one or more strategic
      partners. We cannot assure that adequate additional funding will be
      available . If
      we are
      unable to obtain needed capital from outside sources, we will be forced to
      reduce or curtail our operations. ****





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





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




-33-





***If
      our stockholders do not approve an amendment to our Certificate of Incorporation
      to increase the number of shares we are authorized to issue, we may not be
      unable to raise additional funds, if needed, through the sale of equity
      securities and it may make it more difficult to attract key
      employees*** ***.***





As
      of
      December 15, 2006, we had 133,482,854 shares of Common Stock outstanding and
      approximately 44,208,727 shares reserved for future issuance under outstanding
      options, warrants and the 2006 Equity Incentive Plan, leaving only approximately
      22,308,419 shares of Common Stock available for future issuances. We have
      scheduled an annual meeting of our stockholders to be held on February 21,
      2007
      to approve an amendment to our Certificate of Incorporation to increase the
      number of our authorized shares. As discussed in the risk factors above, we
      may
      need to raise additional funds. In addition, we will need additional shares
      for
      other corporate purposes including, possibly, attraction of key employees.
      If our stockholders do not approve this amendment, we most likely will not
      be
      able to raise additional funds, if needed, through the sale of equity
      securities.





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





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





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





We
      plan
      to use reconditioned and used carbon column collection equipment to recover
      gold. Such equipment is subject to the risk of more frequent breakdowns and
      need
      for repair than new equipment. If the equipment that we use breaks down and
      needs to be repaired or replaced, we will incur additional costs and operations
      may be delayed resulting in lower amounts of gold recovered. In such event,
      our
      capital and operating cost assumptions may be inaccurate and our ability to
      economically and successfully mine the project may be hampered, resulting in
      decreased revenues and, possibly, a loss from operations.





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





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





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





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




-34-





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





The
      2005
      feasibility study indicates our average life of mine water requirements, for
      ore
      processing only, will be about 94.6 million gallons per year (11.4 liters per
      second). The amount of water we are currently permitted to pump for our
      operations is approximately 71.3 million gallons per year (8.6 liters per
      second). Our currently permitted water rights may not be adequate for all of
      our
      total project needs over the entire course of our anticipated mining operations.
      We are looking into ways to rectify this issue. If we need to obtain additional
      rights, but are unable to procure them our planned operations may be adversely
      affected.





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





Our
      only
      current properties are the El Chanate concessions and our Leadville properties.
      At present, we are not doing any substantive work at our Leadville properties
      and, in fact, have written these properties off. Our El Chanate concessions
      are
      owned by one of our wholly-owned subsidiaries, Oro de Altar. Minera Santa Rita
      S. de R.L. de C.V., another of our Mexican subsidiaries leases the land and
      claims at El Chanate from Oro de Altar. FG, our former joint venture partner,
      has the right to receive five percent of Minera Santa Rita's annual dividends,
      when declared. We currently do not have operations on either of our properties,
      and we must commence such operations to receive revenues. Accordingly, we are
      dependent upon the success of the El Chanate concessions.





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





The
      profitability of any gold mining operations in which we have an interest will
      be
      significantly affected by changes in the market price of gold. Gold prices
      fluctuate on a daily basis. During 2005, the spot price for gold on the London
      Exchange fluctuated between $411.10 and $537.50 per ounce. Between January
      1,
      2006 and December 15, 2006, the spot price for gold on the London Exchange
      has
      fluctuated between $524.75 and $725.00 per ounce. Gold prices are affected
      by
      numerous factors beyond our control, including:





·
            the
                level of interest rates,


·
            the
                rate of inflation,


·
            central
                bank sales,


·
            world
                supply of gold and


·
            stability
                of exchange rates.




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





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





We
      have
      entered into metals trading transactions to hedge against fluctuations in gold
      prices, using call option purchases and forward sales, and have entered into
      various interest rate swap agreements. The terms of our debt financing 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 and if we fail to maintain the minimum level of hedge transactions
      required by the terms of our debt financing, our ability to draw amounts from
      Standard Bank may be adversely affected.




-35-




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





In
      addition, we expect to settle our forward sales at a time when the El Chanate
      Project is in production. If the completion of the project is delayed or if
      we
      are unable for any reason to deliver the quantity of gold required by our
      forward sales, we may need to settle the forward sales by purchasing gold at
      spot prices. Depending on the price of gold at that time, the financial
      settlement of the forward sales could have a material adverse effect on our
      financial condition, results of operations and cash flows.





