UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





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


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended October 31, 2010





OR





 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period
from               to





Commission
File Number:  0-13078





CAPITAL GOLD CORPORATION


(Exact
name of registrant as specified in its charter)




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





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


(Address
of principal executive offices)





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








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





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


Yes           x                      No   ̈





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





Yes  ̈                      No
 ̈




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





Large
accelerated filer         ̈                                     
Accelerated filer  x





Non-accelerated
filer           ̈                                      Smaller
reporting company   ̈


(do not
check if smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes 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 2,
    2010Common
      Stock, par value $.0001 per share
                
                61,324,632





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, 2010.





Moreover,
these financial statements do not purport to contain complete disclosure in
conformity with U.S. generally accepted accounting principles and should be read
in conjunction with our audited financial statements as of, and for the fiscal
year ended July 31, 2010.





The
results reflected for the three months ended October 31, 2010 are not
necessarily indicative of the results for the entire fiscal year ending July 31,
2011.





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


-2-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEET


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





October 31,
                    2010
                    (unaudited)
                  
                  
                  July 31,
                    2010ASSETSCurrent
      Assets:Cash
      and Cash Equivalents
                  
                  $
                  9,254
                  
                  
                  $
                  12,125Accounts
      Receivable
                  
                  
                  187
                  
                  
                  
                  -Stockpiles
      and Ore on Leach Pads (Note 6)
                  
                  
                  36,933
                  
                  
                  
                  32,896Material
      and Supply Inventories (Note 5)
                  
                  
                  2,306
                  
                  
                  
                  1,953Marketable
      Securities  (Note 4)
                  
                  
                  103
                  
                  
                  
                  30Prepaid
      Expenses
                  
                  
                  330
                  
                  
                  
                  431Other
      Current Assets (Note 7)
                  
                  
                  2,943
                  
                  
                  
                  1,471Total
      Current Assets
                  
                  
                  52,056
                  
                  
                  
                  48,906Mining
      Concessions (Note 11)
                  
                  
                  17,701
                  
                  
                  
                  52Property
      & Equipment – net (Note 8)
                  
                  
                  68,913
                  
                  
                  
                  21,390Goodwill
      (Note 9)
                  
                  
                  3,480
                  
                  
                  
                  -Intangible
      Assets – net (Note 10)
                  
                  
                  734
                  
                  
                  
                  730Other
      Assets:Deferred
      Financing Costs
                  
                  
                  1,065
                  
                  
                  
                  1,351Security
      Deposits
                  
                  
                  77
                  
                  
                  
                  66Total
      Other Assets
                  
                  
                  1,142
                  
                  
                  
                  1,417Total
      Assets
                  
                  $
                  144,026
                  
                  
                  $
                  72,495LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                  
                  $
                  1,607
                  
                  
                  $
                  907Accrued
      Expenses (Note 18)
                  
                  
                  5,960
                  
                  
                  
                  5,040Derivative
      Contracts (Note 17)
                  
                  
                  17
                  
                  
                  
                  40Deferred
      Tax Liability (Note 19)
                  
                  
                  7,666
                  
                  
                  
                  7,462Current
      Portion of Long-term Debt (Note 16)
                  
                  
                  3,100
                  
                  
                  
                  3,600Total
      Current Liabilities
                  
                  
                  18,350
                  
                  
                  
                  17,049Reclamation
      and Remediation Liabilities (Note 12)
                  
                  
                  2,665
                  
                  
                  
                  2,373Other
      Liabilities
                  
                  
                  308
                  
                  
                  
                  373Non-Current
      Deferred Tax Liability (Note 19)
                  
                  
                  17,869
                  
                  
                  
                  971Long-Term
      Debt (Note 16)
                  
                  
                  400
                  
                  
                  
                  800Total
      Long-term Liabilities
                  
                  
                  21,242
                  
                  
                  
                  4,517Commitments
      and Contingencies
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share; Authorized 75,000,000 shares; Issued
      and Outstanding 61,290,287 and 48,768,665 shares,
    respectively
                  
                  
                  6
                  
                  
                  
                  5Additional
      Paid-In Capital
                  
                  
                  113,354
                  
                  
                  
                  65,391Accumulated
      Deficit
                  
                  
                  (7,141
                  )
                  
                  
                  (10,095
                  )Deferred
      Compensation
                  
                  
                  (9
                  )
                  
                  
                  (80
                  )Accumulated
      Other Comprehensive Income (Note 14)
                  
                  
                  (1,776
                  )
                  
                  
                  (4,292
                  )Total
      Stockholders’ Equity
                  
                  
                  104,434
                  
                  
                  
                  50,929Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  144,026
                  
                  
                  $
                  72,495The
      accompanying notes are an integral part of the financial
      statements.


-3-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS


(UNAUDITED)


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





For
      The Three Months EndedOctober 31,2010
                
                
                2009RevenuesSales
      – Gold, net
                
                $
                18,952
                
                
                $
                11,727Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                7,210
                
                
                
                4,110Depreciation
      and Amortization
                
                
                960
                
                
                
                601General
      and Administrative
                
                
                3,534
                
                
                
                1,630Exploration
                
                
                623
                
                
                
                331Total
      Costs and Expenses
                
                
                12,327
                
                
                
                6,672Income
      from Operations
                
                
                6,625
                
                
                
                5,055Other
      Income (Expense):Interest
      Income
                
                
                3
                
                
                
                3Interest
      Expense
                
                
                (302
                )
                
                
                (376
                )Other
      Income (Expense)
                
                
                1
                
                
                
                (24
                )Total
      Other Expense
                
                
                (298
                )
                
                
                (397
                )Income
      before Income Taxes
                
                
                6,327
                
                
                
                4,658Income
      Tax Expense
                
                
                (3,373
                )
                
                
                (1,719
                )Net
      Income
                
                $
                2,954
                
                
                $
                2,939Income
      Per Common ShareBasic
                
                $
                0.05
                
                
                $
                0.06Diluted
                
                $
                0.05
                
                
                $
                0.06Basic
      Weighted Average Common Shares Outstanding
                
                
                60,970,736
                
                
                
                48,482,400Diluted
      Weighted Average Common Shares Outstanding
                
                
                61,158,138
                
                
                
                48,669,802





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


-4-


CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


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





AccumulatedAdditional
                    
                    
                    
                    
                    
                    Other
                    
                    
                    
                    
                    
                    TotalCommon
      Stock
                    
                    
                    paid-in-
                    
                    
                    Accumulated
                    
                    
                    Comprehensive
                    
                    
                    Deferred
                    
                    
                    Stockholders’Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Deficit
                    
                    
                    Income/(Loss)
                    
                    
                    Compensation
                    
                    
                    EquityBalance
      at July 31, 2010
                    
                    
                    48,768,665
                    
                    
                    $
                    5
                    
                    
                    $
                    65,391
                    
                    
                    $
                    (10,095
                    )
                    
                    $
                    (4,292
                    )
                    
                    $
                    (80
                    )
                    
                    $
                    50,929Nayarit
      Acquisition
                    
                    
                    12,453,363
                    
                    
                    
                    1
                    
                    
                    
                    47,598
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,599Equity
      based compensation, net of forfeitures
                    
                    
                    (20,833
                    )
                    
                    
                    -
                    
                    
                    
                    69
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    71
                    
                    
                    
                    140Common
      stock issued upon the exercising of options and warrants
                    
                    
                    89,092
                    
                    
                    
                    -
                    
                    
                    
                    296
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    296Net
      income for the three months ended October 31, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,954
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,954Change
      in fair value on interest rate swaps
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (23
                    )
                    
                    
                    -
                    
                    
                    
                    (23
                    )Unrealized
      gain on marketable securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    71
                    
                    
                    
                    -
                    
                    
                    
                    71Equity
      adjustment from foreign currency translation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,468
                    
                    
                    
                    -
                    
                    
                    
                    2,468Total
      comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,470Balance
      at October 31, 2010
                    
                    
                    61,290,287
                    
                    
                    $
                    6
                    
                    
                    $
                    113,354
                    
                    
                    $
                    (7,141
                    )
                    
                    $
                    (1,776
                    )
                    
                    $
                    (9
                    )
                    
                    $
                    104,434





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


-5-


CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


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





For
      TheThree
      Months EndedOctober
      31,2010
                  
                  
                  2009Cash
      Flow From Operating Activities:Net
      Income
                  
                  $
                  2,954
                  
                  
                  $
                  2,939Adjustments
      to Reconcile Net Income to Net Cash Provided by Operating
      Activities:Depreciation
      and Amortization
                  
                  
                  960
                  
                  
                  
                  601Amortization
      of Deferred Financing Costs
                  
                  
                  249
                  
                  
                  
                  242Accretion
      of Reclamation and Remediation
                  
                  
                  42
                  
                  
                  
