SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x  QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended October 31, 2008





OR





o  TRANSITION
REPORT UNDER SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from to





Commission
File Number:  0-13078





CAPITAL GOLD
CORPORATION


(Exact
name of 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
                o





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





Large
      accelerated filer
                o
                Accelerated
      filer
                oNon-accelerated
      filer
                x
                Smaller
      reporting company
                o





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





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





Class
                  
                  Outstanding at December  1,
      2008Common
      Stock, par value $.0001 per share
                  
                  193,124,826









PART I.  FINANCIAL
INFORMATION







Item
      1.
                Financial
      Statements





The
accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring adjustments), which
we consider necessary for the fair presentation of results for the three months
ended October 31, 2008.





Moreover,
these financial statements do not purport to contain complete disclosure in
conformity with U.S. generally accepted accounting principles and should be read
in conjunction with our audited financial statements at, and for the fiscal year
ended July 31, 2008.





The
results reflected for the three months ended October 31, 2008 are not
necessarily indicative of the results for the entire fiscal year.





- 2
-


CAPITAL
GOLD CORPORATION


CONSOLIDATED
BALANCE SHEET
 (in
thousands, except for share and per share amounts)


ASSETSCurrent
      Assets:
                  
                  October
      31,
                    2008
                  
                  
                  July
      31,
                    2008Cash
      and Cash Equivalents
                  
                  $
                  9,208
                  
                  
                  $
                  10,992Accounts
      Receivable
                  
                  
                  1,045
                  
                  
                  
                  1,477Stockpiles
      and Ore on Leach Pads (Note 4)
                  
                  
                  12,131
                  
                  
                  
                  12,176Material
      and Supply Inventories
                  
                  
                  1,045
                  
                  
                  
                  937Deposits
                  
                  
                  8
                  
                  
                  
                  9Marketable
      Securities  (Note 3)
                  
                  
                  15
                  
                  
                  
                  65Prepaid
      Expenses
                  
                  
                  163
                  
                  
                  
                  219Loans
      Receivable – Affiliate (Note 9 and13)
                  
                  
                  40
                  
                  
                  
                  39Other
      Current Assets (Note 5)
                  
                  
                  789
                  
                  
                  
                  490Total
      Current Assets
                  
                  
                  24,444
                  
                  
                  
                  26,404Mining
      Concessions (Note 8)
                  
                  
                  56
                  
                  
                  
                  59Property
      & Equipment – net (Note 6)
                  
                  
                  22,097
                  
                  
                  
                  20,918Intangible
      Assets – net (Note 7)
                  
                  
                  174
                  
                  
                  
                  181Other
      Assets:Deferred
      Financing Costs (Note 15)
                  
                  
                  562
                  
                  
                  
                  599Mining
      Reclamation Bonds
                  
                  
                  82
                  
                  
                  
                  82Deferred
      Tax Asset (Note 17)
                  
                  
                  446
                  
                  
                  
                  573Security
      Deposits
                  
                  
                  54
                  
                  
                  
                  63Total
      Other Assets
                  
                  
                  1,144
                  
                  
                  
                  1,317Total
      Assets
                  
                  $
                  47,915
                  
                  
                  $
                  48,879LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                  
                  $
                  740
                  
                  
                  $
                  788Accrued
      Expenses (Note 10)
                  
                  
                  3,553
                  
                  
                  
                  2,673Derivative
      Contracts (Note 16)
                  
                  
                  933
                  
                  
                  
                  930Deferred
      Tax Liability (Note 17)
                  
                  
                  1,607
                  
                  
                  
                  2,063Current
      Portion of Long-term Debt (Note 15)
                  
                  
                  4,275
                  
                  
                  
                  4,125Total
      Current Liabilities
                  
                  
                  11,108
                  
                  
                  
                  10,579Reclamation
      and Remediation Liabilities (Note 11)
                  
                  
                  1,331
                  
                  
                  
                  1,666Other
      liabilities
                  
                  
                  48
                  
                  
                  
                  62Long-term
      Debt (Note 15)
                  
                  
                  7,100
                  
                  
                  
                  8,375Total
      Long-term Liabilities
                  
                  
                  8,479
                  
                  
                  
                  10,103Commitments
      and Contingencies
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share;Authorized
      300,000,000 shares; Issued andOutstanding 192,974,826 and 192,777,326 shares,
    respectively
                  
                  
                  19
                  
                  
                  
                  19Additional
      Paid-In Capital
                  
                  
                  63,244
                  
                  
                  
                  63,074Accumulated
      Deficit
                  
                  
                  (30,560
                  )
                  
                  
                  (32,496
                  )Deferred
      Financing Costs (Note 15)
                  
                  
                  (2,410
                  )
                  
                  
                  (2,611
                  )Deferred
      Compensation
                  
                  
                  (491
                  )
                  
                  
                  (549
                  )Accumulated
      Other Comprehensive Income (Note 12)
                  
                  
                  (1,474
                  )
                  
                  
                  760Total
      Stockholders’ Equity
                  
                  
                  28,328
                  
                  
                  
                  28,197Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  47,915
                  
                  
                  $
                  48,879




The
accompanying notes are an integral part of the financial
statements.
  - 3
-
 
   CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
 (UNAUDITED)
 (in
thousands, except for share and per share
amounts)


For
      The Three Months EndedOctober
      31,2008
                              
                              
                              2007RevenuesSales
      – Gold, net
                              
                              $
                              9,175
                              
                              
                              $
                              6,526Costs
      and Expenses:Costs
      Applicable to Sales
                              
                              
                              3,042
                              
                              
                              
                              2,205Depreciation
      and Amortization
                              
                              
                              703
                              
                              
                              
                              949General
      and Administrative
                              
                              
                              1,364
                              
                              
                              
                              794Exploration
                              
                              
                              490
                              
                              
                              
                              135Equity
      Based Compensation
                              
                              
                              14
                              
                              
                              
                              58Total
      Costs and Expenses
                              
                              
                              5,613
                              
                              
                              
                              4,141Income
      (Loss) from Operations
                              
                              
                              3,562
                              
                              
                              
                              2,385Other
      Income (Expense):Interest
      Income
                              
                              
                              13
                              
                              
                              
                              20Interest
      Expense
                              
                              
                              (200
                              )
                              
                              
                              (281
                              )Other
      Income (Expense)
                              
                              
                              (208
                              )
                              
                              
                              (19
                              )Loss
      on change in fair value of derivative
                              
                              
                              (304
                              )
                              
                              
                              (358
                              )Total
      Other Income (Expense)
                              
                              
                              (699
                              )
                              
                              
                              (638
                              )Income
      (Loss) before Income Taxes
                              
                              
                              2,863
                              
                              
                              
                              1,747Income
      Tax Expense
                              
                              
                              (927
                              )
                              
                              
                              -Net
      Income (Loss)
                              
                              $
                              1,936
                              
                              
                              $
                              1,747Income
      (Loss) Per Common ShareBasic
                              
                              $
                              0.01
                              
                              
                              $
                              0.01Diluted
                              
                              $
                              0.01
                              
                              
                              $
                              0.01Basic
      Weighted Average Common Shares Outstanding
                              
                              
                              192,843,875
                              
                              
                              
                              170,854,825Diluted
      Weighted Average Common Shares Outstanding
                              
                              
                              198,342,324
                              
                              
                              
                              192,997,981





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





CAPITAL
      GOLD CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
                  (UNAUDITED)(in
      thousands, except for share and per share amounts)AccumulatedAdditional
                
                
                
                
                
                Other
                
                
                Deferred
                
                
                
                
                
                TotalCommon
      Stock
                
                
                paid-in-
                
                
                Accumulated
                
                
                Comprehensive
                
                
                Financing
                
                
                Deferred
                
                
                Stockholders’Shares
                
                
                Amount
                
                
                capital
                
                
                Deficit
                
                
                Income/(Loss)
                
                
                Costs
                
                
                Compensation
                
                
                EquityBalance
      at July 31, 2008
                
                
                192,777,326
                
                
                $
                19
                
                
                $
                63,074
                
                
                $
                (32,496
                )
                
                $
                760
                
                
                $
                (2,611
                )
                
                $
                (549
                )
                
                $
                28,197Amortization
      of deferred finance costs
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                201
                
                
                
                -
                
                
                
                201Equity
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                67
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                58
                
                
                
                125Issuance
      of restricted common stock
                
                
                197,500
                
                
                
                -
                
                
                
                103
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                103Change
      in fair value on interest rate swaps
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8
                
                
                
                -
                
                
                
                -
                
                
                
                8Unrealized
      loss on marketable securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (50
                )
                
                
                -
                
                
                
                -
                
                
                
                (50
                )Equity
      adjustment from foreign currency translation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,192
                )
                
                
                -
                
                
                
                -
                
                
                
                (2,192
                )Net
      income for the three months ended October 31, 2008
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,936
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                1,936Balance
      at October 31, 2008
                
                
                192,974,826
                
                
                $
                19
                
                
                $
                63,244
                
                
                $
                (30,560
                )
                
