UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended April 30, 2010





OR





 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period
from               to





Commission
File Number:  0-13078





CAPITAL GOLD CORPORATION





(Exact
name of registrant as specified in its charter)





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





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





(Address
of principal executive offices)





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









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





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


Yes           x                      No   ̈





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





Yes  ̈                      No
 ̈




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





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





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





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





Class
                            
                            Outstanding at June 4, 2010Common
      Stock, par value $.0001 per share
                            
                            
                            48,559,521










PART I.  FINANCIAL
INFORMATION





Item
1.  Financial
Statements





The
accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring adjustments), which
we consider necessary for the fair presentation of results for the three and
nine months ended April 30, 2010.





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





The
results reflected for the three and nine months ended April 30, 2010 are not
necessarily indicative of the results for the entire fiscal year ending July 31,
2010.





As
discussed more fully in Note 1 to the accompanying condensed consolidated
financial statements, the financial information as of the fiscal year ended July
31, 2009 and for the three and nine months ended April 30, 2009 has been recast
so that the basis of presentation is consistent with that of the financial
information as of April 30, 2010 and for the three and nine months ended April
30, 2010. This recast reflects a 1-for-4 reverse stock split of the
Company’s common stock that became effective on January 25, 2010.


-2-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEET


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





April 30,
                      2010
                      (unaudited)
                    
                    
                    July 31,
                      2009ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                    
                    $
                    9,203
                    
                    
                    $
                    6,448Accounts
      Receivable
                    
                    
                    -
                    
                    
                    
                    2,027Ore
      on Leach Pads (Note 6)
                    
                    
                    30,767
                    
                    
                    
                    20,024Material
      and Supply Inventories (Note 5)
                    
                    
                    2,109
                    
                    
                    
                    1,381Marketable
      Securities  (Note 4)
                    
                    
                    75
                    
                    
                    
                    35Prepaid
      Expenses
                    
                    
                    444
                    
                    
                    
                    277Other
      Current Assets (Note 7)
                    
                    
                    1,018
                    
                    
                    
                    1,101Total
      Current Assets
                    
                    
                    43,616
                    
                    
                    
                    31,293Mining
      Concessions (Note 10)
                    
                    
                    52
                    
                    
                    
                    51Property
      & Equipment – net (Note 8)
                    
                    
                    25,134
                    
                    
                    
                    22,417Intangible
      Assets – net (Note 9)
                    
                    
                    672
                    
                    
                    
                    318Other
      Assets:Deferred
      Financing Costs
                    
                    
                    1,641
                    
                    
                    
                    2,232Other
      Long-term Assets
                    
                    
                    332
                    
                    
                    
                    98Total
      Other Assets
                    
                    
                    1,973
                    
                    
                    
                    2,330Total
      Assets
                    
                    $
                    71,447
                    
                    
                    $
                    56,409LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                    
                    $
                    1,103
                    
                    
                    $
                    988Accrued
      Expenses (Note 17)
                    
                    
                    7,114
                    
                    
                    
                    1,633Derivative
      Contracts (Note 16)
                    
                    
                    72
                    
                    
                    
                    193Deferred
      Tax Liability (Note 18)
                    
                    
                    4,571
                    
                    
                    
                    4,233Current
      Portion of Long-term Debt (Note 15)
                    
                    
                    3,600
                    
                    
                    
                    3,600Total
      Current Liabilities
                    
                    
                    16,460
                    
                    
                    
                    10,647Reclamation
      and Remediation Liabilities (Note 11)
                    
                    
                    2,016
                    
                    
                    
                    1,594Other
      liabilities
                    
                    
                    276
                    
                    
                    
                    78Long-term
      Debt (Note 15)
                    
                    
                    1,700
                    
                    
                    
                    4,400Total
      Long-term Liabilities
                    
                    
                    3,992
                    
                    
                    
                    6,072Commitments
      and ContingenciesStockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share;Authorized
      75,000,000 shares; Issued andOutstanding
      48,475,507 and 48,463,406 shares, respectively
                    
                    
                    5
                    
                    
                    
                    5Additional
      Paid-In Capital
                    
                    
                    64,813
                    
                    
                    
                    64,071Accumulated
      Deficit
                    
                    
                    (13,426
                    )
                    
                    
                    (22,089
                    )Deferred
      Compensation
                    
                    
                    (97
                    )
                    
                    
                    (319
                    )Accumulated
      Other Comprehensive Income (Note 12)
                    
                    
                    (300
                    )
                    
                    
                    (1,978
                    )Total
      Stockholders’ Equity
                    
                    
                    50,995
                    
                    
                    
                    39,690Total
      Liabilities and Stockholders’ Equity
                    
                    $
                    71,447
                    
                    
                    $
                    56,409


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


-3-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For The Three Months EndedApril 30,2010
                
                
                2009RevenuesSales
      – Gold, net
                
                $
                17,525
                
                
                $
                12,395Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                6,601
                
                
                
                3,698Depreciation
      and Amortization
                
                
                838
                
                
                
                563General
      and Administrative
                
                
                3,753
                
                
                
                1,361Exploration
                
                
                320
                
                
                
                329Total
      Costs and Expenses
                
                
                11,512
                
                
                
                5,951Income
      from Operations
                
                
                6,013
                
                
                
                6,444Other
      Income (Expense):Interest
      Income
                
                
                4
                
                
                
                7Interest
      Expense
                
                
                (326
                )
                
                
                (351
                )Other
      Expense
                
                
                34
                
                
                
                (40
                )Loss
      on change in fair value of derivative
                
                
                -
                
                
                
                (1,391
                )Total
      Other Expense
                
                
                (288
                )
                
                
                (1,775
                )Income
      before Income Taxes
                
                
                5,725
                
                
                
                4,669Income
      Tax Expense
                
                
                (2,946
                )
                
                
                (2,115
                )Net
      Income
                
                $
                2,779
                
                
                $
                2,554Income
      Per Common ShareBasic
                
                $
                0.06
                
                
                $
                0.05Diluted
                
                $
                0.06
                
                
                $
                0.05Basic
      Weighted Average Common Shares Outstanding
                
                
                48,486,705
                
                
                
                48,340,687Diluted
      Weighted Average Common Shares Outstanding
                
                
                50,264,669
                
                
                
                50,206,726





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


-4-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For The Nine Months EndedApril 30,2010
                
                
                2009RevenuesSales
      – Gold, net
                
                $
                42,480
                
                
                $
                32,939Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                15,336
                
                
                
                10,395Depreciation
      and Amortization
                
                
                2,063
                
                
                
                1,535General
      and Administrative
                
                
                7,413
                
                
                
                3,800Exploration
                
                
                1,000
                
                
                
                1,224Total
      Costs and Expenses
                
                
                25,812
                
                
                
                16,954Income
      from Operations
                
                
                16,668
                
                
                
                15,985Other
      Income (Expense):Interest
      Income
                
                
                11
                
                
                
                32Interest
      Expense
                
                
                (1,046
                )
                
                
                (1,264
                )Other
      Expense
                
                
                (27
                )
                
                
                (273
                )Loss
      on change in fair value of derivative
                
                
                -
                
                
                
                (1,969
                )Total
      Other Expense
                
                
                (1,062
                )
                
                
                (3,474
                )Income
      before Income Taxes
                
                
                15,606
                
                
                
                12,511Income
      Tax Expense
                
                
                (6,943
                )
                
                
                (4,824
                )Net
      Income
                
                $
                8,663
                
                
                $
                7,687Income
      Per Common ShareBasic
                
                $
                0.18
                
                
                $
                0.16Diluted
                
                $
                0.17
                
                
                $
                0.15Basic
      Weighted Average Common Shares Outstanding
                
                
                48,487,931
                
                
                
                48,282,926Diluted
      Weighted Average Common Shares Outstanding
                
                
                49,987,145
                
                
                
                49,801,877





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


-5-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)




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





AccumulatedAdditional
                  
                  
                  
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalCommon Stock
                  
                  
                  paid-in-
                  
                  
                  Accumulated
                  
                  
                  Comprehensive
                  
                  
                  Deferred
                  
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Income/(Loss)
                  
                  
                  Compensation
                  
                  
                  EquityBalance
      at July 31, 2009
                  
                  
                  48,463,406
                  
                  
                  $
                  5
                  
                  
                  $
                  64,071
                  
                  
                  $
                  (22,089
                  )
                  
                  $
                  (1,978
                  )
                  
                  $
                  (319
                  )
                  
                  $
                  39,690Equity
      based compensation
                  
                  
                  (63,333
                  )
                  
                  
                  -
                  
                  
                  
                  689
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  222
                  
                  
                  
                  911Common
      stock issued upon the exercising of options and warrants
                  
                  
                  75,434
                  
                  
                  
                  -
                  
                  
                  
                  53
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  53Net
      income for the nine months ended April 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,663
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,663Change
      in fair value on interest rate swaps
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  122
                  
                  
                  
                  -
                  
                  
                  
                  122Unrealized
      gain on marketable securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  40
                  
                  
                  
                  -
                  
                  
                  
                  40Equity
      adjustment from foreign currency translation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,516
                  
                  
                  
                  -
                  
                  
                  
                  1,516Total
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,341Balance
      at April 30, 2010
                  
                  
                  48,475,507
                  
                  
                  $
                  5
                  
                  
                  $
                  64,813
                  
                  
                  $
                  (13,426
                  )
                  
                  $
                  (300
                  )
                  
                  $
                  (97
                  )
                  