                  38Gain
      on sale of property and equipment
                  
                  
                  (2
                  )
                  
                  
                  -Equity
      Based Compensation
                  
                  
                  140
                  
                  
                  
                  141Changes
      in Operating Assets and Liabilities, excluding business
      combinationIncrease
      in Accounts Receivable
                  
                  
                  (183
                  )
                  
                  
                  (16
                  )Decrease
      in Prepaid Expenses
                  
                  
                  115
                  
                  
                  
                  20Increase
      in Inventory
                  
                  
                  (3,048
                  )
                  
                  
                  (3,239
                  )Decrease
      (increase) in Other Current Assets
                  
                  
                  (522
                  )
                  
                  
                  53(Increase)
      in Other Deposits
                  
                  
                  -
                  
                  
                  
                  (6
                  )Increase
      (decrease) in Accounts Payable
                  
                  
                  (318
                  )
                  
                  
                  958Increase
      (decrease) in Other Liability
                  
                  
                  (72
                  )
                  
                  
                  1Increase
      in Reclamation and Remediation
                  
                  
                  181
                  
                  
                  
                  20Increase
      in Deferred Tax Liability
                  
                  
                  -
                  
                  
                  
                  53Increase
      in Accrued Expenses
                  
                  
                  879
                  
                  
                  
                  1,126Net
      Cash Provided By Operating Activities
                  
                  
                  1,375
                  
                  
                  
                  2,931Cash
      Flow From Investing Activities:Purchase
      of Mining, Milling and Other Property and Equipment
                  
                  
                  (3,602
                  )
                  
                  
                  (1,679
                  )Purchase
      of Intangibles
                  
                  
                  -
                  
                  
                  
                  (269
                  )Cash
      Acquired in Nayarit Business Combination
                  
                  
                  50
                  
                  
                  
                  -Net
      Cash Used in Investing Activities
                  
                  
                  (3,552
                  )
                  
                  
                  (1,948
                  )





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


-6-




CAPITAL
GOLD CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED


(UNAUDITED)


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





For
      TheThree
      Months EndedOctober 31,2010
                
                
                2009Cash
      Flow From Financing Activities:Repayments
      from Affiliate, net
                
                
                2
                
                
                
                1Repayments
      on Notes Payable
                
                
                (900
                )
                
                
                (900
                )Proceeds
      From Issuance of Common Stock
                
                
                196
                
                
                
                53Net
      Cash Used in Financing Activities
                
                
                (702
                )
                
                
                (846
                )Effect
      of Exchange Rate Changes on Cash and Cash Equivalents
                
                
                8
                
                
                
                188(Decrease)
      Increase In Cash and Cash Equivalents
                
                
                (2,871
                )
                
                
                325Cash
      and Cash Equivalents - Beginning
                
                
                12,125
                
                
                
                6,448Cash
      and Cash Equivalents – Ending
                
                $
                9,254
                
                
                $
                6,773Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                
                $
                55
                
                
                $
                138Cash
      Paid For Income Taxes
                
                $
                2,008
                
                
                $
                1,094Non-Cash
      Financing Activities:Change
      in Fair Value of Interest Rate Swaps
                
                $
                (23
                )
                
                $
                39Non-Cash
      Investing Activities:Fair
      Value of Common Stock Issued Upon Acquisition of Nayarit Gold,
      Inc.
                
                $
                47,599
                
                
                
                -





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") was incorporated
in February 1982 in the State of Nevada. During March 2003, the Company's
stockholders approved an amendment to the Articles of Incorporation to change
its name from Leadville Mining and Milling Corp. to Capital Gold Corporation. In
November 2005, the Company reincorporated in Delaware.  Capital Gold
Corporation is engaged in the mining, exploration and development of gold
properties in Mexico.  Our primary focus is on the operation and
development of the El Chanate project, as well as the development of our Orion
Project in the State of Nayarit Mexico.  All of the Company's mining
activities are being performed in Mexico.





On
February 10, 2010, Capital Gold Corporation entered into a
business combination agreement (the “Nayarit Business Combination
Agreement”), as amended and extended, with Nayarit, a corporation organized
under the Ontario Business Corporation Act (“OBCA”) pursuant to which, on
August 2, 2010, Nayarit became a wholly-owned subsidiary of Capital Gold
(the “Nayarit Business Combination”). The Company effected the amalgamation (the
“Amalgamation”) of Nayarit and a corporation, organized under the OBCA as a
wholly-owned subsidiary of the Company (“Merger Sub”), to form a combined entity
(“AmalgSub” or “Surviving Company”), with AmalgSub continuing as the surviving
entity following the Amalgamation.  By virtue of the Amalgamation, the
separate existence of each of Nayarit and Merger Sub cease, and AmalgSub, as the
surviving company in the Amalgamation, continue its corporate existence under
the OBCA as a wholly-owned subsidiary of the Company. Pursuant to the terms of
the Nayarit Business Combination Agreement, all of the Nayarit shares of common
stock (the “Nayarit Common Shares”) issued and outstanding immediately prior to
the consummation of the Nayarit Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) were exchanged
into the Company’s common stock on the basis of 0.134048 shares of
Company common stock for each one (1) Nayarit Common Share.





The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) for
interim financial information and with article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of the Company’s management, the accompanying
condensed consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
condensed consolidated financial position and results of operations and cash
flows for the periods presented. They include the accounts of Capital Gold
Corporation and its wholly owned and majority owned subsidiaries, Leadville
Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de
C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”), Nayarit Gold, Inc.
(“NYG”) and Nayarit Gold de Mexico (“NYM”), as well as the accounts within
Caborca Industrial S.A. de C.V. (“Caborca Industrial”), a Mexican corporation
that is 100% owned by two of the Company’s former officers and directors for
mining support services.  Ownership was relinquished upon their recent
resignations, and as of October 31, 2010, the Company was in the process of
transitioning ownership. 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 ASC
guidance for consolidation accounting.





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





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


-8-


The notes to the consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended July
31, 2010 should be read in conjunction with these condensed consolidated
financial statements.  Results of operations for interim periods are
not necessarily indicative of the results of operations for a full
year.





NOTE 2 –
Summary of Significant Accounting Policies





Recently
Issued Accounting Pronouncements





Fair
Value Measurements





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





NOTE 3 -
Equity Based Compensation





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





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $1.96 to $9.64 per
share of common stock. Certain of these grants are exercisable immediately upon
grant while others vest. Certain grants have vested or are vesting over a period
of between three to five years. Also, certain grants contain a provision whereby
they become immediately exercisable upon a change of control.





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





The cumulative effect of applying
the forfeiture rates is not material. ASC guidance 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, 2010, and 2009
were $1.93 and $0. The fair values of the options and warrants granted were
estimated based on the following weighted average assumptions:




-9-




Three
      months ended October 31,2010
                    
                    
                    2009Expected
      volatility
                    
                    58.66%
      - 66.28%
                    
                    
                    
                    -Risk-free
      interest rate
                    
                    1.46%
      - 1.76%
                    
                    
                    
                    -Expected
      dividend yield
                    
                    
                    -
                    
                    
                    
                    -Expected
      life
                    
                    5
      years
                    
                    
                    
                    -Forfeiture
      rate
                    
                    
                    -
                    
                    
                    
                    -





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




Number of
                    Options
                  
                  
                  Weighted
                    average
                    exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                    term (years)
                  
                  
                  Aggregate
                      intrinsic
      valueOutstanding
      at July 31, 2008
                  
                  
                  887,500
                  
                  
                  $
                  2.20
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted1
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (176,432
                  )
                  
                  
                  1.48
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (86,068
                  )
                  
                  
                  1.40
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2009
                  
                  
                  875,000
                  
                  
                  
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  
                  70Options
      granted1
                  
                  
                  500,000
                  
                  
                  
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (128,638
                  )
                  
                  
                  2.39
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (1,015,112
                  )
                  
                  
                  2.93
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2010
                  
                  
                  231,250
                  
                  
                  
                  2.52
                  
                  
                  
                  4.37
                  
                  
                  
                  280Options
      granted2
                  
                  
                  237,466
                  
                  
                  
                  4.61
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at October 31, 2010
                  
                  
                  468,716
                  
                  
                  $
                  3.58
                  
                  
                  
                  3.28
                  
                  
                  $
                  380Options
      exercisable at October 31, 2010
                  
                  
                  363,716
                  
                  
                  $
                  3.84
                  
                  
                  
                  3.02
                  
                  
                  $
                  198




1Issuances under 2006 Equity Incentive Plan.


2212,466
options added pursuant to the business combination with Nayarit that closed on
August 2, 2010; 25,000 options were issued under 2006 Equity Incentive
Plan.