                $
                (1,474
                )
                
                $
                (2,410
                )
                
                $
                (491
                )
                
                $
                28,328





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




- 5
-




CAPITAL
      GOLD CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS
              (UNAUDITED)(in
      thousands, except for share and per share
  amounts)  For
      TheThree
      Months EndedOctober
      31,2008
                            
                            
                            2007Cash
      Flow From Operating Activities:Net
      Income (Loss)
                            
                            $
                            1,936
                            
                            
                            $
                            1,747Adjustments
      to Reconcile Net Loss toNet
      Cash Provided by (Used in) Operating Activities:Depreciation
      and Amortization
                            
                            
                            703
                            
                            
                            
                            949Accretion
      of Reclamation and Remediation
                            
                            
                            38
                            
                            
                            
                            61Loss
      on change in fair value of derivative, net
                            
                            
                            304
                            
                            
                            
                            66Equity
      Based Compensation
                            
                            
                            227
                            
                            
                            
                            58Changes
      in Operating Assets and Liabilities:Decrease
      (Increase)  in Accounts Receivable
                            
                            
                            432
                            
                            
                            
                            (1,019
                            )Decrease
      in Prepaid Expenses
                            
                            
                            55
                            
                            
                            
                            6Decrease
      (Increase) in Inventory
                            
                            
                            330
                            
                            
                            
                            (1,910
                            )Increase
      in Other Current Assets
                            
                            
                            (299
                            )
                            
                            
                            (470
                            )Decrease
      in Other Deposits
                            
                            
                            1
                            
                            
                            
                            307Decrease
      in Security Deposits
                            
                            
                            9
                            
                            
                            
                            -Decrease
      in Deferred Tax Asset
                            
                            
                            127
                            
                            
                            
                            -(Decrease)
      Increase in Accounts Payable
                            
                            
                            (48
                            )
                            
                            
                            297Decrease
      in Derivative Liability
                            
                            
                            (293
                            )
                            
                            
                            -Decrease
      in Other Liability
                            
                            
                            (14
                            )
                            
                            
                            -Decrease
      in Reclamation and Remediation
                            
                            
                            (373
                            )
                            
                            
                            -Decrease
      in Deferred Tax Liability
                            
                            
                            (455
                            )
                            
                            
                            -Increase
      in Accrued Expenses
                            
                            
                            881
                            
                            
                            
                            323Net
      Cash Provided By Operating Activities
                            
                            
                            3,561
                            
                            
                            
                            415Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property andEquipment
                            
                            
                            (2,027
                            )
                            
                            
                            (799
                            )Purchase
      of Intangibles
                            
                            
                            -
                            
                            
                            
                            (90
                            )Net
      Cash Used in Investing Activities
                            
                            
                            (2,027
                            )
                            
                            
                            (889
                            )


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





CAPITAL
      GOLD CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED(UNAUDITED)(in
      thousands, except for share and per share
  amounts)  For
      TheThree
      Months EndedOctober
      31,2008
                    
                    
                    2007Cash
      Flow From Financing Activities:Advances
      to Affiliate
                    
                    
                    (1
                    )
                    
                    
                    9Repayments
      on Notes Payable
                    
                    
                    (1,125
                    )
                    
                    
                    -Proceeds
      From Issuance of Common Stock
                    
                    
                    -
                    
                    
                    
                    2,076Net
      Cash Provided By Financing Activities
                    
                    
                    (1,126
                    )
                    
                    
                    2,085Effect
      of Exchange Rate Changes
                    
                    
                    (2,192
                    )
                    
                    
                    80Increase
      (Decrease) In Cash and Cash Equivalents
                    
                    
                    (1,784
                    )
                    
                    
                    1,691Cash
      and Cash Equivalents - Beginning
                    
                    
                    10,992
                    
                    
                    
                    2,225Cash
      and Cash Equivalents – Ending
                    
                    $
                    9,208
                    
                    
                    $
                    3,916Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                    
                    $
                    213
                    
                    
                    $
                    879Cash
      Paid For Income Taxes
                    
                    $
                    672
                    
                    
                    $
                    -Non-Cash
      Financing Activities:Change
      in Fair Value of Derivative Instrument
                    
                    $
                    (8
                    )
                    
                    $
                    66





The
accompanying notes are an integral part of the financial
statements.
  - 7
-




CAPITAL
GOLD CORPORATION


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


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





NOTE 1 -
Basis of Presentation





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





The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements reflect
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the condensed consolidated financial position and results of
operations and cash flows for the periods presented. They include the accounts
of Capital Gold Corporation and its wholly owned and majority owned
subsidiaries, Leadville Mining and Milling Holding Corporation, Minera Santa
Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as
well as the accounts within Caborca Industrial S.A. de C.V. (“Caborca
Industriale”), a Mexican corporation 100% owned by two of the Company’s officers
and directors for mining support services. These services include, but are not
limited to, the payment of mining salaries and related costs. Caborca Industrial
bills the Company for these services at slightly above cost.  This
entity is considered a variable interest entity under accounting rules provided
under FIN 46, “Consolidation of Variable Interest Entities”.





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





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





NOTE 2 -
Equity Based Compensation





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





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.33 to $0.85 per
share of common stock with certain of these grants becoming exercisable
immediately upon grant. Certain grants vested or are vesting for a period of
five years.





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




- 8
-




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





The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The estimated per share weighted average grant-date fair values of stock options
and warrants granted during the three months ended October 31, 2008 and 2007,
were $0 and $0.43, respectively. The fair values of the options and warrants
granted were estimated based on the following weighted average
assumptions:





Three
      months ended October 31,2008
              2007Expected
      volatility
              -
              47.60
      – 49.85%Risk-free
      interest rate
              -
              4.31%Expected
      dividend yield
              -
              -Expected
      life
              -
              2.0
      years




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




Number
      of
                Options
              
              
              Weighted
                Average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contracted
                  term
      (years)
              
              
              Aggregate
                intrinsic
                valueOutstanding
      at July 31, 2007
              
              
              2,500,000
              
              
              $
              .34
              
              
              
              1.20
              
              
              $
              255Options
      granted
              
              
              2,500,000
              
              
              
              .63Options
      exercised
              
              
              (1,450,000
              )
              
              
              .32
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2008
              
              
              3,550,000
              
              
              $
              .55
              
              
              
              4.00
              
              
              $
              334Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at October 31, 2008
              
              
              3,550,000
              
              
              $
              .55
              
              
              
              3.75
              
              
              $
              -Warrants
      and options exercisable at October 31, 2008
              
              
              1,925,000
              
              
              $
              .48
              
              
              
              2.58
              
              
              $
              -




- 9
-








Number
      of
                              Options
                          
                          
                          Weighted
                            Average
                            Exercise
                            price
                          
                          
                          Weighted
                            average
                            remaining
                            contracted
                              term
      (years)
                          
                          
                          Aggregate
                            Intrinsic
      valueOutstanding
      at August 1, 2007
                          
                          
                          150,000
                          
                          
                          $
                          .32
                          
                          
                          
                          0.67
                          
                          
                          $
                          18Options
      granted
                          
                          
                          2,500,000
                          
                          
                          $
                          .63
                          
                          
                          
                          -
                          
                          
                          
                          -Options
      vested
                          
                          
                          (900,000
                          )
                          
                          $
                          .58
                          
                          
                          
                          -
                          
                          
                          
                          -Unvested
      Options outstanding at July 31, 2008
                          
                          
                          1,750,000
                          
                          
                          $
                          .63
                          
                          
                          
                          4.49
                          
                          
                          $
                          8Options
      granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Options
      vested
                          
                          
                          (125,000
                          )
                          
                          
                          .63
                          
                          
                          
                          -
                          
                          
                          
                          -Unvested
      Options outstanding at October 31, 2008
                          
                          
                          1,625,000
                          
                          
                          $
                          .63
                          
                          
                          
                          4.24
                          
                          
                          $
                          -




Stock
option and warrant activity for non-employees during the year ended July 31,
2008, and  three months ended October 31, 2008 is as
follows:




Number
      of
                  Options
              
              
              Weighted
                Average
                Exercise
                  price
              
              
              Weighted
                average
                remaining
                contracted
                  term
      (years)
              
              
              Aggregate
                Intrinsic
      valueWarrants
      and options outstanding at July 31, 2007
              
              
              22,535,542
              
              
              $
              .33
              
              
              
              1.48
              
              
              $
              2,578Options
      granted
              
              
              1,715,000
              
              
              
              .66
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (21,555,542
              )
              
              
              .33
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (680,000
              )
              
              
              .30
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2008
              
              
              2,015,000
              
              
              $
              .62
              
              
              
              3.54
              
              
              $
              54Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at October 31, 2008
              
              
              2,015,000
              
              
              $
              .62
              
              
              
              3.02
              
              
              $
              -Warrants
      and options exercisable at October 31, 2008
              
              
              1,592,500
              
              
              $
              .61
              
              
              
              2.25
              
              
              $
              -




- 10
-




Unvested
stock options and warrant balances for non-employees at October 31, 2008 are as
follows:




Number
      of
                  Options
              
              
              Weighted
                Average
                Exercise
                  price
              
              
              Weighted
                average
                remaining
                contracted
                  term
      (years)
              
              
              Aggregate
                Intrinsic
      valueOutstanding
      at August 1, 2007
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      granted
              
              
              650,000
              
              
              $
              .63
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (195,000
              )
              
              $
              .63
              
              
              
              -
              
              
              
              -Unvested
      Options outstanding at July 31, 2008
              
              
              455,000
              
              
              $
              .63
              
              
              
              4.49
              
              
              $
              3Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (32,500
              )
              
              $
              .63
              
              
              
              -
              
              
              
              -Unvested
      Options outstanding at October 31, 2008
              
              
              422,500
              
              
              $
              .63
              
              
              
              4.24
              
              
              $
              -




The impact on the Company’s results of
operations of recording equity based compensation for the three months ended
October 31, 2008 and 2007, for employees and non-employees was approximately
$227 and $58 and reduced earnings per share by $0.00 and $0.00 per basic and
diluted share, respectively.