                  $
                  50,995





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


-6-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


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





For TheNine Months EndedApril 30,2010
                            
                            
                            2009Cash
      Flow From Operating Activities:Net
      Income
                            
                            $
                            8,663
                            
                            
                            $
                            7,687Adjustments
      to Reconcile Net Income toNet
      Cash Provided by Operating Activities:Depreciation
      and Amortization
                            
                            
                            2,063
                            
                            
                            
                            1,535Amortization
      of Deferred Financing Costs
                            
                            
                            741
                            
                            
                            
                            734Accretion
      of Reclamation and Remediation
                            
                            
                            111
                            
                            
                            
                            113Loss
      on change in fair value of derivative
                            
                            
                            -
                            
                            
                            
                            1,969Equity
      Based Compensation
                            
                            
                            911
                            
                            
                            
                            798Changes
      in Operating Assets and Liabilities:Decrease
      (increase) in Accounts Receivable
                            
                            
                            2,027
                            
                            
                            
                            (527
                            )Increase
      in Prepaid Expenses
                            
                            
                            (167
                            )
                            
                            
                            (93
                            )Increase
      in Inventory
                            
                            
                            (10,893
                            )
                            
                            
                            (3,298
                            )Decrease
      (increase) in Other Current Assets
                            
                            
                            82
                            
                            
                            
                            (34
                            )Decrease
      (increase) in Other Long-term Assets
                            
                            
                            (234
                            )
                            
                            
                            (260
                            )Increase
      in Accounts Payable
                            
                            
                            115
                            
                            
                            
                            180Decrease
      in Derivative Liability
                            
                            
                            -
                            
                            
                            
                            (2,684
                            )Increase
      (decrease) in Other Liability
                            
                            
                            198
                            
                            
                            
                            (17
                            )Increase
      (decrease) in Reclamation and Remediation
                            
                            
                            308
                            
                            
                            
                            (511
                            )Increase
      in Deferred Tax Liability
                            
                            
                            338
                            
                            
                            
                            523Increase
      in Accrued Expenses
                            
                            
                            5,481
                            
                            
                            
                            1,196Net
      Cash Provided By Operating Activities
                            
                            
                            9,744
                            
                            
                            
                            7,311Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property
      and Equipment
                            
                            
                            (5,319
                            )
                            
                            
                            (4,590
                            )Purchase
      of Intangibles
                            
                            
                            (393
                            )
                            
                            
                            (180
                            )Net
      Cash Used in Investing Activities
                            
                            
                            (5,712
                            )
                            
                            
                            (4,770
                            )





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


-7-





CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)




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





For TheNine Months EndedApril 30,2010
                
                
                2009Cash
      Flow From Financing Activities:Repayments
      from Affiliate, net
                
                
                4
                
                
                
                5Payment
      of Deferred Finance Costs
                
                
                (150
                )
                
                
                -Repayments
      on Note Payable
                
                
                (2,700
                )
                
                
                (3,375
                )Proceeds
      From Issuance of Common Stock
                
                
                53
                
                
                
                144Net
      Cash Used in Financing Activities
                
                
                (2,793
                )
                
                
                (3,226
                )Effect
      of Exchange Rate Changes
                
                
                1,516
                
                
                
                (3,120
                )(Decrease)
      Increase In Cash and Cash Equivalents
                
                
                2,755
                
                
                
                (3,805
                )Cash
      and Cash Equivalents - Beginning
                
                
                6,448
                
                
                
                10,992Cash
      and Cash Equivalents – Ending
                
                $
                9,203
                
                
                $
                7,187Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                
                $
                328
                
                
                $
                465Cash
      Paid For Income Taxes
                
                $
                4,521
                
                
                $
                2,572Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
                
                $
                122
                
                
                $
                12





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


-8-





CAPITAL
GOLD CORPORATION


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


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





NOTE 1 -
Basis of Presentation





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





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





All significant intercompany accounts
and transactions are eliminated in consolidation.  Certain items in these
financial statements have been reclassified to conform to the current period
presentation.





The
financial information in the accompanying condensed consolidated financial
statements as of the fiscal year ended July 31, 2009 and for the three and nine
months ended April 30, 2009 has been recast so that the basis of presentation is
consistent with that of the financial information as of April 30, 2010 and for
the three and nine months ended April 30, 2010. This recast reflects
a 1-for-4 reverse stock split of the Company’s common stock that became
effective on January 25, 2010.





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




-9-




NOTE 2 –
Summary of Significant Accounting Policies





Recently
Issued Accounting Pronouncements





The
Accounting Standards Codification





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





Share-Based
Payment Transactions





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





Fair
Value Measurements





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





Variable
Interest Entities





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


-10-




Equity-linked
Financial Instruments




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





Accounting
for the Useful Life of Intangibles





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





NOTE 3 -
Equity Based Compensation





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





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





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





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





The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield and expected life.  The estimate
of the number of forfeitures considers historical employee turnover rates and
expectations about the future.  The estimated per share weighted average
grant-date fair values of stock options and warrants granted during the nine
months ended April 30, 2010, and 2009 were $2.16 and $1.12. The fair values of
the options and warrants granted were estimated based on the following weighted
average assumptions:


-11-





Nine months ended April 30,2010
                  
                  
                  2009Expected
      volatility
                  
                  
                  71.25
                  %
                  
                  
                  69.98-79.72
                  %Risk-free
      interest rate
                  
                  
                  2.48
                  %
                  
                  
                  0.86-1.56
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life
                  
                  5.0
      years
                  
                  
                  2.0
      – 5.0 yearsForfeiture
      rate
                  
                  
                  -
                  
                  
                  
                  -




Stock
option and activity for employees during the fiscal years ended July 31, 2009
and 2008, and nine months ended April 30, 2010 are as follows (all tables in
thousands, except for option, price and term data):





Number of
                    Options
                  
                  
                  Weighted
                    average
                    exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                    term (years)
                  
                  
                  Aggregate
                      intrinsic valueOutstanding
      at July 31, 2007
                  
                  
                  625,000
                  
                  
                  $
                  1.36
                  
                  
                  
                  1.20
                  
                  
                  $
                  255Options
      granted*
                  
                  
                  625,000
                  
                  
                  
                  2.52
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (362,500
                  )
                  
                  
                  1.28
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2008
                  
                  
                  887,500
                  
                  
                  $
                  2.20
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted*
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (176,432
                  )
                  
                  
                  1.48
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (86,068
                  )
                  
                  
                  1.40
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2009
                  
                  
                  875,000
                  
                  
                  $
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  $
                  70Options
      granted*
                  
                  
                  500,000
                  
                  
                  $
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (26,932
                  )
                  
                  
                  2.18
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (322,235
                  )
                  
                  
                  2.26
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at April 30, 2010
                  
                  
                  1,025,833
                  
                  
                  $
                  3.00
                  
                  
                  
                  4.61
                  
                  
                  $
                  676Options
      exercisable at April 30, 2010
                  
                  
                  550,000
                  
                  
                  $
                  2.76
                  
                  
                  
                  4.53
                  
                  
                  $
                  494




*
Issuances under 2006 Equity Incentive Plan.


-12-




Unvested
stock option balances for employees at April 30, 2010 are as
follows:




Number of Options
                
                
                Weighted
                  average
                  exercise
                  price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic valueOutstanding at July 31,
      2007
                
                
                37,500
                
                
                $
                1.28
                
                
                
                1.67
                
                
                $
                17Options
      granted
                
                
                625,000
                
                
                
                2.52
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (225,000
                )
                
                
                2.32
                
                
                
                -
                
                
                
                -Unvested
      OptionsOutstanding
      at July 31, 2008
                
                
                437,500
                
                
                $
                2.52
                
                
                
                4.49
                
                
                $
                8Options
      granted
                
                
                250,000
                
                
                
                1.96
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (250,000
                )
                
                
                2.24
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at July 31, 2009
                
                
                437,500
                
                
                $
                2.36
                
                
                
                5.18
                
                
                $
                35Options
      granted
                
                
                500,000
                
                
                
                3.60
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (237,500
                )
                
                
                3.23
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (224,167
                )
                
                
                2.26
                
                
                
                -
                
                
                
                -Unvested
      Options outstanding at April 30, 2010
                
                
                475,833
                
                
                $
                3.28
                
                
                
                4.71
                
                
                $
                182




-13-


Stock
option and warrant activity for non-employees during the years ended July 31,
2009 and 2008, and nine months ended April 30, 2010 are as follows:


Number of
                  options
              
              
              Weighted
                average
                exercise
                  price
              
              
              Weighted
                average
                remaining
                contracted
                term (years)
              
              
              Aggregate
                Intrinsic valueWarrants
      and options outstanding at July 31, 2007
              
              
              5,633,886
              
              
              $
              1.32
              
              
              
              1.48
              
              
              $
              2,578Options
      granted*
              
              
              428,750
              
              
              
              2.64Options
      exercised
              
              
              (5,388,886
              )
              
              
              1.32
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (170,000
              )
              
              
              1.20
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2008
              
              
              503,750
              
              
              $
              2.48
              
              
              
              3.54
              
              
              $
              54Options
      granted
              
              
              350,000
              
              
              
              2.00
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (37,500
              )
              
              
              1.56
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (37,500
              )
              
              
              1.56
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2009
              
              
              778,750
              
              
              $
              2.36
              
              
              
              3.36
              
              
              $
              73Options
      granted
              
              
              187,500
              
              
              
              3.60
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (48,502
              )
              
              
              1.77
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (305,248
              )
              
              
              2.21
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at April 30, 2010
              
              
              612,500
              
              
              $
              2.84
              
              
              
              3.07
              
              
              $
              489Warrants
      and options exercisable at April 30, 2010
              
              
              429,166
              
              
              $
              2.84
              
              
              
              1.78
              
              
              $
              353




* 278,750
issued under 2006 Equity Incentive Plan.