-10-




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





Number
      of Options
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                      term
      (years)
                  
                  
                  Aggregate
                    Intrinsic
      valueUnvested
      Options Outstanding at July 31, 2008
                  
                  
                  437,500
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.49
                  
                  
                  $
                  8Options
      granted
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (250,000
                  )
                  
                  
                  2.24
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options outstanding at July 31, 2009
                  
                  
                  437,500
                  
                  
                  $
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  $
                  35Options
      granted
                  
                  
                  500,000
                  
                  
                  
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (237,500
                  )
                  
                  
                  3.23
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (607,500
                  )
                  
                  
                  3.02
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options outstanding at July 31, 2010
                  
                  
                  92,500
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.37
                  
                  
                  $
                  112Options
      granted
                  
                  
                  25,000
                  
                  
                  
                  3.73
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (12,500
                  )
                  
                  
                  3.73
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options outstanding at October 31, 2010
                  
                  
                  105,000
                  
                  
                  $
                  2.66
                  
                  
                  
                  4.20
                  
                  
                  $
                  181




-11-






Number
      of options
                
                
                Weighted
                  average
                  exercise
                    price
                
                
                Weighted
                  average
                  remaining
                  contracted
                  term
      (years)
                
                
                Aggregate
                  Intrinsic
      valueWarrants
      and options outstanding at July 31, 2008
                
                
                503,750
                
                
                $
                2.48
                
                
                
                3.54
                
                
                $
                54Options
      granted1
                
                
                350,000
                
                
                
                2.00
                
                
                
                -
                
                
                
                -Options
      exercised
                
                
                (37,500
                )
                
                
                1.56
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (37,500
                )
                
                
                1.56
                
                
                
                -
                
                
                
                -Warrants
      and options outstanding at July 31, 2009
                
                
                778,750
                
                
                $
                2.36
                
                
                
                3.36
                
                
                $
                73Options
      granted1
                
                
                237,500
                
                
                
                3.63
                
                
                
                -
                
                
                
                -Warrants
      and options exercised
                
                
                (239,954
                )
                
                
                2.83
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (388,796
                )
                
                
                2.16
                
                
                
                -
                
                
                
                -Warrants
      and options outstanding at July 31, 2010
                
                
                387,500
                
                
                $
                3.02
                
                
                
                3.97
                
                
                $
                250Options
      granted2
                
                
                2,644,162
                
                
                
                4.64
                
                
                
                -
                
                
                
                -Options
      exercised
                
                
                (60,518
                )
                
                
                3.49
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (45,782
                )
                
                
                3.60
                
                
                
                -
                
                
                
                -Warrants
      and options outstanding at October 31, 2010
                
                
                2,925,362
                
                
                $
                4.47
                
                
                
                1.42
                
                
                $
                -Warrants
      and options exercisable at October 31, 2010
                
                
                2,358,715
                
                
                $
                4.73
                
                
                
                .44
                
                
                $
                -




1Issuances under 2006 Equity Incentive Plan.


22,219,162 options added pursuant to the business combination with Nayarit
that closed on August 2, 2010; 425,000 options were issued under 2006 Equity
Incentive Plan.


Unvested
stock option balances for non-employees at October 31, 2010 are as
follows:




Number
      of
                      Options
                  
                  
                  Weighted
                    Average
                    Exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                      term
      (years)
                  
                  
                  Aggregate
                    Intrinsic
                      valueOutstanding
      at July 31, 2008
                  
                  
                  113,750
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.49
                  
                  
                  $
                  3Options
      granted
                  
                  
                  318,750
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (191,875
                  )
                  
                  
                  2.04
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2009
                  
                  
                  240,625
                  
                  
                  $
                  2.16
                  
                  
                  
                  4.88
                  
                  
                  $
                  70Options
      granted
                  
                  
                  237,500
                  
                  
                  
                  3.63
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (154,166
                  )
                  
                  
                  3.18
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (157,292
                  )
                  
                  
                  2.25
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2010
                  
                  
                  166,667
                  
                  
                  $
                  3.21
                  
                  
                  
                  4.32
                  
                  
                  $
                  77Options
      granted
                  
                  
                  425,000
                  
                  
                  
                  3.47
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (25,000
                  )
                  
                  
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      options outstanding at October 31, 2010
                  
                  
                  566,667
                  
                  
                  $
                  3.39
                  
                  
                  
                  4.60
                  
                  
                  $
                  568


-12-




The impact on the Company’s results of
operations of recording equity based compensation for the three months ended
October 31, 2010 and 2009, for employees and non-employees was approximately
$139 and $141.  The Company has not recognized any tax benefit or
expense for the three months ended October 31, 2010 and 2009, related to these
items due to the Company’s net operating losses and corresponding valuation
allowance within the U.S. (See Note 19).




As of October 31, 2010, there was
approximately $966 of unrecognized equity based compensation cost related to
options granted which have not yet vested.





NOTE 4 -
Marketable Securities





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





(in
      thousands)October 31,
                        2010
                      
                      
                      July
      31,
                        2010Marketable
      equity securities, at cost
                      
                      $
                      52
                      
                      
                      $
                      50Marketable
      equity securities, at fair value
                      
                      $
                      103
                      
                      
                      $
                      30





NOTE 5 –
Material and Supplies Inventories





(in
      thousands)October
      31,
                        2010
                      
                      
                      July
      31,
                        2010Materials,
      supplies and other
                      
                      $
                      2,306
                      
                      
                      $
                      1,953Total
                      
                      $
                      2,306
                      
                      
                      $
                      1,953




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




(in
      thousands)October
      31,
                          2010
                        
                        
                        July
      31,
                          2010Ore
      on leach pads
                        
                        $
                        36,933
                        
                        
                        $
                        32,896Total
                        
                        $
                        36,933
                        
                        
                        $
                        32,896




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




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




-13-


NOTE 7 –
Other Current Assets





Other
current assets consist of the following:





(in
      thousands)October
      31,
                        2010
                      
                      
                      July
      31,
                        2010Value
      added tax to be refunded
                      
                      $
                      2,385
                      
                      
                      $
                      891Note
      receivable – Nayarit
                      
                      
                      -
                      
                      
                      
                      350MRS
      receivable
                      
                      
                      80
                      
                      
                      
                      210Loans
      receivable – affiliate
                      
                      
                      13
                      
                      
                      
                      15Deposit
                      
                      
                      443
                      
                      
                      
                      5Other
                      
                      
                      22
                      
                      
                      
                      -Total
      Other Current Assets
                      
                      $
                      2,943
                      
                      
                      $
                      1,471





NOTE 8 –
Property and Equipment





Property
and Equipment consist of the following:





(in
      thousands)October
      31,
                        2010
                      
                      
                      July
      31,
                        2010Process
      equipment and facilities
                      
                      $
                      30,725
                      
                      
                      $
                      29,038Mining
      equipment
                      
                      
                      2,240
                      
                      
                      
                      2,180Mineral properties
                      
                      
                      45,010
                      
                      
                      
                      152Construction
      in progress
                      
                      
                      2,627
                      
                      
                      
                      165Computer
      and office equipment
                      
                      
                      546
                      
                      
                      
                      366Improvements
                      
                      
                      48
                      
                      
                      
                      13Furniture
                      
                      
                      67
                      
                      
                      
                      43Total
                      
                      
                      81,263
                      
                      
                      
                      31,957Less:
      accumulated depreciation
                      
                      
                      (12,350
                      )
                      
                      
                      (10,567
                      )Property
      and equipment, net
                      
                      $
                      68,913
                      
                      
                      $
                      21,390





Depreciation
expense for the three months ended October 31, 2010 and 2009 was approximately
$944 and $589, respectively.





NOTE 9 -
Goodwill





On August 2, 2010 the Company
acquired Nayarit Gold, Inc. (“Nayarit”) for approximately $47,599 in net
consideration paid. The allocation of the fair value of the acquisition resulted
in goodwill. None of the goodwill recognized is expected to be deductible
for income tax purposes. As of October 31, 2010, the balance of
goodwill was $3,480 (See Note 21).





No impairment charges were recorded
for the three months ended October 31, 2010.


-14-


NOTE 10 -
Intangible Assets





Intangible
assets consist of the following:





(in
      thousands)October
      31,
                      2010
                    
                    
                    July
      31,
                      2010Water
      Rights
                    
                    $
                    519
                    
                    
                    $
                    510Reforestation
      fee
                    
                    
                    290
                    
                    
                    
                    271Mobilization
      Payment to Mineral Contractor
                    
                    
                    62
                    
                    
                    
                    70Investment
      in Right of Way
                    
                    
                    9
                    
                    
                    
                    18Total
                    
                    
                    880
                    
                    
                    
                    869Accumulated
      Amortization
                    
                    
                    (146
                    )
                    
                    
                    (139
                    )Intangible
      assets, net
                    
                    $
                    734
                    
                    
                    $
                    730





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





Amortization expense for the three
months ended October 31, 2010 and 2009 was approximately $16 and $12,
respectively.