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





We
      face
      risks normally associated with any conduct of business in foreign countries
      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 future operations which, in
      turn, could have a material adverse impact on our future cash flows, earnings,
      results of operations and financial condition. These risks include the
      following:





·
            labor
                disputes,


·
            invalidity
                of governmental orders,


·
            uncertain
                or unpredictable political, legal and economic
                environments,


·
            war
                and civil disturbances,


·
            changes
                in laws or policies,


·
            taxation,


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


·
            governmental
                seizure of land or mining claims,


·
            limitations
                on ownership,


·
            limitations
                on the repatriation of earnings,


·
            increased
                financial costs,


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


·
            foreign
                exchange controls.





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





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





If
      and
      when we commence sales of gold, such sales will be made in U.S. dollars. We
      incur a significant amount of our expenses in Mexican pesos. As a result, our
      financial performance would be affected by fluctuations in the value of the
      Mexican peso to the U.S. dollar.





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





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





·
            ownership
                of assets,


·
            land
                tenure,


·
            mining
                policies,




-36-




·
            monetary
                policies,


·
            taxation,


·
            rates
                of exchange,


·
            environmental
                regulations,


·
            labor
                relations,


·
            repatriation
                of income and


·
            return
                of capital.





Any
      such
      changes may affect our ability to undertake exploration and development
      activities in respect of present and 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, environmental legislation generally is
      evolving in a manner which will require:





·
            stricter
                standards and enforcement,


·
            increased
                fines and penalties for non-compliance,


·
            more
                stringent environmental assessments of proposed projects and


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





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





***We
      have limited insurance against any losses or liabilities that could arise from
      our operations because we have not commenced operations at El Chanate. Although
      we plan on obtaining additional insurance once
      construction*** ** ***begins,
      such insurance may not be adequate.*** ****** ***If
      we incur material losses or liabilities because our insurance coverage is not
      adequate, our financial position could be materially and adversely
      affected.***





We
      are in
      the process of developing our Mexican concessions and hope to commence mining
      operations during the first calendar quarter of 2007. If and when we commence
      mining operations, such operations will involve a number of risks and hazards,
      including:





·
            environmental
                hazards,


·
            industrial
                accidents,


·
            metallurgical
                and other processing,


·
            acts
                of God, and


·
            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.




-37-




Industrial
      accidents could have a material adverse effect on our future business and
      operations. Although as we move forward in the development of the El Chanate
      Project we plan to obtain and maintain insurance within ranges of coverage
      consistent with industry practice. In this regard, prior to execution of the
      credit agreement with Standard Bank, we obtained general liability coverage
      of
      $2,000,000, basic insurance coverage of $2,000,000 for property and equipment
      in
      transit to the El Chanate Project and $4,000,000 for the property and equipment
      upon delivery to the site. We plan to increase coverage as warranted thereafter
      as the property and equipment are erected and placed into service. We cannot
      be
      certain that this insurance will cover the risks associated with mining or
      that
      we will be able to maintain insurance to cover these risks at economically
      feasible premiums. We also might become subject to liability for pollution
      or
      other hazards which we cannot insure against or which we may elect not to insure
      against because of premium costs or other reasons. Losses from such events
      may
      have a material adverse effect on our financial position.





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





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





***We
      are dependent on the efforts of certain key personnel and we need to retain
      additional personnel and/or contractors to develop our El Chanate Project.
      If we
      lose the services of these personnel or we are unable to retain additional
      personnel and/or contractors, our ability to complete development and operate
      our El Chanate Project may be delayed and our planned operations may be
      materially adverse affected.***





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




-38-




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





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





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





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





·
            the
                location of economic ore bodies,


·
            development
                of appropriate metallurgical processes,


·
            receipt
                of necessary governmental approvals and


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





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





·
            the
                price of gold,


·
            the
                particular attributes of the deposit, such as its


·
            size,


·
            grade
                and


·
            proximity
                to infrastructure,


·
            financing
                costs,


·
            taxation,


·
            royalties,


·
            land
                tenure,


·
            land
                use,


·
            water
                use,


·
            power
                use,


·
            importing
                and exporting gold and


·
            environmental
                protection.





The
      effect of these factors cannot be accurately predicted.