-14-




Unvested
stock option balances for non-employees at April 30, 2010 are as
follows:




Number of
                    Options
                
                
                Weighted
                  Average
                  Exercise
                    Price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term (years)
                
                
                Aggregate
                  Intrinsic
                    valueOutstanding
      at July 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      granted
                
                
                162,500
                
                
                
                2.52
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (48,750
                )
                
                
                2.52
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2008
                
                
                113,750
                
                
                $
                2.52
                
                
                
                4.49
                
                
                $
                3Options
      granted
                
                
                318,750
                
                
                
                1.96
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (191,875
                )
                
                
                2.04
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2009
                
                
                240,625
                
                
                $
                2.16
                
                
                
                4.88
                
                
                $
                70Options
      granted
                
                
                187,500
                
                
                
                3.60
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (129,166
                )
                
                
                3.07
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (115,625
                )
                
                
                2.35
                
                
                
                -
                
                
                
                -Unvested
      options outstanding at April 30, 2010
                
                
                183,334
                
                
                $
                2.85
                
                
                
                4.30
                
                
                $
                148




The impact on the Company’s results of
operations of recording equity based compensation for the nine months ended
April 30, 2010 and 2009, for employees and non-employees was approximately $911
and $798 and reduced earnings per share by $0.02 and $0.02 per basic and diluted
share, for each period.  The Company has not recognized any tax benefit or
expense for the nine months ended April 30, 2010 and 2009, related to these
items due to the Company’s net operating losses and corresponding valuation
allowance within the U.S. (See Note 18).




As of April 30, 2010, there was
approximately $232 of unrecognized equity based compensation cost related to
options granted which have not yet vested.





NOTE 4 -
Marketable Securities





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





(in thousands)April
      30,
                  2010
                
                
                July
      31,
                  2009Marketable
      equity securities, at cost
                
                $
                50
                
                
                $
                50Marketable
      equity securities, at fair value(See
      Note 14)
                
                $
                75
                
                
                $
                35




-15-




NOTE 5 –
Material and Supplies Inventories





(in thousands)April
      30,
                  2010
                
                
                July
      31,
                  2009Materials,
      supplies and other
                
                $
                2,109
                
                
                $
                1,381Total
                
                $
                2,109
                
                
                $
                1,381




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




(in thousands)April
      30,
                    2010
                  
                  
                  July
      31,
                    2009Ore
      on leach pads
                  
                  $
                  30,767
                  
                  
                  $
                  20,024Total
                  
                  $
                  30,767
                  
                  
                  $
                  20,024




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




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





NOTE 7 –
Other Current Assets





Other
current assets consist of the following:





(in thousands)April 30,
                      2010
                    
                    
                    July 31,
                      2009Value
      added tax to be refunded
                    
                    $
                    765
                    
                    
                    $
                    1,032MRS
      receivable
                    
                    
                    219
                    
                    
                    
                    -Loans
      receivable – affiliate
                    
                    
                    30
                    
                    
                    
                    33Deposit
                    
                    
                    4
                    
                    
                    
                    26Other
                    
                    
                    -
                    
                    
                    
                    10Total
      Other Current Assets
                    
                    $
                    1,018
                    
                    
                    $
                    1,101




-16-




On
January 25, 2010, the Company entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it was proposed that the Company would
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for aggregate investment of $2,000.  The Collateral Agreement required the
Company to promptly pay $500 to MRS, with the Company’s intention to invest the
remaining $1,500 being set forth in a letter of intent (the “LOI”) entered into
on January 25, 2010, the material terms of which were non-binding. The Company’s
obligation to invest the remaining $1,500 was contingent upon the execution of a
definitive Investment Agreement (the “Investment Agreement”).  Because the
Investment Agreement was not consummated, the Collateral Agreement provides that
the $500 payment to MRS would be repaid with interest (the “MRS Repayment”).
Such repayment is secured by cash flows from MRS’s Consulting / Services
Agreement with a third-party gold mining company, the expected value of which is
$1,275 to MRS.




On March
25, 2010, the Company elected not to pursue the implementation of the MRS
technology at its El Chanate mine.  Accordingly, the Company has demanded
repayment of the amounts paid to MRS in accordance with the letter agreement
between MRS and the Company. On May 12, 2010, the parties agreed to reduce the
MRS Repayment to $450 and the Company agreed to accept payment over a two year
period in equal monthly installments, subject to the negotiation of a definitive
settlement agreement. The Company recorded the current portion of $219 within
Other Current Assets with the remaining amount due of $231 within Other
Long-Term Assets.  Interest shall accrue on the outstanding balance at 5%
until the principal and any accrued interest is paid in full (See Note
21).





NOTE 8 –
Property and Equipment





Property
and Equipment consist of the following:





(in thousands)April
      30,
                  2010
                
                
                July
      31,
                  2009Process
      equipment and facilities
                
                $
                31,416
                
                
                $
                26,477Mining
      equipment
                
                
                2,494
                
                
                
                2,248Mineral properties
                
                
                175
                
                
                
                175Construction
      in progress
                
                
                181
                
                
                
                70Computer
      and office equipment
                
                
                396
                
                
                
                389Improvements
                
                
                16
                
                
                
                16Furniture
                
                
                48
                
                
                
                47Total
                
                
                34,726
                
                
                
                29,422Less:
      accumulated depreciation
                
                
                (9,592
                )
                
                
                (7,005
                )Property
      and equipment, net
                
                $
                25,134
                
                
                $
                22,417





Depreciation
expense for the nine months ended April 30, 2010 and 2009 was approximately
$2,023 and $1,502, respectively.


-17-




NOTE 9 -
Intangible Assets
  Intangible
assets consist of the following:




(in thousands)April 30,
                  2010
                
                
                July 31,
                  2009Water
      Rights
                
                
                510
                
                
                
                241Reforestation
      fee
                
                
                198
                
                
                
                73Mobilization
      Payment to Mineral Contractor
                
                
                70
                
                
                
                70Investment
      in Right of Way
                
                
                18
                
                
                
                18Total
                
                
                796
                
                
                
                402Accumulated
      Amortization
                
                
                (124
                )
                
                
                (84
                )Intangible
      assets, net
                
                $
                672
                
                
                $
                318





Purchased
intangible assets consisting of rights of way, water rights, easements, etc. are
carried at cost less accumulated amortization. Amortization is computed using
the straight-line method over the economic lives of the respective assets,
generally five years or using the Units of Production (“UOP”) method. It is the
Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
ASC guidance for goodwill and other intangibles. There was no impairment at
April 30, 2010.





Amortization expense for the nine
months ended April 30, 2010 and 2009 was approximately $40 and $33,
respectively.





NOTE 10 -
Mining Concessions





Mining
concessions consists of the following:





(in thousands)April 30,
                  2010
                
                
                July 31,
                  2009El
      Chanate
                
                $
                49
                
                
                $
                45El
      Charro
                
                
                25
                
                
                
                25Total
                
                
                74
                
                
                
                70Less:
      accumulated amortization
                
                
                (22
                )
                
                
                (19
                )Total
                
                $
                52
                
                
                $
                51





The El Chanate concessions are carried
at historical cost and are being amortized using the UOP method. Amortization
expense for the nine months ended April 30, 2010 and 2009 was approximately $3
and $6, respectively.





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




The Company includes environmental and
reclamation costs on an ongoing basis, in our internal revenue and cost
projections.  No assurance can be given that environmental regulations will
not be changed in a manner that would adversely affect the Company’s planned
operations.  As of April 30, 2010, we estimated the reclamation costs for
the El Chanate site to be approximately $3,766.  Reclamation costs are
allocated to expense over the life of the related assets and are periodically
adjusted to reflect changes in the estimated present value resulting from the
passage of time and revisions to the estimates of either the timing or amount of
the reclamation and abandonment costs.  The Asset Retirement Obligation is
based on when the spending for an existing environmental disturbance and
activity to date will occur. The Company reviews, on an annual basis, unless
otherwise deemed necessary, the Asset Retirement Obligation at each mine
site.  The Company reviewed the estimated present value of the El Chanate
mine reclamation and closure costs as of April 30, 2010 primarily due to the
addition of the new leach pad.  As of April 30, 2010, approximately $2,016
was accrued for reclamation obligations relating to mineral properties in
accordance with ASC guidance for asset retirement and environmental
obligations.


-18-




The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the nine months ended April 30, 2010:




(in
      thousands)Balance
      as of July 31, 2009
                  
                  $
                  1,594Additions,
      changes in estimates and other
                  
                  
                  434Liabilities
      settled
                  
                  
                  (123
                  )Accretion
      expense
                  
                  
                  111Balance
      as of April 30, 2010
                  
                  $
                  2,016





NOTE 12 –
Accumulated Other Comprehensive Income





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





Foreign
                      currency items
                    
                    
                    Unrealized gain
                      (loss) on securities
                    
                    
                    Change in fair
                      value of interest
                      rate swaps
                    
                    
                    Accumulated other
                      comprehensive
                      incomeBalance
      as of July 31, 2009
                    
                    $
                    (2,050
                    )
                    
                    $
                    (15
                    )
                    
                    $
                    87
                    
                    
                    $
                    (1,978
                    )Income
      (loss)
                    
                    
                    1,516
                    
                    
                    
                    40
                    
                    
                    
                    122
                    
                    
                    
                    1,678Balance
      as of April 30, 2010
                    
                    $
                    (534
                    )
                    
                    $
                    25
                    
                    
                    $
                    209
                    
                    
                    $
                    (300
                    )





The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the year ended July 31, 2009 and the nine months ended April 30, 2010 due to
the existence of net operating losses.