NOTE 11 -
Mining Concessions





Mining
concessions consists of the following:





(in
      thousands)October
      31,
                      2010
                    
                    
                    July
      31,
                      2010Sonora
      concessions
                    
                    $
                    35
                    
                    
                    $
                    52Nayarit
      concessions
                    
                    
                    17,666
                    
                    
                    
                    -Total
                    
                    $
                    17,701
                    
                    
                    $
                    52





The Sonora concessions are carried at
historical cost and are being amortized using the UOP method. Amortization
expense for the three months ended October 31, 2010 and 2009 was approximately
$1 and $3, respectively.





On August 2, 2010 the Company
acquired Nayarit Gold, Inc. (“Nayarit”) for approximately $47,599 in net
consideration paid. The allocation of the fair value of the acquisition included
exploration interests. As of October 31, 2010, the balance of these exploration
interests was $17,666 (See Note 21).




NOTE 12 -
Reclamations and Remediation Liabilities (“Asset Retirement
Obligations”)




The Company includes environmental and
reclamation costs on an ongoing basis, in our internal revenue and cost
projections.  No assurance can be given that environmental regulations
will not be changed in a manner that would adversely affect the Company’s
planned operations.  As of October 31, 2010, we estimated the
reclamation costs for the El Chanate site to be approximately
$4,606.  Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and abandonment
costs.  The Asset Retirement Obligation is based on when the spending
for an existing environmental disturbance and activity to date will occur. The
Company reviews, on an annual basis, unless otherwise deemed necessary, the
Asset Retirement Obligation at each mine site.  The Company reviewed
the estimated present value of the El Chanate mine reclamation and closure costs
as of October 31, 2010.  As of October 31, 2010, approximately $2,665
was accrued for reclamation obligations relating to mineral properties in
accordance with ASC guidance for asset retirement and environmental
obligations.




-15-




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




(in
      thousands)Balance
      as of July 31, 2010
                    
                    $
                    2,373Additions,
      changes in estimates and other
                    
                    
                    250Accretion
      expense
                    
                    
                    42Balance
      as of October 31, 2010
                    
                    $
                    2,665





NOTE 13 –
Accumulated Other Comprehensive Income





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





Foreign
                    currency items
                  
                  
                  Unrealized
      gain
                    (loss) on securities
                  
                  
                  Change
      in fair
                    value
      on interest
                    rate swaps
                  
                  
                  Accumulated
      other
                    comprehensive
                    incomeBalance
      as of July 31, 2010
                  
                  $
                  (4,512
                  )
                  
                  $
                  (20
                  )
                  
                  $
                  240
                  
                  
                  $
                  (4,292
                  )Income
      (loss)
                  
                  
                  2,468
                  
                  
                  
                  71
                  
                  
                  
                  (23
                  )
                  
                  
                  2,516Balance
      as of October 31, 2010
                  
                  $
                  (2,044
                  )
                  
                  $
                  51
                  
                  
                  $
                  217
                  
                  
                  $
                  (1,776
                  )





The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the year ended July 31, 2010 and the three months ended October 31,
2010.





NOTE 14 -
Related Party Transactions





The Company utilizes a Mexican
Corporation, Caborca Industrial, for mining services. Caborca Industrial was
100% owned by the Company’s former Chief Executive Officer and another former
officer of the Company. Ownership was relinquished upon their recent
resignations, and as of October 31, 2010, the Company was in the process of
transitioning ownership. These services include but are not limited to the
payment of mining salaries and related costs. Caborca Industrial bills the
Company for these services at slightly above cost. Mining expenses charged by
Caborca Industrial and eliminated upon consolidation amounted to approximately
$1,536, and $1,233 for the three months ended October 31, 2010, and 2009,
respectively.





On April
29, 2010, the Company entered into a severance agreement and general release
with Mr. Brownlie, pursuant to which Mr. Brownlie’s employment agreement
terminated and he resigned as President and COO effective upon the consummation
of the Business combination between the Company and Nayarit Gold on August 2,
2010.  Pursuant to the Severance Agreement, Mr. Brownlie will be
entitled to severance payments in the aggregate amount of approximately $1,388,
payable over a six month period beginning June 2010; along with an additional
$375 associated with the closing of the business combination agreement with
Nayarit.  As of October 31, 2010, we have paid approximately
$1,510.


-16-


NOTE 15 -
Stockholders' Equity





Common
Stock





The Company received proceeds of
approximately $196 during the three months ended October 31, 2010 from the
exercising of an aggregate of 56,303 options. The Company also issued 4,218
shares upon the cashless exercising of options during the three months ended
October 31, 2010.





During the three months ended October
31, 2010 and 2009, the Company recorded approximately $140 and $141 in equity
compensation expense, net of related forfeitures, related to the vesting of
restricted stock and stock option grants, respectively.  As of October
31, 2010, the total compensation cost related to unvested restricted stock
granted, but not yet recognized, was $9.





As part of the severance agreement with
the Company’s former President and Chief Operating Officer, the unvested portion
of a previous restricted share grant of 20,833 shares was forfeited. For the
quarter ended October 31, 2010, the Company recorded adjustments to additional
paid in capital and deferred compensation costs totaling approximately $53
related to this forfeiture.





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





Reverse Stock
Split





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





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





2006 Equity Incentive
Plan





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





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


-17-


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





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





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





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





On August
2, 2010, in connection with the consummation of the Business Combination, and at
the recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 25,000 options to Colin
Sutherland under our 2006 Equity Incentive Plan. The stock options have a term
of five years and vest as follows: 50% vested upon issuance and the balance
vests 25% annually thereafter. The exercise price of the stock options is $3.73
per share.  In the event of a termination of continuous service (other
than as a result of a change of control, as defined in the Plan), unvested stock
options shall terminate and, with regard to vested stock options, the exercise
period shall be the lesser of the original expiration date or one year from the
date continuous service terminates. Upon a change of control, all unvested stock
options and unvested restricted stock grants immediately vest.  The Company
utilized the Black-Scholes method to fair value the 25,000 options totaling
$48.  For the three months ended October 31, 2010 the Company recorded
approximately $27 in equity compensation expense on the vested portion of these
stock options, respectively. The grant date fair value of each stock option was
$1.90.


-18-


On August 18, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 175,000, 175,000 and
75,000 options to Stephen Cooper, John Cutler and Gary Huber, respectively,
aggregating 425,000 stock options under our 2006 Equity Incentive Plan. The
stock options have a term of five years and vest as follows: one-third vested
upon first anniversary of date of grant and the balance vests one-third annually
thereafter. The exercise price of the stock options is $3.47 per share (per the
Plan, the closing price on the NYSE Stock Exchange on the trading day
immediately prior to the day of determination converted to U.S. Dollars). In the
event of a termination of continuous service (other than as a result of a change
of control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall be the lesser of
the original expiration date or one year from the date continuous service
terminates. Upon a change of control, all unvested stock options and unvested
restricted stock grants immediately vest.  The Company utilized the
Black-Scholes method to fair value the 425,000 options received by these
individuals totaling $823.  For the three months ended October 31, 2010 the
Company recorded approximately $56 in equity compensation expense on the vested
portion of these stock options, respectively. The grant date fair value of each
stock option was $1.94.





On March
11, 2010, the Company entered into an agreement with Gifford A.
Dieterle, the former Chief Executive Officer (“CEO”) of the
Company and Chairman of the Board, pursuant to which Mr. Dieterle resigned
his position as CEO and Chairman of the Board, effective March 18, 2010.
Pursuant to the agreement, Mr. Dieterle received lump sum
payments totaling approximately $376 in September 2010, and additional
payments totaling approximately $288 will be due in 2011. In addition, Mr.
Dieterle was due an issuance of $100 in shares of the Company's common
stock, initially proposed to be received in September 2010.  The
number of common shares to be issued was determined by dividing $100 by the
volume weighted average closing sale price for the 10 trading days prior to
September 18, 2010 on NYSE EURONEXT.  The Toronto Stock Exchange
(“TSX”) provided conditional approval for this issuance provided no more than
27,000 common shares were to be issued without additional written consent of
TSX.  TSX provided this additional written consent on October 4, 2010
to allow the issuance of an additional 1,571 shares, for a total of 28,571
shares pursuant to the severance agreement.  The shares were issued,
accordingly, on October 4, 2010.