**Risks
      related to ownership of our stock**





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





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




-39-





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





As
      of
      December 15, 2006, approximately 76,326,058 shares of our Common Stock,
      constituted "restricted securities" as defined in Rule 144 under the Securities
      Act of 1933. We have registered more than half of these shares for public
      resale. In addition, we have registered 37 ,361,000
      shares of Common Stock issuable upon the exercise of outstanding warrants and
      872,727 shares of Common Stock issuable upon the exercise of outstanding
      options. All of the foregoing shares, assuming exercise of all of the above
      options and warrants, would represent in excess of 50% of the then outstanding
      shares of our Common Stock. Registration
      of the shares permits the sale of the shares in the open market or in privately
      negotiated transactions without compliance with the requirements of Rule 144.
      To
      the extent the exercise price of the warrants or options is less than the market
      price of the Common Stock, the holders of the warrants are likely to exercise
      them and sell the underlying shares of Common Stock and to the extent that
      the
      exercise prices of these securities are adjusted pursuant to anti-dilution
      protection, the securities could be exercisable or convertible for even more
      shares of Common Stock.  We
      also may
      issue shares
      to be used to meet our capital requirements or use shares to compensate
      employees, consultants and/or directors. We are unable to estimate the amount,
      timing or nature of future sales of outstanding Common Stock. Sales of
      substantial amounts of our Common Stock in the public market could cause the
      market price for our Common Stock to decrease. Furthermore, a decline in the
      price of our Common Stock would likely impede our ability to raise capital
      through the issuance of additional shares of Common Stock or other equity
      securities.





***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. In this regard, in August 2006, we adopted a stockholder
      rights plan and, under the Plan, our Board of Directors declared a dividend
      distribution of one Right for each outstanding share of Common Stock to
      stockholders of record at the close of business on August 14, 2006. Each Right
      initially entitles holders to buy one one-thousandth of a share of Series B
      Common Stock for $3.00 once the Rights become exercisable. The Rights generally
      are not transferable apart from the common stock and will not be exercisable
      unless and until a person or group acquires or commences a tender or exchange
      offer to acquire, beneficial ownership of 20% or more of our common stock.
      However, t he
      Rights
      Agreement provides an exemption for any person who is, as of August 15, 2006,
      the beneficial owner of 20% or more of our outstanding common stock, so long
      as
      such person does not, subject to certain exceptions, acquire additional shares
      of our common stock after that date. The Rights will expire on August 15, 2016,
      and may be redeemed prior thereto at $0.001 per Right under certain
      circumstances.





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





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





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


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




-40-




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


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


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


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


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





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





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





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




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




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




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





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





**Item
      3.** **Controls
      and Procedures** **.**





The
      term
      "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
      term refers to the controls and procedures of a company that are designed to
      ensure that information required to be disclosed by a company in the reports
      that it files under the Exchange Act is recorded, processed, summarized, and
      reported within the required time periods. Our Chief Executive Officer and
      our
      Chief Financial Officer have evaluated the effectiveness of our disclosure
      controls and procedures as of the end of the period covered by this quarterly
      report. They have concluded that, as of that date, our disclosure controls
      and
      procedures were effective at ensuring that required information will be
      disclosed on a timely basis in our reports filed under the Exchange
      Act.





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




-41-




**PART
      II - OTHER INFORMATION**





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





None.





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





During
      the current quarter, as part of the fee for entering into and closing the Credit
      Agreement, we issued to Standard Bank 1,150,000 shares of our restricted common
      stock and a warrant for the purchase of 12,600,000 shares of our common stock
      at
      an exercise price of $0.317 per share, expiring on the earlier of (a) December
      31, 2010 or (b) the date one year after the repayment of the Credit Agreement.





Subsequent
      to the fiscal quarter ended October 31, 2006, we issued 275,000 shares of our
      common stock upon the exercise of outstanding options at an exercise price
      of
      $.05 per share for proceeds of $13,750, including 25,000 options exercised
      by J.
      Scott Hazlitt, our V.P. Mine Development.





In
      addition, on December 13, 2006, subsequent to the end of the quarter, we issued
      two year options to purchase our common stock at an exercise price of $0.36
      per
      share to John Brownlie and Christopher Chipman and our Canadian counsel. These
      options are for the purchase of 250,000 shares, 100,000 shares and 100,000
      shares, respectively. These
      options cannot be exercised unless and until they are approved by the Toronto
      Stock Exchange and Stockholders.





All
      of
      the foregoing issuances were exempt from registration pursuant to the provisions
      of 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.**





We
      have
      scheduled our next Annual Meeting of Stockholders to be held on February 21,
      2007.





On
      December 13, 2006, our Board of Directors adopted the 2006 Equity Incentive
      Plan. Stockholder approval of the plan will be sought at the Annual Meeting.
      The
      following general description of certain features of the Equity Incentive Plan
      is qualified in its entirety by reference to the Equity Incentive Plan, which
      is
      filed as an exhibit hereto. Capitalized terms not otherwise defined herein
      have
      the meanings ascribed to them in the Equity Incentive Plan.