As of
Octo ber 31,
2008, there was approximately $619 of unrecognized equity based compensation
cost related to options granted to executives and employees which have not yet
vested.




- 11
-




NOTE 3 -
Marketable Securities





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





(in
      thousands)October
      31,2008
                                                
                                                
                                                July
      31,2008Marketable
      equity securities, at cost
                                                
                                                $
                                                50
                                                
                                                
                                                $
                                                50Marketable
      equity securities, at fair value(See
      Notes 9 & 13)
                                                
                                                $
                                                15
                                                
                                                
                                                $
                                                65






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




(in
      thousands)October
      31,2008
                                      
                                      
                                      July
      31,2008Ore
      on leach pads
                                      
                                      $
                                      12,131
                                      
                                      
                                      $
                                      12,176Total
                                      
                                      $
                                      12,131
                                      
                                      
                                      $
                                      12,176




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







NOTE 5 –
Other Current Assets





Other
current assets consist of the following:





(in
      thousands)October
      31,2008
                                              
                                              
                                              July
      31,2008Value
      added tax to be refunded
                                              
                                              $
                                              789
                                              
                                              
                                              $
                                              425Other
                                              
                                              
                                              -
                                              
                                              
                                              
                                              65Total
      Other Current Assets
                                              
                                              $
                                              789
                                              
                                              
                                              $
                                              490




- 12
-




NOTE 6 –
Property and Equipment





Property
and Equipment consist of the following:





(in
      thousands)October
      31,2008
                                              
                                              
                                              July
      31, 2008Process
      equipment and facilities
                                              
                                              $
                                              21,289
                                              
                                              
                                              $
                                              20,182Asset
      retirement obligation
                                              
                                              
                                              1,511
                                              
                                              
                                              
                                              1,511Mining
      equipment
                                              
                                              
                                              974
                                              
                                              
                                              
                                              974Mineral properties
                                              
                                              
                                              141
                                              
                                              
                                              
                                              141Construction
      in progress
                                              
                                              
                                              2,190
                                              
                                              
                                              
                                              1,277Computer
      and office equipment
                                              
                                              
                                              320
                                              
                                              
                                              
                                              316Improvements
                                              
                                              
                                              16
                                              
                                              
                                              
                                              16Furniture
                                              
                                              
                                              38
                                              
                                              
                                              
                                              38Total
                                              
                                              
                                              26,479
                                              
                                              
                                              
                                              24,455Less:
      accumulated depreciation
                                              
                                              
                                              (4,382
                                              )
                                              
                                              
                                              (3,537
                                              )Property
      and equipment, net
                                              
                                              $
                                              22,097
                                              
                                              
                                              $
                                              20,918




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




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





Depreciation
expense for the three months ended October 31, 2008 and 2007 was approximately
$847 and $615, respectively.






NOTE 7 -
Intangible Assets





Intangible
assets consist of the following:





(in
      thousands)October
      31,2008
                                      
                                      
                                      July
      31,2008Repurchase
      of Net Profits Interest
                                      
                                      $
                                      500
                                      
                                      
                                      $
                                      500Water
      Rights
                                      
                                      
                                      134
                                      
                                      
                                      
                                      134Mobilization
      Payment to Mineral Contractor
                                      
                                      
                                      70
                                      
                                      
                                      
                                      70Investment
      in Right of Way
                                      
                                      
                                      18
                                      
                                      
                                      
                                      18Total
                                      
                                      
                                      722
                                      
                                      
                                      
                                      722Accumulated
      Amortization
                                      
                                      
                                      (548
                                      )
                                      
                                      
                                      (541
                                      )Intangible
      assets, net
                                      
                                      $
                                      174
                                      
                                      
                                      $
                                      181





Purchased
intangible assets consisting of rights of way, water rights, easements and net
profit interests are carried at cost less accumulated
amortization.  Amortization is computed using the straight-line method
over the economic lives of the respective assets, generally five years or using
the UOP method.  It is the Company’s policy to assess periodically the
carrying amount of its purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with SFAS 144.  There was no
impairment at October 31, 2008.





Amortization expense for the three
months ended October 31, 2008 and 2007 was approximately $8 and $212,
respectively.  The Repurchase of Net Profits Interest was fully
amortized as of April 30, 2008.




- 13
-




NOTE 8 -
Mining Concessions





Mining
concessions consist of the following:





(in
      thousands)October
      31,2008
                                
                                
                                July
      31,2008El
      Chanate
                                
                                $
                                45
                                
                                
                                $
                                45El
      Charro
                                
                                
                                25
                                
                                
                                
                                25Total
                                
                                
                                70
                                
                                
                                
                                70Less:
      accumulated amortization
                                
                                
                                (14
                                )
                                
                                
                                (11
                                )Total
                                
                                $
                                56
                                
                                
                                $
                                59





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





MSR acquired an additional mining
concession – El Charro. El Charro lies within the current El Chanate property
boundaries. MSR is required to pay 1.5% net smelter royalty in connection with
the El Charro concession.





Amortization expense for the three
months ended October 31, 2008 and 2007 was approximately $3 and $3,
respectively.






NOTE 9 -
Loans Receivable - Affiliate





Loans receivable - affiliate consist of
expense reimbursements due from a publicly-owned corporation in which the
Company has an investment.  The Company's president and chairman of
the board of directors was an officer and director of that corporation until
March 10, 2008.  These loans are non-interest bearing and due on
demand (see Notes 3 & 13).






NOTE 10 –
Accrued Expenses








(in
      thousands)October
      31, 2008
                              
                              
                              July
      31, 2008Net
      profit interest
                              
                              $
                              896
                              
                              
                              $
                              753Net
      smelter return
                              
                              
                              130
                              
                              
                              
                              189Mining
      contractor
                              
                              
                              306
                              
                              
                              
                              193Income
      tax payable
                              
                              
                              1,033
                              
                              
                              
                              777Utilities
                              
                              
                              127
                              
                              
                              
                              110Interest
                              
                              
                              59
                              
                              
                              
                              72Salaries,
      wages and employee benefits
                              
                              
                              687
                              
                              
                              
                              334Other
      liabilities
                              
                              
                              315
                              
                              
                              
                              244$
                              3,553
                              
                              
                              $
                              2,672




- 14
-




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




Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs.  The Asset
Retirement Obligation is based on when the spending for reclamation for an
existing environmental disturbance and activity to date will occur. The Company
reviews, on an annual basis, unless otherwise deemed necessary, the Asset
Retirement Obligation at each mine site.  The Company reviewed the
estimated present value of the El Chanate mine reclamation and closure costs as
of July 31, 2008.  This review resulted in an increase in the Asset
Retirement Obligation by approximately $293.  As of October 31, 2008,
approximately $1,331 was accrued for reclamation obligations relating to mineral
properties in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations.”




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




(in
      thousands)Balance
      as of July 31, 2008
                  
                  $
                  1,666Additions,
      changes in estimates and other (foreign currency translation
      adjustment)
                  
                  
                  (373
                  )Liabilities
      settled
                  
                  
                  -Accretion
      expense
                  
                  
                  38Balance
      as of October 31, 2008
                  
                  $
                  1,331








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





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





(in
      thousands)Balance
      as of July 31, 2008
                                          
                                          $
                                          760Change
      in fair value of derivative instrument
                                          
                                          
                                          8Equity
      Adjustments from Foreign Currency Translation
                                          
                                          
                                          (2,192
                                          )Unrealized
      Gains (loss) on Marketable Securities
                                          
                                          
                                          (50
                                          )Balance
      as of October 31, 2008
                                          
                                          $
                                          (1,474
                                          )




- 15
-




NOTE 13 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company also recorded
approximately $2 and $2 in expense reimbursements including office rent from
this entity for the three months ended October 31, 2008 and 2007, respectively
(see Notes 3 and 9).