NOTE 16 -
Debt





Long
      term debt consists of the following:
                    
                    (in
      thousands)October
      31,
                      2010
                    
                    
                    July
      31,
                      2010Total
      long-term debt
                    
                    $
                    3,500
                    
                    
                    $
                    4,400Less
      current portion
                    
                    
                    (3,100
                    )
                    
                    
                    (3,600
                    )Long-term
      debt
                    
                    $
                    400
                    
                    
                    $
                    800





In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank, as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006.  Under the Credit Agreement, MSR and Oro
borrowed money in an aggregate principal amount of up to US$12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico.  The Company guaranteed
the repayment of the Term Loan and the performance of the obligations under the
Credit Agreement.  As of October 31, 2010 and 2009, the accrued
interest on the Term Loan was approximately $8 and $17,
respectively.


-19-


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





The Credit Agreement contains covenants
customary for a term note, including but not limited to restrictions (subject to
certain exceptions) on incurring additional debt, creating liens on its
property, declaring or paying dividends, disposing of any assets, merging with
other companies and making any investments.  The Company is required
to meet and maintain certain financial covenants, including (i) a ratio of
current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S. $30,000, (iii) maintain a ratio of debt to cash flow from operations of no
greater than 2.50:1.00, and (iv) a quarterly average minimum liquidity of U.S.
$500.  In addition, the Credit Agreement restricts, among other
things, the Company’s ability to incur additional debt, create liens on its
property, dispose of any assets, merge with other companies, enter into hedge
agreements, organize or invest in subsidiaries or make any investments above a
certain dollar limit.  A failure to comply with the restrictions
contained in the Credit Agreement could lead to an event of default thereunder
which could result in an acceleration of such indebtedness. As a condition to
closing the Nayarit Business Combination, the Company obtained the consent of
Standard Bank.





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





On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period and determined that during
that time it was not cost beneficial to maintain the revolving loan on a going
forward basis.





On June
30, 2010, Capital Gold Corporation entered into the First Amendment to the
Amended and Restated Credit Agreement (the “Amendment”) by and among our
wholly-owned Mexican subsidiaries Minera Santa Rita S. de R.L. de C.V. and Oro
de Altar S. de R.L. de C.V., as borrowers (“Borrowers”), the Company, as
guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender.  The Amendment amends the Credit Agreement, which amended and
restated the Credit Agreement between the parties dated August 15,
2006.  The Credit Agreement provided for a senior secured term credit
facility in the aggregate amount of $12,500 (the “Term Facility”) and provided
for a senior secured revolving credit facility in the aggregate principal amount
of $5,000 (the “Revolving Facility”).   Capital Gold guarantees
all obligations of the Borrowers under the Term Facility and the Revolving
Facility. The material amendments to the Credit Agreement contained in the
Amendment are as follows:





The
Amendment increases the Revolving Facility to $7,500.  The Revolving
Facility is available for a two-year period commencing June 30,
2010.  The Borrowers may request a borrowing of the Revolving Facility
from time to time, provided that each borrowing shall be in a minimum aggregate
amount of $500.  All amounts due under the Revolving Facility,
including all accrued interest and other amounts described in the Credit
Agreement, shall be due and payable on June 30, 3012.





Amounts
borrowed under the Term Facility and the Revolving Facility 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.  The
applicable margin for the Revolving Facility was increased in the Amendment to
3.0% per annum.





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


-20-


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





Fiscal
      Years Ending July 31,2011
                    
                    $
                    3,1002012
                    
                    
                    400$
                    3,500





NOTE 17 -
Sales Contracts, Commodity and Financial Instruments





Interest
Rate Swap Agreement





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




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




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




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




(in
      thousands)Liability
      balance as of July 31, 2010
                  
                  $
                  40Change
      in fair value of swap agreement
                  
                  
                  1Net
      cash settlements
                  
                  
                  (24
                  )Liability
      balance as of October 31, 2010
                  
                  $
                  17




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




-21-




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




Quarter
                        Ended
                      
                      Derivatives
      in  Cash
                        Flow
      Hedging
                        Relationships
                      
                      Effective
                        Results
                        Recognized
                        inOCI
                      
                      Location
      of Results
                        Reclassified  from
      AOCI
                        to
      Earnings
                      
                      Amount
                        Reclassified
                        from
      AOCI
                        to
      Income
                      
                      
                      Ineffective
                        Results
                        Recognized
                        in
      Earnings
                      
                      
                      Location
                        of
                        Ineffective
                        Results7/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (19
                      )
                      Interest
      Income (Expense)
                      
                      
                      (55
                      )
                      
                      
                      -
                      
                      
                      
                      N/A10/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (16
                      )
                      Interest
      Income (Expense)
                      
                      
                      (53
                      )
                      
                      
                      -
                      
                      
                      
                      N/A1/31/10
                      
                      Interest
      Rate contracts
                      
                      $
                      (8
                      )
                      Interest
      Income (Expense)
                      
                      
                      (48
                      )
                      
                      
                      -
                      
                      
                      
                      N/A4/30/10
                      
                      Interest
      Rate contracts
                      
                      $
                      (1
                      )
                      Interest
      Income (Expense)
                      
                      
                      (38
                      )
                      
                      
                      -
                      
                      
                      
                      N/A7/31/10
                      
                      Interest
      Rate contracts
                      
                      $
                      (2
                      )
                      Interest
      Income (Expense)
                      
                      
                      (30
                      )
                      
                      
                      -
                      
                      
                      
                      N/A10/31/10
                      
                      Interest
      Rate contracts
                      
                      $
                      (1
                      )
                      Interest
      Income (Expense)
                      
                      
                      (22
                      )
                      
                      
                      -
                      
                      
                      
                      N/A




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




Liability
      DerivativesJuly 31, 2009
                                                                                                          
                                                                                                          Balance Sheet Location
                                                                                                          
                                                                                                          Fair ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          193Liability
      DerivativesOctober
      31, 2009
                                                                                                          
                                                                                                          Balance
      Sheet Location
                                                                                                          
                                                                                                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          154Derivatives
      designated as hedging instrumentsLiability
      DerivativesJanuary
      31, 2010
                                                                                                          
                                                                                                          Balance
      Sheet Location
                                                                                                          
                                                                                                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          112Derivatives
      designated as hedging instrumentsLiability
      DerivativesApril
      30, 2010
                                                                                                          
                                                                                                          Balance
      Sheet Location
                                                                                                          
                                                                                                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          72Liability
      DerivativesJuly
      31, 2010
                                                                                                          
                                                                                                          Balance
      Sheet Location
                                                                                                          
                                                                                                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          40Liability
      DerivativesOctober
      31, 2010
                                                                                                          
                                                                                                          Balance
      Sheet Location
                                                                                                          
                                                                                                          Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                                                                                          
                                                                                                          Current
      Liabilities
                                                                                                          
                                                                                                          $
                                                                                                          17




-22-





NOTE 18 –
Accrued Expenses





Accrued
expenses consist of the following:





October 31,
                    2010
                  
                  
                  July 31,
                    2010Net
      smelter return
                  
                  $
                  380
                  
                  
                  $
                  388Mining
      contract
                  
                  
                  546
                  
                  
                  
                  497Income
      tax payable
                  
                  
                  3,264
                  
                  
                  
                  1,900Utilities
                  
                  
                  136
                  
                  
                  
                  126Interest
                  
                  
                  8
                  
                  
                  
                  11Legal
      and professional
                  
                  
                  175
                  
                  
                  
                  70Salaries,
      wages and related benefits
                  
                  
                  792
                  
                  
                  
                  662Severance
                  
                  
                  492
                  
                  
                  
                  1,279Other
      liabilities
                  
                  
                  167
                  
                  
                  
                  107$
                  5,960
                  
                  
                  $
                  5,040





NOTE 19 -
Income Taxes




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





(in thousands)October 31,
                      2010
                    
                    
                    October 31,
                      2009United
      States
                    
                    $
                    (3,649
                    )
                    
                    $
                    (1,908
                    )Foreign
                    
                    
                    9,976
                    
                    
                    
                    6,566Total
                    
                    $
                    6,327
                    
                    
                    $
                    4,658





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


-23-




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.




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





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





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




NOTE 20 -
Fair Value Measurements





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





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





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





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





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


-24-





Fair Value at October 31, 2010
                              (in thousands)Total
                            
                            
                            Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3Assets:Cash
      equivalents
                            
                            $
                            2,801
                            
                            
                            $
                            2,801
                            
                            
                            $
                            -
                            
                            
                            $
                            -Marketable
      securities
                            
                            
                            103
                            
                            
                            
                            103
                            
                            
                            
                            -
                            
                            
                            
                            -$
                            2,904
                            
                            
                            $
                            2,904
                            
                            
                            $
                            -
                            
                            
                            $
                            -Liabilities:Interest
      rate swap
                            
                            
                            17
                            
                            
                            
                            -
                            
                            
                            
                            17
                            
                            
                            
                            -$
                            17
                            
                            
                            $
                            -
                            
                            
                            $
                            17
                            
                            
                            $
                            -




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




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





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





NOTE 21 -
Acquisition of Nayarit Gold, Inc.