NOTE 13 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $4 and $5 in expense reimbursements including office rent
from this entity for the nine months ended April 30, 2010, and 2009,
respectively (See Note 4).





The Company utilizes Caborca
Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the
Company’s former Chief Executive Officer, and another officer and director of
the Company. These services include but are not limited to the payment of mining
salaries and related costs. Caborca Industrial bills the Company for these
services at slightly above cost. The profit from Caborca Industrial represents
additional remuneration paid quarterly to the workers at the mine. Mining
expenses charged by Caborca Industrial and eliminated upon consolidation
amounted to approximately $4,182 and $3,561 for the nine months ended April 30,
2010 and 2009, respectively.


-19-




The
Company incurred approximately $7 and $15 during the nine months ended April 30,
2010 and 2009, respectively, for services provided related to marketing
materials. The firm providing the services is owned and operated by relatives of
the Company’s President and COO, John Brownlie.





On
September 17, 2009, the Company terminated Jeffrey W. Pritchard as Executive
Vice President and Secretary of the Company without cause pursuant to a
restructuring of its corporate investor relations functions.  The
termination was effective September 15, 2009.  Mr. Pritchard also resigned
as a Director of the Company effective September 29, 2009.  As part of the
settlement, Mr. Pritchard received a lump sum payment of approximately
$426.





On
January 19, 2010, the Compensation Committee of the Board of Directors of
the Company approved a new employment agreement (the “Agreement”) for John
Brownlie, the Company’s President, Chief Operating Officer and a Director
of the Company. The term of the agreement is for three years commencing
January 19, 2010, and will automatically extend for consecutive one-year terms
unless Mr. Brownlie or the Company notifies the other party that it does not
wish to extend the Agreement. The Agreement provides for an initial base
salary to Mr. Brownlie of $275 plus an immediate payment of $375 for
reaching certain milestones. The Agreement provides for an additional payment
upon the accomplishment of other goals. The Agreement also grants Mr. Brownlie
500,000 stock options.  The exercise price of the stock options is $3.60
per share (per the Plan, the closing price on the Toronto Stock Exchange on the
trading day immediately prior to the day of determination converted to U.S.
Dollars). In the event of a termination of continuous service (other than as a
result of a change of control, as defined in the Plan), unvested stock options
shall terminate and, with regard to vested stock options, the exercise period
shall be the lesser of the original expiration date or one year from the date
continuous service terminates. Upon a change of control, all unvested stock
options and unvested restricted stock grants immediately vest.  The Company
utilized the Black-Scholes method to fair value the 500,000 options.  For
the nine months ended April 30, 2010, the Company recorded approximately $360 in
equity compensation expense on the vested portion of these stock options. 
The grant date fair value of each stock option was $2.16.  The stock
options have a term of five years and vest as follows: one-third vested upon
issuance and the balance vests on a one-third basis annually
thereafter.





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





On April
29, 2010, the Company entered into a severance agreement and general release
with John Brownlie, the Company’s President and Chief Operating Officer (“COO”),
pursuant to which Mr. Brownlie’s employment agreement will terminate and he will
resign as President and COO effective upon the earlier of the consummation of
the Business combination between the Company and Nayarit Gold or July 1,
2010.  Pursuant to the Severance Agreement, Mr. Brownlie will be entitled
to severance payments in the aggregate amount of
approximately  $1,388, payable over a six month period; along with an
additional $375 if the closing of the business combination occurs on or prior to
the date which is 120 days from the date of the severance
agreement.


-20-


NOTE 14 -
Stockholders' Equity





Common
Stock





The Company received proceeds of
approximately $53 during the nine months ended April 30, 2010 from the
exercising of an aggregate of 31,250 options issued to officers and directors.
The Company also issued 44,184 shares upon the cashless exercising of options
during the nine months ended April 30, 2010.





As part of the settlement agreement
with the Company’s former Executive Vice-President, upon his termination without
cause, the unvested portion of a previous restricted share grant of 41,667
shares was forfeited. As part of the severance agreement with the Company’s
former Chief Executive Officer, the unvested portion of a previous restricted
share grant of 20,833 shares was forfeited. An additional 833 shares, the
unvested portion of a previous restricted share grant, was forfeited by a former
employee of the Company.





During the nine months ended April 30,
2010 and 2009, the Company recorded approximately $911 and $675 in equity
compensation expense related to the vesting of restricted stock grants and stock
options, respectively.  As of April 30, 2010, the total compensation
cost related to unvested restricted stock granted, but not yet recognized, was
$97.





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





Stock
Split





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





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





2006
Equity Incentive Plan





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





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


-21-





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





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





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





On January 19, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 500,000, 50,000, 50,000,
50,000 and 37,500 options to John Brownlie, Leonard J. Sojka, John Cutler,
Stephen Cooper and Trey Wasser, respectively, aggregating 687,500 stock options
under our 2006 Equity Incentive Plan. The stock options for John Brownlie and
Trey Wasser have a term of five years and vest as follows: one-third vested upon
issuance and the balance vests on a one-third basis annually thereafter. The
stock options for Leonard J. Sojka, John Cutler, and Stephen Cooper have a term
of five years and vest 25,000 on January 19, 2010, 12,500 on January 19, 2011
and 12,500 on January 19, 2012.  The exercise price of the stock options is
$3.60 per share (per the Plan, the closing price on the Toronto Stock Exchange
on the trading day immediately prior to the day of determination converted to
U.S. Dollars). In the event of a termination of continuous service (other than
as a result of a change of control, as defined in the Plan), unvested stock
options shall terminate and, with regard to vested stock options, the exercise
period shall be the lesser of the original expiration date or one year from the
date continuous service terminates. Upon a change of control, all unvested stock
options and unvested restricted stock grants immediately vest.  The Company
utilized the Black-Scholes method to fair value the 687,500 options received by
these individuals totaling $1,486.  For the nine months ended April 30,
2010, the Company recorded approximately $603 in equity compensation expense on
the vested portion of these stock options. The grant date fair value of each
stock option was $2.16.





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


-22-





NOTE 15 -
Debt





Long term debt consists of the following:





(in thousands)April 30,
                    2010
                  
                  
                  July 31,
                    2009Total
      long-term debt
                  
                  $
                  5,300
                  
                  
                  $
                  8,000Less
      current portion
                  
                  
                  3,600
                  
                  
                  
                  3,600Long-term
      debt
                  
                  $
                  1,700
                  
                  
                  $
                  4,400





In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank, as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006.  Under the Credit Agreement, MSR and Oro
borrowed money in an aggregate principal amount of up to US$12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico.  The Company guaranteed
the repayment of the Term Loan and the performance of the obligations under the
Credit Agreement.  As of April 30, 2010 and 2009, the accrued interest
on the Term Loan was approximately $12 and $28, respectively.





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





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





As of
April 30, 2010, the Company and its related entities were in compliance with all
debt covenants and default provisions.  The accounts of Caborca
Industrial are not subject to the debt covenants and default
provisions.


-23-





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





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





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





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





Fiscal
      Years Ending July 31,2010
                        
                        $
                        9002011
                        
                        
                        3,6002012
                        
                        
                        800$
                        5,300





NOTE 16 -
Sales Contracts, Commodity and Financial Instruments





Interest
Rate Swap Agreements





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




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.


-24-




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




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




(in thousands)Liability
      balance as of July 31, 2009
                  
                  $
                  193Change
      in fair value of swap agreement
                  
                  
                  26Net
      cash settlements
                  
                  
                  (147
                  )Liability
      balance as of April 30, 2010
                  
                  $
                  72




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




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




Quarter
                                    Ended
                                  
                                  Derivatives in Cash
                                    Flow Hedging
                                    Relationships
                                  
                                  Effective
                                    Results
                                    Recognized
                                    in OCI
                                  
                                  
                                  Location of Results
                                    Reclassified from AOCI
                                    to Earnings
                                  
                                  Amount
                                    Reclassified
                                    from AOCI
                                    to Income
                                  
                                  
                                  Ineffective
                                    Results
                                    Recognized
                                    in Earnings
                                  
                                  
                                  Location
                                    of
                                    Ineffective
                                    Results7/31/08
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  19
                                  
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (49
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A10/31/08
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (38
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A1/31/09
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (95
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (35
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A4/30/09
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (16
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (55
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A7/31/09
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (19
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (55
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A10/31/09
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (16
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (53
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A1/31/10
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (8
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (48
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A4/30/10
                                  
                                  Interest
      Rate contracts
                                  
                                  $
                                  (1
                                  )
                                  
                                  Interest
      Income (Expense)
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  N/A


-25-




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




Liability DerivativesJuly 31, 2008
                          
                          Balance Sheet Location
                          
                          Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          192Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                          
                          Current
      Liabilities
                          
                          $
                          738Liability
      DerivativesOctober
      31, 2008
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          199Derivatives
      designated as non- hedging instrumentsGold
      derivatives
                          
                          Current
      Liabilities
                          
                          $
                          734Liability
      DerivativesJanuary
      31, 2009
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          268Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                          
                          Current
      Liabilities
                          
                          $
                          719Liability
      DerivativesApril
      30, 2009
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          228Liability
      DerivativesJuly
      31, 2009
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          193Liability
      DerivativesOctober
      31, 2009
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          154January
      31, 2010
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          112April
      30, 2010
                          
                          Balance
      Sheet Location
                          
                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                          
                          Current
      Liabilities
                          
                          $
                          72





NOTE 17–
Accrued Expenses





Accrued
      expenses consist of the following:


(in thousands)April 30,
                      2010
                    
                    
                    July 31,
                      2009Net
      smelter return
                    
                    $
                    374
                    
                    
                    $
                    212Mining
      contract
                    
                    
                    425
                    
                    
                    
                    30Income
      tax payable
                    
                    
                    2,929
                    
                    
                    
                    507Utilities
                    
                    
                    172
                    
                    
                    
                    128Interest
                    
                    
                    12
                    
                    
                    
                    21Legal
      and professional
                    
                    
                    60
                    
                    
                    
                    125Salaries,
      wages and related benefits
                    
                    
                    2,916
                    
                    
                    
                    533Deferred
      Financing Costs
                    
                    
                    159
                    
                    
                    
                    -Other
      liabilities
                    
                    
                    67
                    
                    
                    
                    77$
                    7,114
                    
                    
                    $
                    1,633


-26-


NOTE 18 -
Income Taxes





The
Company’s Income tax (expense) benefit consisted of:





(in thousands)
                    
                    
                    (in thousands)For The Three Months Ended
                    
                    
                    For The Nine Months EndedApril 30,
                      2010
                    
                    
                    April 30,
                      2009
                    
                    
                    April 30,
                      2010
                    
                    
                    April 30,
                      2009Current:United
      States
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Foreign
                    
                    
                    (2,946
                    )
                    
                    
                    (2,154
                    )
                    
                    
                    (6,943
                    )
                    
                    
                    (4,078
                    )(2,946
                    )
                    
                    
                    (2,154
                    )
                    
                    
                    (6,943
                    )
                    
                    
                    (4,078
                    )Deferred:United
      States
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    -
                    
                    
                    
                    39
                    
                    
                    
                    -
                    
                    
                    
                    (746
                    )-
                    
                    
                    
                    39
                    
                    
                    
                    -
                    
                    
                    
                    (746
                    )Total
                    
                    $
                    (2,946
                    )
                    
                    $
                    (2,115
                    )
                    
                    $
                    (6,943
                    )
                    
                    $
                    (4,824
                    )





The
Company’s Income (loss) before income tax consisted of:





(in thousands)
                    
                    
                    (in thousands)For The Three Months Ended
                    
                    
                    For The Nine Months EndedApril 30,
                      2010
                    
                    
                    April 30,
                      2009
                    
                    
                    April 30,
                      2010
                    
                    
                    April 30,
                      2009United
      States
                    
                    $
                    (4,046
                    )
                    
                    $
                    (1,637
                    )
                    
                    $
                    (8,270
                    )
                    
                    $
                    (4,602
                    )Foreign
                    
                    
                    9,771
                    
                    
                    
                    6,306
                    
                    
                    
                    23,876
                    
                    
                    
                    17,113Total
                    
                    $
                    5,725
                    
                    
                    $
                    4,669
                    
                    
                    $
                    15,606
                    
                    
                    $
                    12,511





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





On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures.  The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.


-27-





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





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





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





NOTE 19 -
Fair Value Measurements





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




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




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




Level 3
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (supported by little or no
      market activity).





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





Fair Value at April 30, 2010
                    (in thousands)Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets:Cash
      equivalents
                  
                  $
                  2,796
                  
                  
                  $
                  2,796
                  
                  
                  $
                  -
                  
                  
                  $
                  -Marketable
      securities
                  
                  
                  75
                  
                  
                  
                  75
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  2,871
                  
                  
                  $
                  2,871
                  
                  
                  $
                  -
                  
                  
                  $
                  -Liabilities:Interest
      rate swap
                  
                  
                  72
                  
                  
                  
                  -
                  
                  
                  
                  72
                  
                  
                  
                  -$
                  72
                  
                  
                  $
                  -
                  
                  
                  $
                  72
                  
                  
                  $
                  -





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


-28-





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





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





NOTE 20 –
Business Combination





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





NOTE 21 –
Subsequent Events




On May
12, 2010, the Company and MRS agreed to reduce the MRS Repayment to $450 and the
Company agreed to accept payment over a two year period in equal monthly
installments, subject to the negotiation of a definitive settlement agreement..
Interest shall accrue on the outstanding balance at 5% until the principal and
any accrued interest is paid in full (See Note 7).


-29-





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


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





Cautionary Statement on
Forward-Looking Statements





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





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





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





General





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





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


-30-





Receipt of Technical Report
for Updated Reserves at El Chanate





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





Our
proven and probable reserve tonnage increased to 70.6 million metric tonnes with
an average gold grade of 0.66 grams per tonne (77.8 million US short tons
at 0.0193 ounces per ton). The proven and probable reserve has 1,504,000
contained ounces of gold. The open pit strip ratio for the life of mine is
2.88:1 (2.88 tonnes of waste to one tonne of ore).  For the next year,
our mine plan anticipates the open pit strip ratio will average 2:1.
Determination of operational pre-stripping (increase in strip ratio) will be
made after further geological drilling and determination of corporate strategy
within the three year window of opportunity. There is also the potential to
improve the life of mine strip ratio as the report identifies material within
the pit design classified as waste that with additional drilling could be
reclassified as ore. The updated pit design for the revised mine plan is based
on a plant recovery of gold that varies by rock types, but is expected to
average 58.25%. A gold price of US$800 (SEC three year average as of October 1,
2009) per ounce was used to re-estimate the reserves compared with a gold price
of $750 per ounce used in the previous reserve estimate.  The stated
proven and probable mineral reserves have been prepared in accordance with the
Canadian Institute of Mining, Metallurgy and Petroleum (CIM).  CIM
definitions for proven and probable reserves convert directly from measured and
indicated mineral resources with the application of appropriate economic
parameters. These reserves are equivalent to proven and probable reserves as
defined by the United States Securities and Exchange Commission (SEC) Industry
Guide 7.





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


-31-





Production
Summary





Metric
                            
                            U.S.MaterialsReservesProven
                            
                            22.4 Million Tonnes
      @   0.70   g/t(1)
                            
                            24.7 Million Tons @   0.0204
      opt(1)Probable
                            
                            48.2
      Million
      Tonnes  @  0.65   g/t(1)
                            
                            53.0
      Million Tons @   0.0189
      opt(1)Total Reserves(2)
                            
                            70.6 Million
      Tonnes  @  0.66   g/t(1)
                            
                            77.7 Million Tons @   0.0193
      opt(1)Waste
                            
                            203.5
      Million
      Tonnes
                            
                            224.3
      Million
      TonsTotal
      Ore/Waste
                            
                            274.1
      Million Tonnes
                            
                            302.0
      Million tonsContained
      Gold
                            
                            46.78
      Million grams
                            
                            1,504,000  OzProduction
                            
                            5.4
      Million Tonnes /Year
                            
                            6.0
      Million Tons/YearOre
      Crushed
                            
                            14,868 Mt/d(1)
                            
                            16,390 t/d(1)Operating
      Days/Year
                            
                            365
      Days per year
                            
                            365
      Days per yearGold
      Plant Average Recovery
                            
                            58.25
      %
                            
                            58.25%Average
      Annual Production
                            
                            2.1  Million
      grams
                            
                            67,391  OzTotal
      Gold Produced
                            
                            27.25
      Million grams
                            
                            876,080  Oz








(1)
            “g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
      metric tonnes per day and “t/d” means tons per
  day.


(2)
            The
      reserve estimates are mainly based on a gold cutoff grade of 0.15 g/t for
      sandstone and 0.19 grams for siltstone and latite within the pit
      design.




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




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


-32-





Cutoff
      Grade Calculation
                  
                  Internal
      Cutoff Grade
                  
                  Break
      Even Cutoff GradeBasic
      ParametersGold
      Price
                  
                  US$800/oz
                  
                  US$800/ozGold
      Selling Cost (4% Royalty,
                  
                  $25.258/oz
                  
                  $25.258/ozRefining,
      Transport, Silver Credit, etc)
                  
                  58.25%
                  
                  58.25%Gold
      Recovery*Operating
      Costs per Tonne of OreMining
                  
                  
                  
                  $1.08/tonneProcessing
      – Heap leach
                  
                  $2.357/tonne
                  
                  $2.357/tonneTotal
                  
                  $2.357/tonne
                  
                  $3.44/tonneCutoff
      Grade
                  
                  Grams
      per Tonne
                  
                  Grams
      per TonneHead
      Grade Cutoff (58.25% average recovery)
                  
                  0.15
      g/t gold
                  
                  0.24
      g/t goldRecovered
      Gold Grade Cutoff
                  
                  0.09
      g/t gold
                  
                  0.14
      g/t gold





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





In August
2009, we initiated the construction of an additional leach pad area with
capacity for eight million tonnes of ore, at an estimated cost of approximately
$3,300.  Permitting and site clearing was completed, the construction
contractor completed the earthworks and the geomembrane liners were applied to
the new leach pad area.  We initiated leaching of ore on the new leach
pad as of December 31, 2009.  Golder Engineering of Tucson, Arizona
oversaw construction activities and quality control and assurance for the
project. The final actual construction cost of this additional leach pad area is
anticipated to be less than $3,000.





In
December 2009, we completed the procurement and commissioning of a new tertiary
crusher for the El Chanate mine.  The cost for this equipment was
approximately $1,100.  We also upgraded the platform supports for
three of our crushers in May 2010.  We anticipate these upgrades to
cost approximately $750.





In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
aggregate capacity will be approximately 20.1 million tonnes.  This capital
expenditure is anticipated to be expended over the next sixteen months. 
Site clearing was initiated this month and construction is anticipated to
commence in July 2010.  The first panel is anticipated to be ready for
stacking towards the end of the calendar year.