The
Company utilizes a Mexican Corporation 100% owned by two officers/Directors and
stockholders of the Company for mining support services.  These services
include but are not limited to the payment of mining salaries and related costs.
 The Mexican Corporation bills the Company for these services at slightly
above cost. Mining expenses charged by the Mexican Corporation and eliminated
upon consolidation amounted to approximately $1,234 and $609 for the three
months ended October 31, 2008 and 2007, respectively.





NOTE 14 -
Stockholders' Equity





Common
Stock





On August 11, 2008, the Company issued
197,500 restricted shares to employees  under our 2006 Equity
Incentive Plan. The restricted shares granted vested immediately.  The
fair value of the Company’s stock was $0.52 on the date of grant resulting in
the Company recording approximately $103 in equity compensation
expense.





During the quarter ended October 31,
2008, the Company recorded approximately $125 in equity compensation expense
related to the vesting of restricted stock grants and stock
options.





2006 Equity Incentive
Plan




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





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





The Plan is administered by the
Company’s Board of Directors which has delegated the administration to the
Company’s Compensation Committee.  The Plan provides for Awards to be
made to 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.





The exercise price of an option must be
paid in cash.  No options may be granted under the Plan after the
tenth anniversary of its effective date.  Unless the Board determines
otherwise, there are certain continuous service requirements and the options are
not transferable.





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




- 16
-




NOTE 15 -
Debt




Long term
debt consists of the following:


(in
      thousands)October
      31,
                                      2008
                                    
                                    
                                    July
      31,
                                      2008Total
      debt
                                    
                                    $
                                    11,375
                                    
                                    
                                    $
                                    12,500Less
      current portion
                                    
                                    
                                    4,275
                                    
                                    
                                    
                                    4,125Long-term
      debt
                                    
                                    $
                                    7,100
                                    
                                    
                                    $
                                    8,375




In September 2008, the Company closed
an Amended and Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), the
Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender.
The Credit Agreement amends and restates the prior credit agreement between the
parties dated August 15, 2006 (the “Original Agreement”).  Under the
Original Agreement, MSR and Oro borrowed money in an aggregate principal amount
of up to US$12,500 (the “Term Loan”) for the purpose of constructing, developing
and operating the El Chanate gold mining project in Sonora State,
Mexico.  The Company guaranteed the repayment of the Term Loan and the
performance of the obligations under the Original Agreement.  As of
October 31, 2008, the outstanding amount on the term note was $11,375 and
accrued interest on this facility was approximately $59.





The Credit Agreement also established a
new senior secured revolving credit facility that permits the Borrowers to
borrow up to $5,000 during the one year period after the closing of the Credit
Agreement.  Term Loan principal shall be repaid quarterly commencing
on September 30, 2008 and consisting of four payments in the amount of $1,125,
followed by eight payments in the amount of $900 and two final payments in the
amount of $400.  There is no prepayment fee.  There was no
amount outstanding on the revolving credit facility as of October 31,
2008.  Principal under the Term Loan and the Revolving Loans shall
bear interest at a rate per annum equal to the LIBO Rate plus 2.5% and 2.0% per
annum, respectively.




- 17
-




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





In
connection with the amendment of the Company’s credit arrangement proceedings in
September 2008, MSR, as a condition precedent to closing, obtained a six month
waiver letter from the Lender of any default or event of default as a result of
not being in compliance with regulations of Mexican federal law with regard to
certain filing and environmental bonding issues in connection with the operation
of mining the El Chanate concessions as well as certain insurance
requirements.  MSR has not yet complied with these regulations due to
the absence of professionals in the area qualified to conduct studies to
facilitate compliance. MSR has agreed to make a commercially reasonable effort
to come into compliance with these requirements.  The Company believes
it has met the insurance requirements required by the Lender and will be
compliant with the other aforementioned issues by the end of this fiscal
quarter.





As of
October 31, 2008, except for the aforementioned waiver, The Company and its
related entities were in compliance with all debt covenants and default
provisions.




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





In March 2006, The Company entered into
a gold price protection arrangement to protect it against future fluctuations in
the price of gold and interest rate swap agreements in October 2006 in
accordance with the terms of the credit arrangements with Standard Bank (See
Note 16 for more details on these transactions).








NOTE 16 -
Sales Contracts, Commodity and Financial Instruments





Gold Price Protection
Agreement





In March 2006, in conjunction with the
Company’s credit facility, the Company entered into two identically structured
derivative contracts with Standard Bank (See Note 15).  Both
derivatives consisted of a series of forward sales of gold and a purchase gold
cap.  Under these contracts, the Company agreed to sell a total volume
of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce
on a quarterly basis during the period from March 2007 to September
2010.  The Company also agreed to purchase gold caps.  The
caps allow the Company to buy gold at a price of $535 per ounce covering the
same volume and horizon as the forward sales.  This combination of
forward sales with purchased call options synthesizes a put position, which, in
turn, serves to put a floor on the Company’s sales price.  The volume
of these derivative positions represents about 74% of sales during the three
months ended October 31, 2008, such that these derivative positions mitigate the
Company’s gold price risk, rather than eliminate or reverse the natural exposure
of the Company.





Under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
these contracts must be carried on the balance sheet at their fair
value.  The Company records these changes in fair value and any cash
settlements within Other Income or Expense. The contracts were not designated as
hedging derivatives, and therefore special hedge accounting is not
applied.




- 18
-




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





(in
      thousands)Liability
      balance as of July 31, 2008
                                      
                                      $
                                      725Loss
      on change in fair value of derivative
                                      
                                      
                                      304Net
      cash settlements
                                      
                                      
                                      (
      295
                                      )Liability
      balance as of October 31, 2008
                                      
                                      $
                                      734





Rather than modifying the original Gold
Price Protection agreement with Standard Bank to satisfy these forward sale
obligations, the Company has opted for a net cash settlement between the call
option purchase price of $535 and the forward sale price of $500, or $35.00 per
oz.  For the three months ended October 31, 2008 and 2007, the Company
has paid Standard Bank approximately $295 and $294 on the settlement
of 8,442 and 8,391 ounces, respectively.  Since inception, the Company
has paid Standard Bank an aggregate of approximately $1,936 on the
settlement of 55,325 ounces.  These expenses were incurred
concurrently with sales revenues that reflected actual sales of physical gold at
market prices well above the option strike price of $535 per
ounce.  The remaining ounces to settle with regard to this agreement
amounted to 66,602 as of October 31, 2008.





Interest Rate Swap
Agreement





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







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




The interest rate swap agreements are
accounted for as cash flow hedges, whereby “effective” hedge gains or losses are
initially recorded in other comprehensive income (“OCI”) and later reclassified
to the interest expense component of earnings coincidently with the earnings
impact of the interest expenses being hedged.  “Ineffective” hedge
results are immediately recorded in earnings also under interest
expense.  No component of hedge results will be excluded from the
assessment of hedge effectiveness.  The amount expected to be
reclassified from other comprehensive income to earnings during the year ending
July 31, 2009 from these two swaps was determined to be immaterial.




- 19
-




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




(in
      thousands)Liability
      balance as of July 31, 2008
                                          
                                          $
                                          205Change
      in fair value of derivative
                                          
                                          
                                          (8
                                          )Interest
      expense (income)
                                          
                                          
                                          46Net
      cash settlements
                                          
                                          
                                          (44
                                          )Liability
      balance as of October 31, 2008
                                          
                                          $
                                          199




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




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




Quarter
      Ended
                                                Derivatives
      in Cash Flow Hedging Relationships
                                                Effective
      Results Recognized in OCI
                                                Location
      of Results Reclassified from AOCI to Earnings
                                                Amount
      Reclassified from AOCI to Income
                                                Ineffective
      Results Recognized in Earnings
                                                Location
      of Ineffective Results1/31/08
                                                Interest
      Rate contracts
                                                $        (201)
                                                Interest
      Income (Expense)
                                                (5)
                                                -
                                                N/A4/30/08
                                                Interest
      Rate contracts
                                                $             28
                                                Interest
      Income (Expense)
                                                (24)
                                                -
                                                N/A7/31/08
                                                Interest
      Rate contracts
                                                $             19
                                                Interest
      Income (Expense)
                                                (49)
                                                -
                                                N/A10/31/08
                                                Interest
      Rate contracts
                                                $          (38)
                                                Interest
      Income (Expense)
                                                (38)
                                                -
                                                N/A




Quarter
      Ended
                                                    Derivatives
      Not Designated in Hedging Relationships
                                                    Location
      of Results
                                                    Amount
      of Gain (Loss)1/31/08
                                                    Gold
      contracts
                                                    Other
      Income (Expense)
                                                    $        (345)4/30/08
                                                    Gold
      contracts
                                                    Other
      Income (Expense)
                                                    $        (337)7/31/08
                                                    Gold
      contracts
                                                    Other
      Income (Expense)
                                                    $        (319)10/31/08
                                                    Gold
      contracts
                                                    Other
      Income (Expense)
                                                    $        (304)