Capital
Gold Corporation (“Capital Gold”) is a party to that certain Business
Combination Agreement (the “Agreement”), dated as of February 10, 2010, as
amended by Amendment No. 1 to the Agreement, dated as of April 29,
2010 and the Extension Agreement dated as of July 6, 2010, by and among Capital
Gold, Nayarit Gold Inc. (“Nayarit”), John Brownlie, Colin Sutherland and Brad
Langille.  The Business Combination was consummated on August 2, 2010. As a
result of the Business Combination, Nayarit became a wholly-owned subsidiary of
the Company.  In connection with the Business Combination, each outstanding
share of Nayarit common stock was converted into 0.134048 shares of Capital Gold
common stock, with cash paid in lieu of any fractional share.  Capital Gold
issued 12,454,354 shares of its common stock in the Business Combination to
Nayarit's current stockholders and has reserved for issuance an additional
1,621,981 and 903,483 shares of Capital Gold common stock upon the exercise of
former Nayarit warrants and options, respectively.  Based on the number of
outstanding shares of Nayarit common stock and Capital Gold common stock, after
the consummation of the Business Combination, the stockholders of Nayarit own
approximately 20.4% of Capital Gold on a non-diluted basis.





Based on
the closing price of the Company’s common stock on August 2, 2010, the
consideration received by Nayarit shareholders had a value of approximately
$47.6 million as detailed below.


-25-





Conversion
                            Calculation
                          
                          
                          Estimated
                            FairValue
                          
                          Formof
                            Consideration(In thousands, except per share amounts)Number
      of Nayarit shares outstanding as of the Amalgamation date
                          
                          
                          92,910Exchange
      ratio(1)
                          
                          
                          0.134048Number
      of shares issued to Nayarit shareholders
                          
                          
                          12,454Value
      of Capital Gold common shares issued(1)
                          
                          $
                          3.71
                          
                          
                          $
                          46,206
                          
                          Capital
      Gold
                            Common
      stockValue
      of Nayarit’s options and warrants to be exchanged for Capital Gold options
      and warrants (2)
                          
                          
                          
                          
                          
                          
                          1,393
                          
                          Capital
      Gold
                            Options
      and
                            WarrantsTotal
      consideration transferred
                          
                          
                          
                          
                          
                          $
                          47,599





(1) In
accordance with ASC 805, the fair value of equity securities issued as part of
the consideration transferred was the closing market price of Capital Gold’s
common stock on the effective date of the Amalgamation. The shares issued were
calculated by multiplying 0.134048 by 92,909,659, being the number of shares of
Nayarit common stock outstanding on August 2, 2010.  Nayarit shareholders
own approximately 20.4% of the issued and outstanding shares of Capital Gold
common stock.





(2)
Represents the fair value to acquire 1,621,981 and 903,483 shares of Capital
Gold common stock upon the exercise of former Nayarit warrants and options,
respectively. The fair value of the warrants and options were estimated using
the Black-Scholes valuation model utilizing the assumptions noted
below.




Stock
      price
                    
                    $3.71Post
      conversion strike price
                    
                    $3.28
      - $9.92Average
      expected volatility
                    
                    70%Dividend
      yield
                    
                    NoneAverage
      risk-free interest rate
                    
                    0.29%Average
      contractual term
                    
                    .79
      yearsBlack-Scholes
      average value per warrant and option
                    
                    $0.57





The
expected volatility of Capital Gold’s stock price is based on the average
historical volatility which is based on daily observations and duration
consistent with the expected life assumption and implied volatility.  The
average contractual term of the warrants and options is based on the remaining
contractual exercise term of each warrant and option.  The risk free
interest rate is based on U.S. treasury securities with maturities equal to the
expected life of the warrants and options.





The
transaction has been accounted for using the acquisition method of accounting
which requires, among other things, the assets acquired and liabilities assumed
to be recognized at their fair values as of the acquisition date. The following
table summarizes the estimated fair values of major assets acquired and
liabilities assumed on August 2, 2010:


-26-





FairValue(in
                    thousands)Cash
      and cash equivalents
                  
                  $
                  50Short-term
      investments
                  
                  
                  2Prepaid
      expenses and sundry receivables
                  
                  
                  1,238Property,
      plant and equipment
                  
                  
                  196Mineral
      interests – indicated and inferred
                  
                  
                  43,780Exploration
      interests
                  
                  
                  16,730Goodwill
                  
                  
                  3,394Accounts
      payable and liabilities assumed
                  
                  
                  (1,336
                  )Deferred
      tax liability
                  
                  
                  (16,455
                  )Net
      assets acquired
                  
                  $
                  47,599





A single
estimate of fair value results from a complex series of judgments about future
events and uncertainties and relies heavily on estimates and assumptions. The
Company’s judgments used to determine the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact the Company’s results from operations. The Company’s
management allocated the acquisition cost to the assets acquired and liabilities
assumed based on the estimated fair value of Nayarit’s tangible and identifiable
assets and liabilities.  The amount allocated to the mineral and
exploration interests was based on a valuation report prepared by a third party
appraisal firm.  The allocation is considered final as of the date of this
report as management reviewed certain of the underlying assumptions and
calculations used in the allocation to the assets and liabilities of Nayarit
that were acquired.





During
the three months ended October 31, 2010, the Company incurred transaction costs
consisting primarily of legal, professional, investment advisory and accounting
fees of $945.  These costs are included in general and administrative
expenses on the consolidated statement of operations.




Pro
forma Information




The
following unaudited pro forma results of operations of the Company for the three
months ended October 31, 2010 and 2009 assume that the acquisition of the
operating assets of the significant business acquired during 2010 and 2009 had
occurred on August 1 of the respective year in which the business was acquired
and for the comparable period only (i.e., 2010 acquisitions are reflected in
2009). These unaudited pro forma results are not necessarily indicative of
either the actual results of operations that would have been achieved had the
companies been combined during these periods, nor are they necessarily
indicative of future results of operations.




(in thousands)Three Months
                              Ended
                              October 31,
                              2010
                            
                            
                            Three Months
                              Ended October
                              31,
                              2009Revenues
                            
                            $
                            18,952
                            
                            
                            $
                            11,727Net
      income
                            
                            $
                            2,954
                            
                            
                            $
                            2,037Income
      per common share:Basic – net
      income
                            
                            $
                            0.05
                            
                            
                            $
                            0.03Diluted – net
      income
                            
                            $
                            0.05
                            
                            
                            $
                            0.03


-27-




NOTE 22 –
Definitive Agreement – Gammon Gold, Inc.





On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) entered into a
definitive merger agreement pursuant to which, if consummated, Gammon Gold will
acquire all of the issued and outstanding common shares of Capital Gold in a
cash and share transaction (the “Gammon Transaction”). The total consideration
for the purchase of 100% of the fully diluted shares of Capital Gold is
approximately US$288 million or US$4.57 per Capital Gold share based on Gammon
Gold’s closing price on September 24, 2010 on the NYSE. The Gammon Transaction
has the unanimous support of both companies’ Boards of Directors and
Officers.  Under the terms of the Gammon Transaction, each common share of
Capital Gold will be exchanged for 0.5209 common shares of Gammon Gold and a
cash payment in the amount of US$0.79 per share. Based on the September 24, 2010
closing price of Capital Gold’s shares on the NYSE EURONEXT, the acquisition
price represents a 20% premium to the close on September 24th and a 30% premium
to the 20-day volume weighted average price on the NYSE EURONEXT ending on that
date.  The consummation of the Gammon Transaction is subject to numerous
contingencies as described in the related merger agreement including, but not
limited to, Capital Gold stockholder approval.





NOTE 23 –
Subsequent Events





Legal
Proceedings





Subsequent
to the announcement of the merger, eleven putative shareholder class action
complaints were filed challenging the transaction. Five complaints were filed in
the Supreme Court of the State of New York, New York County, the New York
Actions, and six were filed in the Delaware Court of Chancery, the Delaware
Actions. The New York complaints captioned Jenkins v. Capital Gold Corp., et
al., Index No. 651651/2010; Schroeder v. Capital Gold Corp., et
al., Index No. 651652/2010; and Leone v. Capital Gold Corp., et
al., Index No. 651690/2010, name as defendants the directors of CGC, as
well as CGC and Gammon Gold. The New York complaint captioned Kramer v. Capital Gold Corp., et
al., Index No. 651678/2010, names as defendants the directors of CGC,
CGC’s Chief Financial Officer and Secretary as well as CGC and Gammon Gold. The
New York complaint captioned Stanford v. Cooper, et al.,
Index No. 651827/2010, names as defendants the directors of CGC, as well as CGC,
Gammon Gold and Capital Gold AcquireCo, Inc., Gammon Gold’s wholly-owned
subsidiary. The New York plaintiffs allege generally that the CGC officers and
directors breached their fiduciary duties to CGC stockholders by agreeing to an
unfair price and an inappropriate sale process, and that the individual
defendants agreed to the merger to benefit themselves personally at the expense
of stockholder interests. The Kramer and Stanford complaints allege in
addition that the proposed transaction involves unreasonable deal protection
devices, including a nonsolicitation agreement, matching rights, and an
unreasonable termination fee. The New York Actions further claim that CGC and
Gammon Gold aided and abetted the purported breaches of fiduciary duties. The
New York Actions seek injunctive relief, including enjoining the transaction and
rescinding all agreements made in anticipation of the transaction or awarding
the plaintiffs and the purported class rescissory damages. The New York Actions
additionally seek attorneys’ and other fees and costs, in addition to seeking
other relief.