The
      Equity Incentive Plan authorizes the grant of non-qualified and incentive stock
      options, stock appreciation rights and restricted stock awards (each, an
“Awards”). A maximum of 10,000,000 shares 1  of
      common stock will be reserved for potential issuance pursuant to Awards under
      the Equity Incentive Plan. Unless sooner terminated, the Equity Incentive Plan
      will continue in effect for a period of 10 years from its effective
      date.





1
              The
                  Company has only reserved 1,000,000 shares for issuance under the
                  Plan at
                  this time. It will increase the number of shares reserved for issuance
                  under the Plan as more shares become available from, among other
                  things,
                  expired warrants or approval of an increase in our authorized shares
                  of
                  common stock at the upcoming Annual
                  Meeting.




-42-





The
      Equity Incentive Plan is administered by the Board of Directors or a committee
      thereof. The Equity Incentive Plan provides for awards to be made to such
      employees, directors and consultants of the Company and its affiliates as the
      Board may select. As of the date hereof, 450,000 options have been granted
      under
      the Equity Incentive Plan to two of our officers and our Canadian counsel.
      These
      options cannot be exercised unless and until they are approved by the Toronto
      Stock Exchange and Stockholders.





Stock
      options awarded under the Equity Incentive Plan may vest and be exercisable
      at
      such times (not later than 10 years after the date of grant) and at such
      exercise prices (not less than fair market value at the date of grant) as the
      Board may determine. The Board may provide for options to become immediately
      exercisable upon a "change in control," which is defined in the Equity Incentive
      Plan to occur in the event one or more persons acting individually or as a
      group: (i)
      acquires sufficient additional stock to constitute more than 50% of (A) the
      total Fair Market Value of all Common Stock issued and outstanding or (B) the
      total voting power of all shares of capital stock authorized to vote for the
      election of directors; (ii) acquires, in a 12-month period, 35% or more of
      the
      voting power of all shares of capital stock authorized to vote for the election
      of directors, or alternatively a majority of the members of the board is
      replaced during any 12-month period by directors whose appointment was not
      endorsed by a majority of the members of the board; or (iii) acquires, during
      a
      12-month period, more than 40% of the total gross fair market value of all
      of
      the Company’s assets .





The
      exercise price of an option must be paid in cash. No options may be granted
      under the Equity Incentive Plan after the tenth anniversary of its effective
      date. Unless the Board determines otherwise: (i) the options shall provide
      that,
      in the event a participant’s continuous service to the Company terminates, the
      options will terminate either immediately or within a specified period after
      continuous service terminates, depending upon the cause of such termination;
      and
      (ii) the options will be transferable only by will or the laws of descent and
      distribution.





Stock
      appreciation rights awarded under the Equity Incentive Plan may be granted (i) in
      connection and simultaneously with the grant of another Award, (ii) with
      respect to a previously granted Award, or (iii) independent of another
      Award. Stock appreciation rights to receive in shares of Common Stock the excess
      of the Fair Market Value of Common Stock on the date the rights are surrendered
      over the Fair Market Value of Common Stock on the date of grant may be granted
      to any Employee, Director or Consultant selected by the Board. The Board may,
      in
      its discretion and on such terms as it deems appropriate, require as a condition
      of the grant of a stock appreciation right that the participant surrender for
      cancellation some or all of the Awards previously granted to such person under
      the Plan or otherwise. A stock appreciation right, the grant of which is
      conditioned upon such surrender, may have an exercise price lower (or higher)
      than the exercise price of the surrendered Award, may contain such other terms
      as the Board deems appropriate, and shall be exercisable in accordance with
      its
      terms, without regard to the number of shares, price, exercise period or any
      other term or condition of such surrendered Award.





Restricted
      stock awarded under the Equity Incentive Plan may be granted on such terms
      and
      conditions as the Board may determine. The terms and conditions of restricted
      stock Award Agreements may change from time to time, and the terms and
      conditions of separate restricted stock Award Agreements need not be identical.
      Each restricted stock Award Agreement: (i) may be awarded in consideration
      for
      past services actually rendered, or for future services to be rendered, to
      the
      Company or an Affiliate for its benefit; (ii) may be subject to a vesting
      schedule to be determined by the Board, or be fully vested at the time of grant;
      (iii) shall provide that, unless otherwise provided in the restricted stock
      Award Agreement, in the event a participant’s continuous service to the Company
      terminates for cause prior to a vesting date set forth in the restricted stock
      Award Agreement, any unvested restricted stock Award shall be forfeited; and
      (iv) unless otherwise provided for therein, shall not be
      transferable.


-43-




**Item 6.**
            
            **Exhibits.**  10.1
            Hazlitt
                Agreement.


10.2
            2006
                Equity Incentive Plan


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.





-44-





**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. Dieterle
              President/Treasurer





Date:
      December 19, 2006




-45-