- 20
-




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
      DerivativesJanuary
      31, 2008
                        Balance
      Sheet Location
                        Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                        Current
      Liabilities
                        $              313Derivatives
      designated as hedging instrumentsGold
      derivatives
                        Current
      Liabilities
                        $              660April
      30, 2008
                        Balance
      Sheet Location
                        Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                        Current
      Liabilities
                        $              274Derivatives
      designated as hedging instrumentsGold
      derivatives
                        Current
      Liabilities
                        $              702July
      31, 2008
                        Balance
      Sheet Location
                        Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                        Current
      Liabilities
                        $              205Derivatives
      designated as hedging instrumentsGold
      derivatives
                        Current
      Liabilities
                        $              725Liability
      DerivativesOctober
      31, 2008
                        Balance
      Sheet Location
                        Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                        Current
      Liabilities
                        $              199Derivatives
      designated as hedging instrumentsGold
      derivatives
                        Current
      Liabilities
                        $              734






NOTE 17 –
Income Taxes





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





(in
      thousands)October
      31,2008
                              
                              
                              October
      31,2007Current:United
      States
                              
                              $
                              -
                              
                              
                              $
                              -Foreign
                              
                              
                              (927
                              )
                              
                              
                              -(927
                              )
                              
                              
                              -Deferred:United
      States
                              
                              
                              -
                              
                              
                              
                              -Foreign
                              
                              
                              -
                              
                              
                              
                              --
                              
                              
                              
                              -Total
                              
                              $
                              (927
                              )
                              
                              $
                              -




- 21
-




The
Company’s Income (loss) from operations before income taxconsisted
of:





(in
      thousands)October
      31,2008
                  
                  
                  October
      31,2007United
      States
                  
                  $
                  (1,524
                  )
                  
                  $
                  (1,603
                  )Foreign
                  
                  
                  4,387
                  
                  
                  
                  3,350Total
                  
                  $
                  2,863
                  
                  
                  $
                  1,747




The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1,
2007.  The purpose of FIN 48 is to clarify and set forth consistent
rules for accounting for uncertain tax positions in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes".  The cumulative effect of applying the provisions of this
interpretation are required to be reported separately as an adjustment to the
opening balance of retained earnings in the year of adoption.  The
adoption of this standard did not have an impact on the financial condition or
the results of the Company’s operations.




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




Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly
period.  Annualized income projections indicate that the Company will
not be liable for any excess flat tax for calendar year 2008 and, accordingly,
has recorded a Mexican income tax provision as of October 31, 2008.




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





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. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.






NOTE 18 –
Recently Issued Accounting Pronouncements




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




- 22
-




In March
2008, the FASB issued FASB Statement No. 161, “Disclosure about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“FAS 161”) which provides revised guidance for enhanced
disclosures about how and why an entity uses derivative instruments, how
derivative instruments and the related hedged items are accounted for under FAS
133, and how derivative instruments and the related hedged items affect an
entity’s financial position, financial performance and cash flows. FAS 161 is
effective and was adopted for the Company’s fiscal year ended July 31,
2008.





The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:





* FASB
Statements of Financial Accounting Standards and Interpretations, FASB Statement
133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research
Bulletins and Accounting Principles Board Opinions that are not superseded by
actions of the FASB, and Rules and interpretive releases of the SEC for SEC
registrants.





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





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





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





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





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




- 23
-




In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”) which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
“Goodwill and Other Intangible Assets” (“FAS 142”).  The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under FAS 142 and the period of expected cash flows used to
measure the fair value of the asset under FASB Statement No. 141, “Business
Combinations” (“FAS 141”). FSP 142-3 is effective for the Company’s fiscal year
beginning January 1, 2009 and will be applied prospectively to intangible assets
acquired after the effective date. The Company does not expect the adoption of
FSP 142-3 to have an impact on the Company’s consolidated financial position,
results of operations or cash flows.







NOTE 19 –
Subsequent Events





On
November 1, 2008, The Company entered into an Engagement Agreement with J. Scott
Hazlitt, our Vice President of Mine Development.  The agreement
supersedes a January 1, 2007 employment agreement between us and Mr.
Hazlitt.  Pursuant to the Engagement Agreement, Mr. Hazlitt serves as
our Vice President of Mine Development and receives a base annual fee of at
least $155,250 and is entitled to annual bonuses.  The Engagement
Agreement runs through August 31, 2009, and automatically renews thereafter for
additional one year periods unless terminated by either party within 30 days of
a renewal date. The Company can terminate the agreement for cause or upon 30
days notice without cause. Mr. Hazlitt can terminate the agreement upon 60 days
notice without cause or, if there is a breach of the agreement by us that is not
timely cured, upon 30 days notice. In the event that the Company terminates him
without cause or he terminates due to our breach, he will be entitled to certain
termination payments. The Company previously entered into a change of control
agreement with Mr. Hazlitt similar to the agreements entered into with our other
executive officers.




- 24
-




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


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





Cautionary Statement on
Forward-Looking Statements





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





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




- 25
-




General





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





On August
30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered
to us an updated resource block model and an updated mine plan and mine
production schedule (the “2007 Report”).  According to the 2007
Report, our proven and probable reserve tonnage increased by approximately 98%
from 19.9 million to 39.5 million metric tonnes with a gold grade of 0.66 grams
per tonne (43.5 million US short tons at 0.019 ounces per ton).  The
open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one tonne of
ore).  The updated pit design for the revised plan in the 2007 Report
is based on a plant recovery of gold that varies by rock types, but is expected
to average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
as determined by IMC) per ounce was used to re-estimate the reserves compared
with a gold price of $450 per ounce used in the previous estimate.





The
following Summary is extracted from the 2007 Report.   Please
note that the reserves as stated are an estimate of what can be economically and
legally recovered from the mine and, as such, incorporate losses for dilution
and mining recovery.  The 832,280 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process.  Total gold
produced is estimated to be 555,960 ounces, or approximately 66.8% of the
contained gold.  The gold recovery rate is expected to average
approximately 66.8% for the entire ore body.  Individual portions of
the ore body may experience varying recovery rates ranging from about 73% to
48%.  Oxidized and sandstone ore types may have recoveries of about
73%; fault zone ore type recoveries may be about 64%; siltstone ore types
recoveries may be about 48% and latite intrusive ore type recoveries may be
about 50%.





- 26
-


El Chanate
Project





Production
Summary





Metric
                                          U.S.Materials
                                            Reserves
                                            Proven
                                            Probable
                                            Total
      Reserves
                                            Waste
                                            Total
                                            
                                            Contained
      Gold
                                            
                                            Production
                                            Ore
      Crushed**
                                            
                                            
                                            Operating
      Days/Year
                                            Gold
      Plant Average Recovery
                                            Average
      Annual Production**
                                            Total
      Gold Produced
                                          26.7
      Million Tonnes @   0.68   g/t*
                                            12.8 Million
      Tonnes  @  0.61 g/t*
                                            39.5
      Million
      Tonnes  @  0.66   g/t*
                                            24.1 Million Tonnes
                                            63.6
      Million Tonnes
                                            
                                            25.89
      Million grams
                                            
                                            
                                            2.6
      Million Tonnes /Year
                                            7,500
      Mt/d
                                            
                                            365
      Days per year
                                            66.8
      %
                                            1.35  Million
      grams
                                            17.29
      Million grams
                                          29.4
      Million Tons @   0.0198 opt*
                                            14.1 Million Tons @   0.0179 opt*
                                            43.5
      Million Tons @   0.0192 opt*
                                            26.6 Million Tons
                                            70.1
      Million tons
                                            
                                            832,280  Oz
                                            
                                            
                                            2.87
      Million Tons/Year
                                            8,267
      t/d
                                            
                                            365
      Days per year
                                            66.8
      %
                                            43,414  Oz
                                            555,960  Oz





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





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







In the
mineral resource block model developed, with blocks 6m (meters) x 6m x 6m high,
Measured and Indicated resources (corresponding to Proven and Probable reserves
respectively when within the pit design) were classified in accordance with the
following scheme:






·
            Blocks
      with 2 or more drill holes within a search radius of 80m x 70m x 40m and
      with a relative kriging (a geostatistical calculation technique) standard
      deviation less than or equal to 0.45 were classified as Measured
      (corresponding to Proven);






·
            Blocks
      with 1 hole within the search radius of 80m x 70m x 40m and with a
      relative kriging standard deviation of 0.60 or less, blocks with 2 holes
      and a kriging standard deviation of 0.70 or less, blocks with 3 holes and
      a kriging standard deviation of 0.80 or less, blocks with 4 holes and a
      relative kriging standard deviation of 0.90 or less and all blocks with 5
      or more holes within the search radius were classified as Indicated
      (corresponding to Probable), unless they met the above criterion for
      Proven;




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




- 27
-




·
            Blocks
      outside the above search radii or outside suitable geological zones were
      not assigned a gold grade or a resource
  classification.