The
Delaware complaints captioned Boehm v. Capital GoldCorp.,
et al. Case No. 5887-VCL; and Wood v. Capital Gold Corp., et
al., Case No. 5920- , name as defendants the directors of CGC, as well as
CGC, Gammon Gold, and Capital Gold AcquireCo, Inc. The Delaware complaint
captioned Pait v. Sutherland,
et al., Case No. 5899-VCN, names as defendants the directors of CGC and
Gammon Gold. The Delaware complaints captioned Reggio v. Capital Gold Corp., et
al., Case No. 5939- , Blumenthal v. Capital Gold
Corp., Case No. 5940- , and McClure v. Capital Gold Corp., et
al., Case No. 5945- , name as defendants CGC and its directors, as well
as Gammon Gold. The Delaware Actions allege generally that the CGC directors
breached their fiduciary duties to CGC’s stockholders by agreeing to an unfair
price, an inappropriate sale process, and unreasonable deal protection devices,
including a non-solicitation agreement, matching rights, an unreasonable
termination fee, and an impermissible director voting agreement. The Boehm, Wood, Reggio, BlumenthalandMcClure
complaints further claim that CGC, Gammon Gold, and/or Capital Gold AcquireCo,
Inc. aided and abetted the purported breaches of fiduciary duties. The Delaware
Actions seek injunctive relief, including enjoining the transaction, rescinding
all agreements made in anticipation of the transaction or awarding the plaintiff
and the purported class rescissory damages, and directing the individual
defendants to account to the plaintiff and the purported class upon any damages
suffered as a result of individual defendant wrongdoing. The Delaware Actions
also seek attorneys’ and other fees and costs, in addition to seeking other
relief.


-28-





On
November 2, 2010, a putative shareholder class action was filed regarding the
Company’s merger with Gammon:  Bromberg v. Capital Gold
Corp., Case No. 651904/2010 (NY Sup.). The claims stated and relief
sought are substantially identical to the claims made and relief sought in the
Jenkins and Schroeder lawsuits referred above.




On Nov.
12, 2010, the Delaware Court of Chancery entered an Order of Consolidation and a
Stipulation and Scheduling Order, whereby the Court, inter alia, consolidated
the Delaware Actions except for Boehm, which had been
withdrawn, and set a schedule for expedited discovery.  On November 16,
2010, plaintiffs in the Delaware Actions filed an amended and consolidated class
action complaint in the Court of Chancery.





On
November 22, 2010, Helmut Boehm filed a suit in the United States District Court
for the Southern District of New York, captioned Boehm v. Capital Gold, et
al., 10-CIV-8818 (RMB), naming as defendants CGC and its directors, as
well as Gammon Gold and Capital Gold AcquireCo.  The complaint alleges that
CGC and its directors violated Section 14(a) and Section 20(a) of the Securities
Exchange Act by issuing or causing to be issued a registration statement
containing material misleading statements and omissions.  The complaint
also asks the District Court to exercise its jurisdiction over putative class
action claims under Delaware law against CGC and its directors for breach of
fiduciary duty and against CGC, Gammon and Capital Gold AcquireCo for aiding and
abetting breach of fiduciary duty.  The basis for all claims and request
for relief are substantially identical to those in the amended and consolidated
class action complaint filed in Delaware.





The
defendants believe the Delaware Actions and the New York Actions lack merit and
will contest them vigorously.


-29-


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


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





Cautionary Statement on
Forward-Looking Statements





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





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





General





Capital
Gold Corporation (the “Company”, “we” , “our”) is engaged in the mining,
exploration and development of gold properties in Mexico.  Our primary
focus is on the operation and development of the El Chanate mine in Sonora,
Mexico, as well as the development of our Orion Project in the State of Nayarit
Mexico.   Through our recent acquisition of Nayarit Gold, Inc.
(“Nayarit”) on August 2, 2010, we control approximately 257,000 acres (104,000
hectares) of mining concessions known as the Orion Project.  The Orion
Project lies in the Sierra Madre Occidental, a prolific mining district in
Western Mexico.  We also conduct gold exploration in other locations in
Sonora, Mexico. (The financial data in this discussion is in thousands, except
where otherwise specifically noted.)





On
February 10, 2010, Capital Gold Corporation entered into a
business combination agreement (the “Nayarit Business Combination
Agreement”), as amended and extended, with Nayarit, a corporation organized
under the Ontario Business Corporation Act (“OBCA”) pursuant to which, on
August 2, 2010, Nayarit became a wholly-owned subsidiary of Capital Gold
(the “Nayarit Business Combination”). We effected the amalgamation (the
“Amalgamation”) of Nayarit and a corporation, organized under the OBCA as a
wholly-owned subsidiary of the Company (“Merger Sub”), to form a combined entity
(“AmalgSub” or “Surviving Company”), with AmalgSub continuing as the surviving
entity following the Amalgamation.  By virtue of the Amalgamation, the
separate existence of each of Nayarit and Merger Sub cease, and AmalgSub, as the
surviving company in the Amalgamation, continue its corporate existence under
the OBCA as a wholly-owned subsidiary of the Company. Pursuant to the terms of
the Nayarit Business Combination Agreement, all of the Nayarit shares of common
stock (the “Nayarit Common Shares”) issued and outstanding immediately prior to
the consummation of the Nayarit Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) were exchanged
into the Company’s common stock on the basis of 0.134048 shares of
Company common stock for each one (1) Nayarit Common Share (the
“Amalgamation Consideration”).


-30-





On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) entered into a
definitive merger agreement pursuant to which, if consummated, Gammon Gold will
acquire all of the issued and outstanding common shares of Capital Gold in a
cash and share transaction (the “Gammon Transaction”). The total consideration
for the purchase of 100% of the fully diluted shares of Capital Gold is
approximately US$288 million or US$4.57 per Capital Gold share based on Gammon
Gold’s closing price on September 24, 2010 on the NYSE. The Gammon Transaction
has the unanimous support of both companies’ Boards of Directors and
Officers.  Under the terms of the Gammon Transaction, each common share of
Capital Gold will be exchanged for 0.5209 common shares of Gammon Gold and a
cash payment in the amount of US$0.79 per share. Based on the September 24, 2010
closing price of Capital Gold’s shares on the NYSE EURONEXT, the acquisition
price represents a 20% premium to the close on September 24th and a 30% premium
to the 20-day volume weighted average price on the NYSE EURONEXT ending on that
date.  The consummation of the Gammon Transaction is subject to numerous
contingencies as described in the related merger agreement including, but not
limited to, Capital Gold stockholder approval.





Receipt of Technical Report
for Updated Reserves at El Chanate





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





Our
proven and probable reserve tonnage increased to 70.6 million metric tonnes with
an average gold grade of 0.66 grams per tonne (77.7 million US short tons
at 0.0193 ounces per ton). The proven and probable reserve has 1,504,000
contained ounces of gold. The open pit strip ratio for the life of mine is
2.88:1 (2.88 tonnes of waste to one tonne of ore).  For the next year, our
mine plan anticipates the open pit strip ratio will average 2:1. Determination
of operational pre-stripping (increase in strip ratio) will be made after
further geological drilling and determination of corporate strategy within the
three year window of opportunity. There is also the potential to improve the
life of mine strip ratio as the report identifies material within the pit design
classified as waste that with additional drilling could be reclassified as ore.
The updated pit design for the revised mine plan is based on a plant recovery of
gold that varies by rock types, but is expected to average 58.25%. A gold price
of US$800 (SEC three year average as of October 1, 2009) per ounce was used to
re-estimate the reserves compared with a gold price of $750 per ounce used in
the previous reserve estimate.  The stated proven and probable mineral
reserves have been prepared in accordance with the Canadian Institute of Mining,
Metallurgy and Petroleum (CIM).  CIM definitions for proven and probable
reserves convert directly from measured and indicated mineral resources with the
application of appropriate economic parameters. These reserves are equivalent to
proven and probable reserves as defined by the United States Securities and
Exchange Commission (SEC) Industry Guide 7.