We
commenced a drill campaign during the current quarter within the El Chanate pit
area which will consist of approximately 84 reverse circulation drill holes
totaling approximately 8,400 meters.  To date, we have drilled 23
holes totaling 2,580 meters.  Most of these holes will be focused on
the western part of the pit to further define the ore body and provide a better
mine plan going forward.  In addition, some holes will test the outer
limits of the pit and also provide condemnation within the proposed additional
leach pad area as noted above.


-33-





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





Proven and probable mineral reserve (Ktonnes of ore)
                  
                  April 30,
                    2010
                  
                  
                  July 31,
                    2009Ore
                  
                  
                  -
                  
                  
                  
                  -Beginning
      balance (Ktonnes)
                  
                  
                  40,911
                  
                  
                  
                  35,417Additions
                  
                  
                  30,388
                  
                  
                  
                  9,342Reductions
                  
                  
                  (3,438
                  )
                  
                  
                  (3,848
                  )Ending
      Balance
                  
                  
                  67,861
                  
                  
                  
                  40,911Contained
      goldBeginning
      balance (thousand of ounces)
                  
                  
                  859
                  
                  
                  
                  719Additions
                  
                  
                  662
                  
                  
                  
                  239Reductions
                  
                  
                  (83
                  )
                  
                  
                  (99
                  )Ending
      Balance
                  
                  
                  1,438
                  
                  
                  
                  859





El
Oso Project - Saric Properties – Sonora, Mexico





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





In
January 2010, we initiated an additional drill campaign at Saric that consisted
of 13 core holes totaling approximately 1,100 meters.  The drilling
was completed on February 23, 2010 and targeted the existing mineralized
structure to confirm the geologic interpretation and confirm the accuracy of
previous reverse circulation drilling. The drill hole samples were assayed by
ALS Chemex.  Currently, we have been conducting additional soil
geochemical sampling, radiometric sampling, compiling geological results,
planning additional drilling, working on an updated environmental report and
clarifying the surface ranch land ownership.





The lease agreement required an initial
payment of $45 upon execution of the lease.  We are required to pay an
additional $250, consisting of ten payments of $25 every four months beginning
six months after execution of the lease agreement. The agreement also contains
an option to acquire the mining concessions for a cash payment of $1,500 at the
end of the term (December 2011).  If we elect not to exercise this
option, we would have the ability to mine the concessions by paying a 1% net
smelter return to the owners of the leased concessions, capped at
$3,000.  Prior payments made under this lease agreement would be
deductible from the $3,000 cap.





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


-34-





Result
of Operations





As discussed more fully in Note 1 to
the accompanying condensed consolidated financial statements, the financial
information as of the fiscal year ended July 31, 2009 and for the three and nine
months ended April 30, 2009 has been recast so that the basis of presentation is
consistent with that of the financial information as of April 30, 2010 and for
the three and nine months ended April 30, 2010. This recast reflects
a 1-for-4 reverse stock split of the Company’s common stock that became
effective on January 25, 2010.





Three months ended April 30,
2010 compared to three months ended April 30, 2009





Net income for the three months ended
April 30, 2010 and 2009 was approximately $2,779 and $2,554, respectively,
representing an increase of approximately $225 or 9% over the prior
period.  Income before taxes was $5,725 and $4,669 for the three
months ended April 30, 2010 and 2009, respectively, which represented an
increase of 23%.  Income before taxes increased primarily as a result
of higher revenues from a higher gold price being realized on ounces sold during
the current quarter as well as higher production results during the three months
ended April 30, 2010, as compared to the same period a year ago.





As a result of management changes
during the three months ended April 30, 2010, we incurred one-time severance
related charges of approximately $2,284 within general and administrative
expense.  If we exclude these one-time charges, net income for the
three months ended April 30, 2010 would have been approximately $5,063
representing an increase of approximately $2,509 or 98% over the prior
period.





Revenues & Costs
Applicable to Sales





Gold
sales for the three months ended April 30, 2010 totaled approximately $17,525 as
compared to $12,395 in the prior period representing an increase of
approximately $5,130 or 41%.  We sold 15,745 ounces at an average
realizable price per ounce of approximately $1,113 in the current
period.  We sold 13,347 ounces at an average realizable price per
ounce of $929 during the same period last year.





Costs
applicable to sales were approximately $6,601 and $3,698, respectively, for the
three months ended April 30, 2010 and 2009, an increase of approximately $2,903
or 79%.  Cash costs were $403 per ounce of gold sold for the three
months ended April 30, 2010 as compared to $263 for the three months ended April
30, 2009.   The primary reasons for this increase in cash cost
per ounce sold in the current period is attributable to: 1) higher mining
contractor costs of approximately $983 primarily due to an increase in tonnage
mined of 1,495,000 tonnes or 84%, higher diesel fuel consumption of $453 due to
an increase in tonnage mined and longer haul distance as the pit deepens, and
higher explosive costs of $341; 2) higher leaching and ADR plant costs of
approximately $562 mainly due to an increase in tonnage crushed of 338,000 and
associated consumption of certain chemicals as well as a price increase in cost
of lime(this increased consumption was mainly the result of increasing the
solution flow to the leach pad as we increased the level of lifts or height of
the leach pad as well as the surface area under leach with the additional leach
pad); 3) higher crushing costs of approximately $405 due to an increased tonnage
crushed of 338,000 and associated consumption of crushing supplies and parts;
and  4) higher heavy equipment maintenance of approximately $136k due
to an increase in wear parts and tires for our equipment during the current
quarter.  Total costs were $455 per ounce of gold sold for the three
months ended April 30, 2010 as compared to $305 total cost in the prior
period.  The primary reason for this increase in total costs was
attributed to the same reason as detailed above for the increase in cash costs
per ounce sold.


-35-





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $427 and $298 for the
three months ended April 30, 2010 and 2009, on silver ounces sold of 24,715 and
22,991, respectively.





Depreciation and
Amortization





Depreciation and amortization expense
during the three months ended April 30, 2010 and 2009 was approximately $838 and
$563, respectively.  The primary reason for the increase of
approximately $275, or 49%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions as well as the increase in amortization under the Units-of-Production
method associated with corresponding increase in production.





General and Administration
Expense





General
and administrative expenses during the three months ended April 30, 2010 were
approximately $3,753, an increase of approximately $2,392, or 176%, from the
three months ended April 30, 2009.  This increase resulted primarily
from one-time severance related charges to executives and employees of
approximately $2,284 during the quarterly period ended April 30,
2010.  If we exclude these one-time charges, general and
administrative expenses increased $108 or 8% which was primarily due to an
increase in legal and professional fees associated with the acquisition of
Nayarit Gold.





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





On April
29, 2010, we entered into a severance agreement and general release with John
Brownlie, our President and Chief Operating Officer (“COO”), pursuant to which
Mr. Brownlie’s employment agreement will terminate and he will resign as
President and COO effective upon the earlier of the consummation of the Business
combination between the Company and Nayarit Gold or July 1,
2010.  Pursuant to the Severance Agreement, Mr. Brownlie will be
entitled to severance payments in the aggregate amount of approximately $1,388,
payable over a six month period; along with an additional $375 if the closing of
the business combination occurs on or prior to the date which is 120 days from
the date of the severance agreement. .





Exploration
Expense





Exploration
expense during the three months ended April 30, 2010 and 2009 was approximately
$320 and $329, respectively, or a decrease of $9, or 3%.  The primary
reason for the decrease can be attributed to the prior year containing
exploration expense associated with a 10 hole, deep core drilling campaign at
our El Chanate mine totaling 2,500 meters.  Both periods presented
include activity associated with on-going exploration, drilling and geochemical
work being conducted on our leased and owned concessions located northwest of
Saric, Sonora.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended April 30, 2010 and 2009, was approximately $0 and $1,391, respectively,
and was reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.


-36-





Interest expense was approximately
$326 for the three months ended April 30, 2010 compared to approximately $351
for the same period a year earlier.  This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period.  As of April 30, 2010 and
2009, there was $5,300 and $9,125, respectively, outstanding on our term note
with Standard Bank.  Interest expense also includes amortization of
deferred financing costs resulting from the credit arrangements entered into
with Standard Bank.  This accounted for approximately $247 and $247 of
amortization expense during the three months ended April 30, 2010 and 2009,
respectively.





Nine months ended April 30,
2010 compared to nine months ended April 30, 2009





Net income for the nine months ended
April 30, 2010 and 2009 was approximately $8,663 and $7,687, respectively,
representing an increase of approximately $976 or 13% over the prior
period.  Income before taxes was $15,606 and $12,511 for the nine
months ended April 30, 2010 and 2009, respectively, which represented an
increase of 25%.  Income before taxes increased primarily as a result
of higher revenues from a higher gold price being realized on ounces sold during
the current quarter as well as slightly higher production results during the
nine months ended April 30, 2010, as compared to the same period a year
ago.





As a result of management changes
during the nine months ended April 30, 2010, we incurred one-time severance
related charges to executives and employees of approximately $2,710 within
general and administrative expense.  If we exclude these one-time
charges, net income for the nine months ended April 30, 2010 would have been
approximately $11,373 representing an increase of approximately $3,686 or 48%
over the prior period.





Revenues & Costs
Applicable to Sales





Gold
sales for the nine months ended April 30, 2010 totaled approximately $42,480 as
compared to $32,939 in the prior period representing an increase of
approximately $9,541 or 29%.  We sold 39,294 ounces at an average
realizable price per ounce of approximately $1,081 in the current
period.  We sold 38,047 ounces at an average realizable price per
ounce of $866 during the same period last year.