The
proven and probable reserve estimates are based on a recovered gold cutoff grade
of 0.17 to 0.21 grams/tonne, depending on the operating year.  The
variation is due to balancing the mine and plant production capacities on a year
by year basis for the plan.  (A recovered gold cutoff grade was used
for reserves calculation as the head gold grade cutoff varies with the different
ore types due to their variable gold recoveries.)  The internal
(in-pit) and break even cutoff grade calculations are as follows:





Cutoff
      Grade Calculation
              Basic
      Parameters
              Gold
      Price
              Shipping
      and Refining
              Gold
      Recovery
              Royalty
              
              Operating
      Costs per Tonne of Ore
              Mining
      *
              Processing/Leach
      Pad
              G&A
              Total
              
              Internal Cutoff
      Grade
              Head
      Grade Cutoff (66.8% recov.)
              Recovered
      Gold Grade Cutoff
            Internal
      Cutoff Grade
              
              US$550/oz
              US$
      4.14/oz
              66.8%
              4%
      of NSR
              
              $
      per Tonne of Ore
              0.070
              1.980
              0.800
              2.850
              
              Grams
      per Tonne
              0.25
              0.17
            Break
      Even Cutoff Grade
              
              US$550/oz
              US$
      4.14/oz
              66.8%
              4%
      of NSR
              
              $
      per Tonne of Ore
              1.360
              1.980
              0.800
              4.140
              
              Grams
      per Tonne
              0.37
              0.25





* The
calculation of an internal cutoff grade does not include the basic mining costs
(which are considered to be sunk costs for material within the designed
pit).  The $0.07 per tonne cost included is the incremental (added)
cost of hauling ore over hauling waste, and which is included in the
calculation.





Through
October 31, 2008, approximately 5,000,000 tonnes of ore has been placed on the
leach pad.  During the three months ended October 31, 2008,
approximately 1,029,000 tonnes of ore was placed on the leach pad amounting to
approximately 18,600 recoverable ounces placed.  Gold production for
the three months ended October 31, 2008, totaled 11,888 ounces .





Gold
production at El Chanate is currently at a level of approximately 5,000 ounces
per month inclusive of gold equivalents. We have implemented steps necessary to
effectively increase production rates to approximately 70,000 ounces per year in
2009.  As of October 31, 2008, we have expended approximately
$4,000,000 on the leach pad expansion and ADR plant improvements.  The
ADR plant improvements were completed as of the date of this
filing.  Management has been and anticipates that it will continue to
fund these expansion costs with its cash on hand as well as through revenues
from gold sales.





In
September 2008, we initiated a 10 hole deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters which targeted the southern extremity of
the main pit.  Once this data has been compiled and analyzed, it will
be combined with results from a previous drilling campaign initiated in December
2007 which consisted of 26 reverse circulation holes amounting to 4,912
meters.  These drill holes were mainly positioned to test the outer
limits of the currently known ore zones within the main pit.  All data
will be combined with the intention of increasing proven and probable
reserves.




- 28
-




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





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








Results of
Operations





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





Three months ended October
31, 2008 compared to Three months ended October 31, 2007





Net
income for the three months ended October 31, 2008 and 2007was approximately
$1,936 and $1,747, respectively, representing an increase of approximately 11%
over the prior period.  Net income before income taxes was $2,863 and
$1,747 for the three months ended October 31, 2008 and 2007, respectively, which
represented an increase of 64%.  There was no income tax expense in
the prior period due to a net operating loss carryforward within our
wholly-owned subsidiary, MSR, that offset any tax due.  This loss
carry-forward was fully utilized as of December 31, 2007.   Net
income per common share was $0.01 for the three months ended October 31, 2008
and 2007, on both a basic and diluted basis, respectively.





Revenues & Costs
Applicable to Sales





Gold
sales in the current period totaled approximately $9,175 as compared to $6,526
in the prior period representing an increase of approximately $2,649 or
41%.  We sold 11,413 ounces at an average realizable price per ounce
of approximately $805 in the current period.  We sold 9,194 ounces at
an average realizable price per ounce of $710 during the same period last
year.





Costs
applicable to sales were approximately $3,042 and $2,205, respectively, for the
three months ended October 31, 2008 and 2007, an increase of approximately $837
or 38%, which increased in proportion with our increase in
revenues.  Our cash cost and total cost per ounce sold, excluding
Royal Gold’s 10% net profit interest (formerly owned by AngloGold) was $255 and
$295, respectively, for the three months ended October 31, 2008.  If
we factor in this net profit interest cost for the same period, our cash cost
and total cost per ounce sold would be $270 and $310,
respectively.  As of October 31, 2008, we had approximately $896
accrued towards this net profit interest.  We anticipate incurring the
remaining portion of the net profit interest within this calendar
year.





Revenues
from by-product sales (silver) are credited to Costs applicable to sales as
a by-product credit.  Silver sales totaled 25,334 ounces at an average
price of $11.29 per ounce amounting to approximately $286 during the three
months ended October 31, 2008.   There were no silver sales
during the same period last year.




- 29
-




Depreciation and
Amortization





Depreciation
and amortization expense during the three months ended October 31, 2008 and 2007
was approximately $703 and $949, respectively.  The primary reason for
the decrease of approximately $246 was due to amortization charges recorded in
the prior period related to the repurchase of the 5% net profit interest
acquired in 2006 for $500.  This was fully amortized during the
quarterly period ended April 30, 2008.  Depreciation and amortization
also includes deferred financing costs resulting from the credit arrangements
entered into with Standard Bank Plc.  This accounted for approximately
$239 and $272 of depreciation and amortization expense during the three months
ended October 31, 2008 and 2007, respectively.





General and Administration
Expense





General and administrative expenses
during the three months ended October 31, 2008 were approximately $1,364, an
increase of approximately $570 or 72% from the three months ended October 31,
2007. The increase in general and administrative expenses resulted primarily
from: 1) higher salaries and wages due to the hiring of additional finance and
administrative personnel, 2) the effect of compensation increases to executives
enacted in the prior year to levels more commensurate with industry rates, 3)
higher stock compensation expense resulting from the vesting of certain stock
options and restricted stock grants issued to officers, directors and employees
in the prior year, and 4) higher legal fees related to the amending of our
credit arrangements.  The above mentioned increases in compensation,
as well as the stock option and restricted stock awards were granted based upon
recommendations from an independent report on executive compensation in the
prior year.  This independent report, requested by our Compensation
Committee, was obtained in order to assist us in attracting and retaining
individuals of experience and ability, to provide incentive to our employees and
directors, to encourage employee and director proprietary interests in our
company, and to encourage employees to remain in our employ.





Exploration
Expense





Exploration
expense during the three months ended October 31, 2008 and 2007 was
approximately $490 and $135, respectively, or an increase of
$355.  Exploration expense for the current period included costs
incurred from a 10 hole deep core drilling campaign at our El Chanate mine
totaling 2,500 meters which targeted the southern extremity of the main
pit.  This data is currently being compiled and
analyzed.  Once complete, it will be combined with results from a
previous drilling campaign initiated in December 2007 which consisted of 26
reverse circulation holes amounting to 4,912 meters.  These drill
holes were mainly positioned to test the outer limits of the currently known ore
zones within the main pit.  All data will be combined with the
intention of increasing proven and probable reserves.  Exploration
costs also included on-going exploration and geochemical work being conducted on
our leased concessions located northwest of Saric, Sonora.




Equity Based
Compensation





Equity based compensation during the
three months ended October 31, 2008 was approximately $14 as compared to $58 in
costs for the same period a year earlier.  These costs primarily
represent the equity compensation expense from the issuance and vesting of stock
options and restricted stock grants for professional services provided by
non-employees during the current and prior period.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the three months
ended October 31, 2008 and 2007, was approximately $304 and $358, respectively,
and was reflected as an other expense.This was primarily due
to the change in fair value of our two identically structured derivative
contracts with Standard Bank which correlates to fluctuations in the gold
price.  These contracts were not designated as hedging derivatives;
and therefore, special hedge accounting does not apply.




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-




Interest expense was approximately
$200 for the three months ended October 31, 2008 compared to approximately $281
for the same period a year earlier.  This decrease was mainly due to
lower interest charges incurred during the current period related to our credit
arrangements with Standard Bank.  As of October 31, 2008, there was
$11,375 outstanding on our term note.




Changes in Foreign Exchange
Rates




During
the three months ended October 31, 2008, we recorded equity adjustments from
foreign currency translations of approximately $2,192.  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.





Summary of Quarterly
Results


(000’s except per share
Data)





For the three
                                            
                                            
                                            For the threeMonths ended
                                            
                                            
                                            Months endedOctober 31,2008
                                            
                                            
                                            October 31,2007Revenues
                                            
                                            
                                            9,175
                                            
                                            
                                            
                                            6,526Net Income (loss)
                                            
                                            
                                            1,936
                                            
                                            
                                            
                                            1,747Basic net income (loss) per
      share
                                            
                                            
                                            0.01
                                            
                                            
                                            
                                            0.01Diluted net income (loss) per
      share
                                            
                                            
                                            0.01
                                            
                                            
                                            
                                            0.01Gold ounces sold
                                            
                                            
                                            11,413
                                            
                                            
                                            
                                            9,194Average price received
                                            
                                            $
                                            805
                                            
                                            
                                            $
                                            710Cash cost per ounce sold
                                            
                                            $
                                            270
                                            
                                            
                                            $
                                            239Total cost per ounce sold
                                            
                                            $
                                            310
                                            
                                            
                                            $
                                            311




Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the three months ended October 31, 2008 was $3,561 as
compared to Cash provided by
operating activities of $415 during the three months ended October 31,
2007.   The 2007 results were negatively impacted by an increase
in gold sales receivable and additions to in-process inventory.