Costs
applicable to sales were approximately $15,336 and $10,395, respectively, for
the nine months ended April 30, 2010 and 2009, an increase of approximately
$4,941 or 48%.  Cash costs were $374 per ounce of gold sold for the
nine months ended April 30, 2010 as compared to $261 for the nine months ended
April 30, 2009.   The primary reasons for this increase in cash
cost per ounce sold in the current period is attributable to: 1) higher mining
contractor costs of approximately $1,467 primarily due to an increase in tonnage
mined of 1,896,000 tonnes or 32%, higher diesel fuel consumption of $758 due to
an increase in tonnage mined and longer haul distance as the pit deepens, and
higher explosive costs of $582; 2) higher leaching and ADR plant costs of
approximately $1,623 mainly due to an increase in consumption of certain
chemicals ($1,048) as well as consumption and price increase in cost of lime
($366) in the processing of ore as well as an increase in both water ($103) and
electricity  ($94) usage  (the increased consumption was
mainly the result of increasing the solution flow to the leach pad as we
increased the level of lifts or height of the leach pad as well as the surface
area under leach with the additional leach pad); and 3) higher crushing costs of
approximately $762 due to an increased consumption of crushing supplies and
parts.  This resulted from the addition of the new crushers as well as
the increased tonnage put through the circuit as compared to the prior period.
Total costs were $426 per ounce of gold sold for the nine months ended April 30,
2010 as compared to $301 total cost in the prior period.  The primary
reason for this increase in total costs was attributed to the same reason as
detailed above for the increase in cash costs per ounce sold.


-37-





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $970 and $809 for the
nine months ended April 30, 2010 and 2009, on silver ounces sold of 56,875 and
68,325, respectively.





Depreciation and
Amortization





Depreciation and amortization expense
during the nine months ended April 30, 2010 and 2009 was approximately $2,063
and $1,535, respectively.  The primary reason for the increase of
approximately $528, or 34%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions.





General and Administration
Expense





General and administrative expenses
during the nine months ended April 30, 2010 were approximately $7,413, an
increase of approximately $3,613, or 95%, from the nine months ended April 30,
2009.  This increase resulted primarily from one-time severance
related charges to executives and employees of approximately $2,710 during the
quarterly period ended April 30, 2010.  In addition, we experienced
higher legal and professional fees associated with our proposed acquisition with
Nayarit Gold of approximately $458 as well as higher non-cash stock compensation
expense of approximately $276. If we exclude these one-time severance related
charges, general and administrative expenses increased $903 or
24%.  See also discussion on General and Administration Expense
contained within the “Three
months ended April 30, 2010 compared to three months ended April 30, 2009”sectionfor
further detail related to these one-time severance related charges.





Exploration
Expense





Exploration
expense during the nine months ended April 30, 2010 and 2009 was approximately
$1,000 and $1,224, respectively, or a decrease of $224, or 18%.  The
primary reason for the decrease can be attributed to the prior year containing
exploration expense associated with a 10 hole, deep core drilling campaign at
our El Chanate mine totaling 2,500 meters.  Both periods presented
include activity associated with on-going exploration, drilling and geochemical
work being conducted on our leased and owned concessions located northwest of
Saric, Sonora.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the nine months
ended April 30, 2010 and 2009, was approximately $0 and $1,969, respectively,
and was reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.





Interest expense was approximately
$1,046 for the nine months ended April 30, 2010 compared to approximately $1,264
for the same period a year earlier.  This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period.  As of April 30, 2010 and
2009, there was $5,300 and $9,125, respectively, outstanding on our term note
with Standard Bank.  Interest expense also includes amortization of
deferred financing costs resulting from the credit arrangements entered into
with Standard Bank.  This accounted for approximately $741 and $734 of
amortization expense during the nine months ended April 30, 2010 and 2009,
respectively.


-38-





Changes in Foreign Exchange
Rates





During the nine months ended April 30,
2010 and 2009, we recorded equity adjustments from foreign currency translations
of approximately $1,516 and $3,120, respectively.  These translation
adjustments are related to changes in the rates of exchange between the Mexican
Peso and the U.S. dollar and are included as a component of other comprehensive
income.  The Mexican Peso and the U.S. dollar exchange rate as of
April 30, 2010 was 12.2783.  As of July 31, 2009, such exchange rate
was 12.9933.





Summary of Quarterly
Results


(000’s except per share
Data)





For the three
                  
                  
                  For the three
                  
                  
                  For the nine
                  
                  
                  For the ninemonths ended
                  
                  
                  months ended
                  
                  
                  months ended
                  
                  
                  months endedApril 30,
                    2010
                  
                  
                  April 30,
                    2009
                  
                  
                  April 30,
                    2010
                  
                  
                  April 30,
                    2009Revenues
                  
                  
                  17,525
                  
                  
                  
                  12,395
                  
                  
                  
                  42,480
                  
                  
                  
                  32,939Net
      Income
                  
                  
                  2,779
                  
                  
                  
                  2,554
                  
                  
                  
                  8,663
                  
                  
                  
                  7,687Basic
      net income per share
                  
                  
                  0.06
                  
                  
                  
                  0.05
                  
                  
                  
                  0.18
                  
                  
                  
                  0.16Diluted
      net income per share
                  
                  
                  0.06
                  
                  
                  
                  0.05
                  
                  
                  
                  0.17
                  
                  
                  
                  0.15Gold
      ounces sold
                  
                  
                  15,745
                  
                  
                  
                  13,347
                  
                  
                  
                  39,294
                  
                  
                  
                  38,047Average
      price received
                  
                  $
                  1,113
                  
                  
                  $
                  929
                  
                  
                  $
                  1,081
                  
                  
                  $
                  866Cash
      cost per ounce sold(1)
                  
                  $
                  403
                  
                  
                  $
                  263
                  
                  
                  $
                  374
                  
                  
                  $
                  261Total
      cost per ounce sold(1)
                  
                  $
                  455
                  
                  
                  $
                  305
                  
                  
                  $
                  426
                  
                  
                  $
                  301





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





The
following table reconciles the Non-GAAP measure “Cash costs per ounce sold” to
the GAAP measure of “Costs applicable to sales per ounce sold”:





For the three
                  
                  
                  For the three
                  
                  
                  For the nine
                  
                  
                  For the ninemonths ended
                  
                  
                  months ended
                  
                  
                  months ended
                  
                  
                  months endedReconciliation from non-GAAP
                    measure to US GAAP
                  
                  April 30,
                    2010
                  
                  
                  April 30,
                    2009
                  
                  
                  April 30,
                    2010
                  
                  
                  April 30,
                    2009Cash
      cost per ounce sold
                  
                  $
                  403
                  
                  
                  $
                  263
                  
                  
                  $
                  374
                  
                  
                  $
                  261Intercompany
      management fee
                  
                  
                  11
                  
                  
                  
                  11
                  
                  
                  
                  13
                  
                  
                  
                  13Other
                  
                  
                  5
                  
                  
                  
                  3
                  
                  
                  
                  3
                  
                  
                  
                  (1
                  )Costs
      applicable to sales per ounce sold
                  
                  $
                  419
                  
                  
                  $
                  277
                  
                  
                  $
                  390
                  
                  
                  $
                  273


-39-





Summary of Results of
Operations





For the three
                
                
                For the three
                
                
                For the nine
                
                
                For the ninemonths ended
                
                
                months ended
                
                
                months ended
                
                
                months endedApril 30,
                  2010
                
                
                April 30,
                  2009
                
                
                April 30,
                  2010
                
                
                April 30,
                  2009Tonnes
      of ore mined
                
                
                1,204,414
                
                
                
                866,604
                
                
                
                3,437,951
                
                
                
                2,771,284Tonnes
      of waste removed
                
                
                2,047,766
                
                
                
                890,241
                
                
                
                4,373,945
                
                
                
                3,144,623Ratio
      of waste to ore
                
                
                1.70
                
                
                
                1.03
                
                
                
                1.27
                
                
                
                1.13Tonnes
      of ore processed
                
                
                1,229,139
                
                
                
                938,469
                
                
                
                3,441,506
                
                
                
                2,892,595Grade
      (grams/tonne)
                
                
                0.76
                
                
                
                0.68
                
                
                
                0.73
                
                
                
                0.82Gold
      (ounces)-    
      Produced(1)
                
                
                16,506
                
                
                
                13,460
                
                
                
                40,459
                
                
                
                38,994-    
      Sold
                
                
                15,745
                
                
                
                13,347
                
                
                
                39,294
                
                
                
                38,047


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





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the nine months ended April 30, 2010 and 2009 was
$9,744 and $7,311, respectively.  Cash provided by operating
activities increased $2,433 as compared to the nine months ended April 30, 2009,
primarily due to higher net income resulting from an increase in the average
gold price received for ounces sold, an increase in inventory balances during
the current period of $7,595, and an increase in accounts payable and accrued
expenses of $4,220 mainly due to the accruals associated with one-time severance
related charges to executives and employees of approximately $2,710 during the
quarterly period ended April 30, 2010.




In
addition, on January 25, 2010, we entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it was proposed that we would acquire
twenty-five percent of all of the issued and outstanding equity of MRS for
aggregate investment of $2,000.  The Collateral Agreement required us
to promptly pay $500 to MRS, with the intention to invest the remaining $1,500
set forth in a letter of intent (the “LOI”) entered into on January 25, 2010,
the material terms of which were non-binding. Our obligation to invest the
remaining $1,500 was contingent upon the execution of a definitive Investment
Agreement (the “Investment Agreement”).  Because the Investment
Agreement was not consummated, the Collateral Agreement provides that the $500
payment to MRS would be repaid with interest (the “MRS Repayment”). Such
repayment is secured by cash flows from MRS’s Consulting / Services Agreement
with a third-party gold mining company, the expected value of which is $1,275 to
MRS.