Investing
Activities




Cash used in investing
activities during the three months ended October 31, 2008, amounted to
approximately $2,027, primarily from the acquisition of mobile equipment,
conveyors and ADR plant equipment, mainly the carbon regeneration
kiln.  Cash used in
investing activitiesfor the same period a year ago was approximately
$889 which represented mainly conveyors and original ADR plant equipment for the
El Chanate mine.




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-




Financing
Activities




Cash used in financing
activities during the three months ended October 31, 2008 amounted to
approximately $1,126, primarily from the repayment of the note payable in the
amount of $1,125.  Cash provided by financing
activities for the same period a year ago was approximately $2,085 which
mostly was comprised of proceeds received of approximately $2,076 from the
issuance of common stock upon the exercising of 6,070,500 warrants.




Term
loan and Revolving Credit Facility





In September 2008, we closed an Amended
And Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), 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 (the “Original
Agreement”).  Under the Original Agreement, MSR and Oro borrowed money
in an aggregate principal amount of up to $12,500(the “Term Loan”) for the
purpose of constructing, developing and operating the El Chanate gold mining
project in Sonora State, Mexico.  We guaranteed the repayment of the
Term Loan and the performance of the obligations under the Original
Agreement.  As of October 31, 2008, the outstanding amount on the term
note was $11,375 and accrued interest on this facility was approximately
$59.





The Credit Agreement also established a
new senior secured revolving credit facility that permits the Borrowers to
borrow up to $5,000 during the one year period after the closing of the Credit
Agreement. The Borrowers may request a borrowing of the Revolving Commitment
from time to time, provided that the Borrowers are not entitled to request a
borrowing more than once in any calendar month (each borrowing a “Revolving
Loan”). Repayment of the Revolving Loans will be secured and guaranteed in the
same manner as the Term Loan. Term Loan principal shall be repaid quarterly
commencing on September 30, 2008 and consisting of four payments in the amount
of $1,125, followed by eight payments in the amount of $900 and two final
payments in the amount of $400. There is no prepayment fee.  There was
no amount outstanding on the revolving credit facility as of October 31,
2008.  Principal under the Term Loan and the Revolving Loans 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 and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively.  The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment.  Pursuant to the terms of the Original Credit Agreement,
Standard Bank exercised significant control over the operating accounts of MSR
located in Mexico and in the United States. Standard Bank’s control over the
accounts has been lifted significantly under the terms of the Credit Agreement,
giving the Borrowers authority to exercise primary day-to-day control over the
accounts.  However, the accounts remain subject to an account pledge
agreement between MSR and Standard Bank.





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




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Debt
Covenants





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





In connection with the amending of
our credit agreements in September 2008, MSR, as a condition precedent to
closing, obtained a six month waiver letter from the Lender of any default or
event of default as a result of not being in compliance with regulations of
Mexican federal law with regard to certain filing and environmental bonding
issues in connection with the operation of mining the El Chanate concessions as
well as certain insurance requirements.  MSR has not yet complied with
these regulations due to the absence of professionals in the area qualified to
conduct studies to facilitate compliance. MSR believes that the Mexican
government is aware of these barriers to compliance and that it has not enforced
the Requirements against MSR or other mining companies in Sonora. MSR has agreed
to make a commercially reasonable effort to come into compliance with these
requirements.  See also “Environmental and Permitting
Issues” section below.  We believe we have met the insurance
requirements required by the Lender and will be compliant with the other
aforementioned issues by the end of this fiscal quarter.




As of
October 31, 2008, except for the aforementioned waiver, 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.  In Mexico, although we must continue to
comply with laws, rules and regulations concerning mining, environmental,
health, zoning and historical preservation issues, we are not aware of any
significant environmental concerns or existing reclamation requirements at the
El Chanate concessions.  We have received the required Mexican
government permits and extensions for construction, mining and processing the El
Chanate ores.  Once we revise our new mine plan based on the 2007
Report, we will work to extend the permits for mining and processing for the new
life of mine.  See also “Debt Covenants”
above.





We
received the renewable explosive permit from the government that expires on
December 31, 2008 and is renewable annually.





We do
include in all our internal revenue and cost projections a certain amount for
environmental and reclamation costs on an ongoing basis.  No assurance
can be given that environmental regulations will not be changed in a manner that
would adversely affect our planned operations.  We estimated the
reclamation costs for the El Chanate site to be approximately
$2,900.  Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and closure costs.
The asset retirement obligation is based on when the spending for an existing
environmental disturbance and activity to date will occur. We review, on an
annual basis, unless otherwise deemed necessary, the asset retirement obligation
at each mine site.  We reviewed the estimated present value of the El
Chanate mine reclamation and closure costs as of July 31, 2008.  This
review resulted in an increase in the Asset Retirement Obligation by
approximately $293.  As of October 31, 2008, approximately $1,331 was
accrued for reclamation obligations relating to mineral properties in accordance
with SFAS No. 143, “Accounting for Asset Retirement
Obligations.”




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-




We own
properties in Leadville, Colorado for which we have previously recorded an
impairment loss.  Part of the Leadville Mining District has been
declared a federal Superfund site under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, and the Superfund Amendments
and Reauthorization Act of 1986.  Several mining companies and one
individual were declared defendants in a possible lawsuit.  We were
not named a defendant or Principal Responsible Party.  We did respond
in full detail to a lengthy questionnaire prepared by the Environmental
Protection Agency ("EPA") regarding our proposed procedures and past activities
in November 1990.  To our knowledge, the EPA has initiated no further
comments or questions.  The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of our Leadville Mining properties in August 2007.  The Division
concluded that based upon 2007 equipment prices and labor costs, an additional
$46 was necessary to be bonded with the Division to reclaim the site to achieve
the approved post-mining land use.  The total amount of the bond
sufficient to perform reclamation as of October 31, 2008, was approximately
$82.  We have met this bonding requirement.  During our
fiscal year ended July 31, 2008, we sold two of the Leadville Mining claims and
the mill for gross proceeds of $100 which was recorded within other income and
expense.





To date,
we have not been adversely affected by the recent volatility in the global
credit and foreign exchange markets.  To a minor degree we have
benefited from the devaluation of the Mexican peso compared to the U.S. dollar.
 We will continue to assess the evolution of our business and the impact of
the global credit crisis.





While we
believe that our available funds in conjunction with anticipated revenues from
gold sales will be adequate to cover capital expenditures, debt service,
royalties, net cash settlements on our gold price protection agreement as well
as operating activities at El Chanate and corporate general and administrative
expenses for fiscal 2009, if we encounter unexpected problems we may need to
raise additional capital.  We also may need to raise additional
capital for significant property acquisitions and/or exploration activities. To
the extent that we need to obtain additional capital, management intends to
raise such funds through the sale of our securities and/or joint venturing with
one or more strategic partners.  We cannot assure that adequate
additional funding, if needed, will be available.  If we need
additional capital and we are unable to obtain it from outside sources, we may
be forced to reduce or curtail our operations or our anticipated exploration
activities.





New
Accounting Pronouncements





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





Disclosure
About Off-Balance Sheet Arrangements





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





Critical
Accounting Policies





Our
financial statements and accompanying notes are prepared in accordance with
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.




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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 net realizable value.  Net realizable value
represents the estimated future sales price of the product based on current and
long-term metals prices, less the estimated costs to complete production and
bring the product to sale. Write-downs of ore on leach pads and inventories,
resulting from net realizable value impairments, are reported as a component of
Costs applicable to
sales.  The current portion of ore on leach pads and
inventories is determined based on the expected amounts to be processed within
the next 12 months.  Ore on leach pads and inventories not expected to
be processed within the next 12 months are classified as
long-term.




The major classifications are as
follows:




Ore
on Leach Pads




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





The estimates of recoverable gold on
the leach pads are calculated from the quantities of ore placed on the leach
pads (measured tons added to the leach pads), the grade of ore placed on the
leach pads (based on assay data) and a recovery percentage (based on ore type).
In general, leach pads recover approximately 50% to 75% of the recoverable
ounces in the first year of leaching, declining each year thereafter until the
leaching process is complete.





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




In-process
Inventory




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




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-




Precious
Metals Inventory




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




Materials
and Supplies




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




Property, Plant and Mine
Development




Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the 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.




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-




Reclamation and Remediation
Costs (Asset Retirement Obligations)




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




Deferred Financing
Costs





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





Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements and net profit interests are carried at cost less
accumulated amortization.  Amortization is computed using the
straight-line method over the economic lives of the respective assets, generally
five years or using the units of production method.  It is our policy
to assess periodically the carrying amount of our purchased intangible assets to
determine if there has been an impairment to their carrying
value.  Impairments of other intangible assets are determined in
accordance with SFAS 144. There was no impairment at October 31,
2008.