On March
25, 2010, we elected not to pursue the implementation of the MRS technology at
its El Chanate mine.  Accordingly, we demanded repayment of the amounts
paid to MRS in accordance with the letter agreement between MRS and us. On May
12, 2010, the parties agreed to reduce the MRS Repayment to $450 and we agreed
to accept payment over a two year period in equal monthly installments, subject
to the negotiation of a definitive settlement agreement. We recorded the current
portion of $219 within Other Current Assets with the remaining amount due of
$231 within Other Long-Term Assets.  Interest shall accrue on the
outstanding balance at 5% until the principal and any accrued interest is paid
in full.


-40-


Investing
Activities





Cash used in investing
activities during the nine months ended April 30, 2010, amounted to
approximately $5,712, primarily for the acquisition of an additional tertiary
crusher and screen plant, additional water rights, additional leach pad
expansion, as well as new platform upgrades for three of our
crushers.  In August 2009, we initiated the construction of an
additional leach pad area with capacity for eight million tonnes of
ore.  Permitting and site clearing was completed, the construction
contractor completed the earthworks and the geomembrane liners were applied to
the new leach pad area.  We initiated leaching of ore on the new leach
pad as of December 31, 2009.  Golder Engineering of Tucson, Arizona
oversaw construction activities and quality control and assurance for the
project. The final actual construction cost of this additional leach pad area is
anticipated to be less than $3,000.





In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
capacity will be 20.1 million tonnes.  This capital expenditure is
anticipated to be expended over the next sixteen months.  Site clearing was
initiated this month and construction is anticipated to commence in July
2010.  The first panel is anticipated to be ready for stacking towards the
end of the calendar year.  We also upgraded the platform supports for
three of our crushers in May 2010.  We anticipate these upgrades to
cost approximately $750.





Cash used in investing
activities during the nine months ended April 30, 2009, amounted to
approximately $4,770, primarily from the acquisition of an additional secondary
crusher and tunnel conveyor, mobile equipment, conveyors and ADR plant
equipment, including the carbon regeneration kiln.




Financing
Activities




Cash used in financing
activities during the nine months ended April 30, 2010 amounted to
approximately $2,793, primarily from the repayment of our term loan of
$2,700.  We also received proceeds of approximately $53 in the current
period from the issuance of common stock upon the exercise of 125,000
options.  In addition, we incurred $150 in finance costs to amend our
Amended and Restated Credit Agreement with Standard Bank (See “Term loan and Revolving Credit
Facility” section below).  Cash used in financing
activities during the nine months ended April 30, 2009 amounted to
approximately $3,226, primarily from the repayment of the term loan of
$3,375.




Business
Combination Agreement





On February 10, 2010, Capital Gold
Corporation (the “Company”) entered into a business  combination
agreement (the “Business Combination Agreement”) with Nayarit Gold Inc.,
(“Nayarit”), a corporation organized under the Ontario Business Corporation Act
(“OBCA”).  Pursuant to the terms of the Business Combination
Agreement, the Company and Nayarit intend to effect an amalgamation (the
“Amalgamation”) of Nayarit and a corporation, to be organized under the OBCA as
a wholly-owned subsidiary of the Company (“Merger Sub”), to form a combined
entity (“AmalgSub” or “Surviving Company”), with AmalgSub continuing as the
surviving entity following the Amalgamation.  By virtue of the
Amalgamation, the separate existence of each of Nayarit and Merger Sub shall
thereupon cease, and AmalgSub, as the surviving company in the Amalgamation,
shall continue its corporate existence under the OBCA as a wholly-owned
subsidiary of the Company. Pursuant to the terms of the Business Combination
Agreement, by virtue of the Amalgamation and without any action on the part of
Nayarit or the holders of any securities of Nayarit, all of the Nayarit shares
of common stock (the “Nayarit Common Shares”) issued and outstanding immediately
prior to the consummation of the Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) shall become
exchangeable into the Company’s common stock on the basis of 0.134048
shares of Company common stock for each one (1) Nayarit Common Share (the
“Amalgamation Consideration”).  The Company anticipates closing
this transaction in
July2010, subject to stockholder
approval.


-41-




Term
loan and Revolving Credit Facility





In September 2008, we closed an Amended
And Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), us,
as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006. Under the Credit Agreement, MSR and Oro borrowed money in
an aggregate principal amount of up to $12,500 (the “Term Loan”) for the purpose
of constructing, developing and operating the El Chanate gold mining project in
Sonora State, Mexico. We guaranteed the repayment of the Term Loan and the
performance of the obligations under the Credit Agreement. As of April 30, 2010,
the outstanding amount on the term note was $5,300 and accrued interest on this
agreement was approximately $12.





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





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





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





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


-42-


Debt
Covenants





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




As of
April 30, 2010, we and our related entities were in compliance with all debt
covenants and default provisions.





Environmental
and Permitting Issues





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





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





We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the
future.  As of April 30, 2010, we have estimated the reclamation costs
for the El Chanate site to be approximately $3,766.  Reclamation costs
are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation for the mine
site.  We reviewed the estimated present value of the El Chanate mine
reclamation and closure costs as of January 31, 2010 primarily due to the
addition of the new leach pad in accordance with ASC guidance for asset
retirement and environmental obligations.  As of April 30, 2010, our
reclamation and remediation liability was $2,016.





Recently
Issued Accounting Pronouncements





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





Disclosure
About Off-Balance Sheet Arrangements





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


-43-


Critical
Accounting Policies





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




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




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




Ore on Leach Pads





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





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





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




In-process
Inventory




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


-44-




Materials
and Supplies




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





Mineral
Reserves




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




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





Property, Plant and Mine
Development





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





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




Impairment of Long-Lived
Assets




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


-45-




Reclamation and Remediation
Costs (Asset Retirement Obligations)




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





Deferred Financing
Costs





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





Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements, net profit interests, etc. are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with ASC guidance for goodwill and other
intangibles. There was no impairment at April 30, 2010.





Fair Value of Financial
Instruments





The carrying value of our financial
instruments, including cash and cash equivalents, loans receivable and accounts
payable approximated fair value because of the short maturity of these
instruments.  The carrying value of long term debt approximates fair
value due to the variable nature of the debt’s interest rates.





Revenue
Recognition





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


-46-


Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $970 and $809 for the
nine months ended April 30, 2010 and 2009, on silver ounces sold of 56,875 and
68,325, respectively.





Foreign Currency
Translation





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





Comprehensive Income
(Loss)





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





Income
Taxes





On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures.  The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.





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





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





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


-47-


Equity Based
Compensation





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





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





Accounting for Derivatives
and Hedging Activities





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





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





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





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





Use of
Estimates





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


-48-


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




Metal
Price




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




Foreign
Currency




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





Interest
Rate Swap Contracts





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





Market
Risk Disclosures


April
30, 2010


(in
thousands)





Instruments
entered into for hedging purposes -





Type of Derivative
                    
                    Notional Size
                    
                    
                    Fixed Price or
                      Strike Price
                    
                    Underlying Price
                    
                    Termination or
                      Expiration
                    
                    Fair ValueInterest
      Rate Swaps
                    
                    $
                    2,625
                    (1)
                    
                    
                    5.30
                    %
                    3 Mo. USD LIBOR
                    
                    12/31/2010
                    
                    $
                    (72
                    )





(1)The value shown reflects
the notional as of April 30, 2010. Over the term of the swap, the notional
amortizes, dropping to approximately $1,313.


-49-


As of April 30, 2010, the dollar
value of a basis point for this interest rate swap was approximately ($86),
suggesting that a one-basis point rise (fall) of the yield curve would likely
foster an increase (decrease) in the interest rate swaps value by approximately
$86.  Because hedge accounting is applied, the contract serves to lock
in a fixed rate of interest for the portion of the variable rate debt equal to
the swap's notional size.  The swap covers only 75% of our variable
rate exposure.





Item
4. Controls and
Procedures.





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





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


-50-


PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.





None.





Item
      1A.
            Risk
      Factors





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





Risks related to our
business and operations





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





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the twelve months ended April
30, 2010, the spot price for gold on the London Exchange has fluctuated between
$884.50 and $1,212.50 per ounce.  Gold prices are
affected by numerous factors beyond our control, including:





·
            Industrial
      and commercial demand for gold,


·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





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





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




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





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





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





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





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





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





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





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





Risks related to ownership
of our stock





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





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





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




·
            a
      limited availability for market quotations for the Company’s
      securities;




·
            reduced
      liquidity with respect to the Company’s
  securities;




·
            a
      determination that the Common Stock are a “penny stock,” which will
      require brokers trading in the Common Stock to adhere to more stringent
      rules and possibly result in a reduced level of trading activity in the
      secondary trading market for the Ordinary
  Shares;




·
            limited
      amount of news and analyst coverage for the Company’s securities;
      and




·
            a
      decreased ability to issue additional securities or obtain additional
      financing in the future.




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





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





None.





Item
      3.
            Defaults Upon Senior
      Securities.





None.





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





None.





Item
      5.
            Other
      Information.





None.





Item
      6.
            Exhibits.





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


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


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


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





SIGNATURES





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





CAPITAL GOLD CORPORATIONDate:
      June 9, 2010
                    By:
                    /s/ John BrownlieJohn
      BrownliePresident
      and Chief Operating Officer(Principal
      Executive Officer)Date:
      June 9, 2010
                    By:
                    /s/ Christopher M. ChipmanChristopher
      M. ChipmanChief
      Financial Officer(Principal
      Financial Officer)