Fair Value of Financial
Instruments





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





Revenue
Recognition





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





Income
Taxes





We adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48")
effective January 1, 2007.  The purpose of FIN 48 is to clarify and
set forth consistent rules for accounting for uncertain tax positions in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (“SFAS 109”).  The cumulative effect of applying the
provisions of this interpretation are required to be reported separately as an
adjustment to the opening balance of retained earnings in the year of
adoption.  The adoption of this standard did not have a material
impact on the financial condition or the results of our operations.




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




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-




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. 
Annualized income projections indicate that we will not be liable for any excess
flat tax for calendar year 2008 and, accordingly, has recorded a Mexican income
tax provision as of October 31, 2008.




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





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





Equity Based
Compensation





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





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





Accounting for Derivatives
and Hedging Activities





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




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-




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





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





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





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





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







Metal
Price




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




Foreign Currency




Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow.  Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic
conditions.  Most of our assets and operations are solely in Mexico;
and 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 impact our cost structure, were not
mitigated by offsetting increases in the U.S. dollar gold price or by other
factors, 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.




- 39
-




Gold
Price Protection Agreement





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





The total
contractual ounces to settle and cash payments remaining on the gold price
protection agreement are as follows (000’s):


Fiscal
      year ending:
                      
                      Ounces Remaining
                      
                      
                      Amount2009
                      
                      
                      25,196
                      
                      
                      $
                      8822010
                      
                      
                      33,176
                      
                      
                      $
                      1,1612011
                      
                      
                      8,230
                      
                      
                      $
                      288Total
                      
                      
                      66,602
                      
                      
                      $
                      2,331





Interest
Rate Swap Contracts





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




- 40
-




Market
      Risk DisclosuresOctober
      31, 2008(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
                                                $
      6,375(1)
                                                5.30%
                                                3
      Mo. USD LIBOR
                                                12/31/2010
                                                $         (198)Gold
      Forward Sales(2)
                                                8,369
      oz./qtr. (3)
                                                $500/oz.
                                                Price
      of gold
                                                9/30/2010
                                                $  (14,861)Gold
      Call Options (2)
                                                8,369
      oz./qtr. (3)
                                                $535/oz.
                                                Price
      of gold
                                                9/30/2010
                                                $      14,127
  (1)The value shown
      reflects the notional as of October 31, 2008. Over the term of the swap,
      the notional amortizes, dropping to approximately $656.(2)These contracts
      are used for hedging purposes, but hedge accounting is not
      applied.(3)The value shown
      reflects the current notional, but these contracts amortize down to 8,230
      ounces per quarter by the contract
termination.





As of October 31, 2008, the dollar
value of a basis point for this interest rate swap was slightly more than $700,
suggesting that a one-basis point rise (fall) of the yield curve would likely
foster an increase (decrease) in the interest rate swaps value by slightly more
than $700.  Because hedge accounting is applied, the contract serves
to lock in a fixed rate of interest for the portion of the variable rate debt
equal to the swap's notional size.  The swap covers only 75% of our
variable rate exposure.





The combined gold forward sales and
long call options serve to synthesize a put option that protects us from the
market exposure to gold prices below $535 per ounce on the volume of sales
consistent with the notional size of these contracts.  These contracts
covered approximately 74% of production during the three months ended October
31, 2008.





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.




- 41
-




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.





Risks related to our
business and operations








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





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





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





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least U.S.$15,000, and (iii) a
quarterly average minimum liquidity of U.S.$500. In addition, the Credit
Facility restricts, among other things, our ability to incur additional debt,
create liens on our property, dispose of any assets, merge with other companies,
enter into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with
the restrictions contained in the Credit Facility could lead to an event of
default thereunder which could result in an acceleration of such indebtedness.
In this regard, in connection with the recent refinance of the Credit Facility,
it was discovered that we were not in compliance with certain regulations of
Mexican federal law with regard to certain filing and environmental bonding
issues in connection with the operation of mining the El Chanate concessions as
well as certain insurance requirements.  We obtained a waiver from
Standard Bank with regard to these matters (Please see “Management's Discussion and Analysis
of Financial Condition and Results of Operations; Liquidity and Capital
Resources; Debt Covenants” in Part I, Item 2 above).




- 42
-




Our
mining contractor is using reconditioned equipment which could adversely affect
our cost assumptions and our ability to economically and successfully mine the
project.





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





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





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





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





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





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





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the twelve months ended
October 31, 2008, the spot price for gold on the London Exchange has fluctuated
between $712.50 and $1,011.30 per ounce.  Gold prices are affected by
numerous factors beyond our control, including:





·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





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




- 43
-




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





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




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





To date,
rather than modifying the original Gold Price Protection agreement with Standard
Bank to satisfy these forward sale obligations, we have opted for a net cash
settlement between the call option purchase price of $535 and the forward
sale price of $500, or $35.00 per ounce.  As of November 30, 2008, we
have paid Standard Bank an aggregate of approximately $1,936 on the settlement
of 55,325 ounces.  The remaining ounces to settle with regard to this
agreement amounted to 66,602 as of November 30, 2008.  We believe we
will be able to deliver the quantity of gold required by our forward sales on a
going forward basis; however, we may continue to opt to net cash settle these
forward sale obligations if it remains the most cost effective option for
us.  If we are unable for any reason to produce the quantity of gold
required by our forward sales and generate sufficient cash flow to settle these
forward sales in gold or cash, it could have a material adverse effect on our
financial condition and cash flows.





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





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





·
            labor
      disputes,


·
            invalidity
      of governmental orders,


·
            uncertain
      or unpredictable political, legal and economic
    environments,


·
            war
      and civil disturbances,


·
            changes
      in laws or policies,


·
            taxation,


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


·
            governmental
      seizure of land or mining claims,


·
            limitations
      on ownership,


·
            limitations
      on the repatriation of earnings,


·
            increased
      financial costs,


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


·
            foreign
      exchange controls.




- 44
-




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





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





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





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





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





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


·
            repatriation
      of income and/or


·
            return
      of capital.





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





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





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





·
            stricter
      standards and enforcement,


·
            increased
      fines and penalties for
non-compliance,


·
            more
      stringent environmental assessments of proposed projects
    and


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




- 45
-




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





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





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





·
            environmental
      hazards,


·
            industrial
      accidents,


·
            metallurgical
      and other processing,


·
            acts
      of God, and/or


·
            mechanical
      equipment and facility performance
problems.





Such
risks could result in:





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


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses and /or


·
            possible
      legal liability.





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





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





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




- 46
-




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





We are
dependent on a relatively small number of key personnel, including but not
limited to John Brownlie, Chief Operating Officer who, among other duties,
oversees the El Chanate Project, the loss of any one of whom could have an
adverse effect on us.  We are also dependent upon Sinergia to provide
mining services.  Sinergia’s mining fleet is not new.  If we
lose the services of our key personnel, or if Sinergia is unable to effectively
maintain its fleet, our planned operations at our El Chanate Project may be
disrupted and/or materially adversely affected.





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





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





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





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





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





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





·
            the
      location of economic ore bodies,


·
            development
      of appropriate metallurgical
processes,


·
            receipt
      of necessary governmental approvals
and


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




- 47
-




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





·
            the
      price of gold,


·
            the
      particular attributes of the deposit, such as
  its


o
            size,


o
            grade
      and


o
            proximity
      to infrastructure,


·
            financing
      costs,


·
            taxation,


·
            royalties,


·
            land
      tenure,


·
            land
      use,


·
            water
      use,


·
            power
      use,


·
            importing
      and exporting gold and


·
            environmental
      protection.





The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





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





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





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





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





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





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




- 48
-





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





We issued
197,500 shares of restricted common stock to our employees during the current
quarter.





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





Item
3. Defaults Upon
Senior Securities.





None.





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





At a Special Meeting of Stockholders
held on October 31, 2008, our stockholders approved: (a) a possible reverse
stock split of our outstanding shares of Common Stock, $.0001 par value in an
amount which our Board of Directors deems appropriate to result in a sustained
per share market price above $2.00 per share (a requirement for listing on the
American Stock Exchange, now known as the NYSE Alternext US), to be at a ratio
of not less than one-for-four and not more than one-for-six; (b) a possible
reduction in the number of shares of our Common Stock authorized for issuance
and an increase in the par value thereof in proportion to the reverse stock
split; and (c) the filing of an Amendment to our Certificate of Incorporation
effectuating the foregoing at such time as Board of Directors
determines.




For:  129,980,425
              Against:  6,063,222
              Abstain:  129,607





The total
shares voted at the meeting was 136,173,254 out of 192,777,324 eligible to
vote.





Item
5. Other
Information.





None.





Item
6. Exhibits.





10.1
            Engagement
      Agreement with J. Scott Hazlitt.





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


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


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


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


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SIGNATURES








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





CAPITAL GOLD
      CORPORATIONRegistrantBy:
                /s/ Gifford
      A. DieterleGifford
      A.  Dieterle
                  President/Treasurer







Date:  December
10, 2008




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