-31-


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





El Chanate
Mine





Production
Summary





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





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


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




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


-32-





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





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





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





In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
aggregate capacity will be approximately 20.1 million tonnes.  As of
October 31, 2010, we have expended $1,098 towards the construction of this new
leach pad. The remaining capital expenditure is anticipated to be expended over
the next nine months.  Site clearing was initiated in May 2010 and
construction commenced in July 2010.  We have completed construction on
this new leach pad and we anticipate stacking on the first panel by the end of
December 2010.  Complete construction of this new leach pad is anticipated
to be completed by May 2011.





In July
2010, the Company commenced the use of belt agglomeration with cement which is
added to the crushed ore at the El Chanate mine to improve the flow of leaching
solution.   We have engaged an independent consultant with respect to heap
leaching optimization, which has resulted in recommendations to increase the
barren solution flow to the leach pad, increase the pregnant solution flow to
the recovery plant, and redirect the low grade solution to the leach pads.
 When fully implemented, these operational changes combined with the
agglomeration with cement and barren solution may result in immediate
improvements in leaching time.  We ordered two agglomeration drums which
are expected to arrive by January 2011.  The current belt agglomeration is
a temporary measure until the drums are delivered.  The use of
agglomeration drums will allow for better mixing of cement and lime with the
crushed ore, producing a consistent quality control of the product.  The
cost of these agglomeration drums and an additional overland conveyor is
anticipated to be $2,000.  As of October 31, 2010, we have made payments
amounting to $1,067 on the agglomeration equipment.





In
October 2009, we procured additional water rights at El Chanate that has enabled
us to drill another water supply well.  The new well was completed in
October 2010 and will allow for a further increase in solution flow to the leach
pads.





We
commenced a reverse circulation drill program at our El Chanate mine in April
2010 .  The primary reason for the drilling is to replace depleted
reserves and improve the forecast accuracy of the mine plan with infill
holes.  Drill holes will test the north pit wall for mineralization as well
as the outer limits of the pit, and outlying prospective areas.  The
program is budgeted to continue through April 2011.  The data from drilling
will be used to update the block model for mine planning, and we plan to update
our resource estimate before the end of our fiscal year ending July 31,
2011.  Since April 2010 we have drilled 118 reverse circulation holes
totaling approximately 13,600 meters.


-33-





The
following table represents a summary of cumulative activity in connection with
our proven and probable mineral reserves:





Proven and probable mineral reserve (Ktonnes of ore)
                
                October 31,
                  2010
                
                
                July 31,
                  2010
                
                
                July 31,
                  2009Ore
                
                
                -
                
                
                
                -
                
                
                
                -Beginning
      balance (Ktonnes)
                
                
                66,712
                
                
                
                40,911
                
                
                
                35,417Additions
                
                
                -
                
                
                
                30,388
                
                
                
                9,342Reductions
                
                
                (1,221
                )
                
                
                (4,587
                )
                
                
                (3,848
                )Ending
      Balance
                
                
                65,491
                
                
                
                66,712
                
                
                
                40,911Contained
      goldBeginning
      balance (thousand of ounces)
                
                
                1,411
                
                
                
                859
                
                
                
                719Additions
                
                
                -
                
                
                
                662
                
                
                
                239Reductions
                
                
                (27
                )
                
                
                (110
                )
                
                
                (99
                )Ending
      Balance
                
                
                1,384
                
                
                
                1,411
                
                
                
                859





El
Chanate is an open pit mining and heap leach processing operation.  Ore is
hauled by truck from the pits to the processing plant.  The recovery of
gold from certain gold ores is achieved through the heap leaching process. Under
this method, ore is placed on impermeable leach pads where it is treated with
dilute alkaline cyanide bearing solution, which dissolves gold and silver
contained within the ore. The resulting “pregnant” solution is further processed
in a plant where the gold is recovered.  The processing is a closed
circuit, solution is reused, and the process is designed to be zero discharge.
The mining and other mobile equipment is mostly refurbished as is the smaller of
the two Adsorption, Desorption, Refinery (“ADR”) processing plants.  All
other equipment and infrastructure at the El Chanate mine were new when
procured.  Management continuously analyzes production results and
considers improvements and modernizations as deemed necessary.





Equipment
and infrastructure include: A three stage crushing plant, a fleet of haul
trucks, loaders and mining support equipment, a leach pad and solution holding
ponds, two ADR processing plants, and a refinery.  In addition, there are
numerous ancillary support facilities including warehouses, maintenance shops,
roadways, administrative offices, power and water supply systems, and a fully
equipped assay and metallurgical laboratory.





El
Oso Project - Saric Properties – Sonora, Mexico





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





In
January 2010, we initiated an additional drill campaign at Saric that consisted
of 13 core holes totaling approximately 1,100 meters.  The drilling was
completed on February 23, 2010 and targeted the existing mineralized structure
to confirm the geologic interpretation and confirm the accuracy of previous
reverse circulation drilling. The drill-hole samples were assayed by ALS
Chemex.  Currently, we are planning to initiate a geophysical survey in
late 2010 or early 2011.  The intention of the geophysical survey is to
assist us in determining the focus of our next drill campaign.  We are also
continuing our work on an updated environmental report and clarifying the
surface ranch land ownership.


-34-





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





Orion
Project





Through
our recent acquisition of Nayarit on August 2, 2010, we control approximately
257,000 acres (104,000 hectares) of mining concessions known as the Orion
Project.  The Orion Project lies in the Sierra Madre Occidental, a prolific
mining district in Western Mexico. Nayarit was a junior mineral exploration
company that was incorporated in November, 2003 and became a public company by
virtue of its amalgamation with Canhorn Chemical Corporation on May 2,
2005.  With this recent acquisition, our plan is to continue exploration
work on the Orion Project in the State of Nayarit, Mexico. As an exploration
stage project, the Orion Project currently does not produce any gold.  The
original exploration focus was on the known mineralization of the La Estrella
property, one of the original properties making up the Orion Gold Project. With
expansion of the property area by almost 1200% in 2005 and 2006, other targets
were identified and the strategy has taken on more of a district approach. A
reconnaissance drill program initiated in 2007 throughout a small portion of the
northern area in the concession resulted in the discovery of the Animas System,
which was the focus of Nayarit's diamond drill program.





The Orion
Project lies in the prolific Sierra Madre Occidental, which is known to host
numerous multi-million ounce gold-silver deposits. The Orion Project is one of
the larger contiguous concessions in the Sierra Madre, composed of 257,000 acres
(104,000 hectares).  The Orion Project is located on the southeast flank of
the Sierra Madre, about 125km south of  the famous Tayoltita district which
has reserves reported to be in excess of 20 million gold equivalent
ounces.  The concessions are located approximately 110km north–northwest of
Tepic, state capital of Nayarit, México, 150km southeast of Mazatlan,
Sinaloa.  The Orion Project is located 13 km south–southeast of the town of
Acaponeta, Nayarit, in the Motaje Mining District as identified by the Servicio
Geologico Mexicano (formerly the Consejo de Recursos Minerales).  We
anticipate progressing this project to a pre-feasibility stage by the
second quarter 2011.





Nayarit
Gold de Mexico, S.A. de C.V. (“Nayarit Mexico”), our wholly-owned subsidiary,
has the exclusive right to explore and, as the case may be, exploit the “La
Estrella” (title 196009) mining concession, in accordance with the terms of an
exploration agreement (the “Exploration Agreement”) dated November 28, 2003
which was entered into by and between Mr. Adrian Evodio Prado Gomez and Minera
Portree de Zacatecas, S.A. de C.V., which conveyed its rights to Nayarit Mexico
in accordance with the terms of a Conveyance Agreement dated May 20, 2004 (the
“Conveyance Agreement”) and amendments thereto dated May 17, 2004, July 29,
2004, November 28, 2007, November 28, 2008 and a letter of intent for a new
amendment dated December 4, 2009 (the “Estrella Amendments”).




For the
exploration rights of La Estrella as described above, Nayarit Mexico has paid up
to date the amount of $550 plus applicable Value Added Tax, and shall pay the
following amounts in the dates indicated below, after which payment, Nayarit
Mexico will acquire 100% interest to La Estrella concession:




(i)
            $100
      plus applicable Value Added Tax, in December 8,
  2010;





(ii)
            $100
      plus applicable Value Added Tax, in June 8,
  2011;





(iii)
            $175
      plus applicable Value Added Tax, in December 8; 
  2011


-35-





(iv)
            $175
      plus applicable Value Added Tax, in June 8, 2012;
  and





(v)
            $350
      plus applicable Value Added Tax, in December 8,
  2012.





The
Exploration Agreement and Amendments thereto may be terminated by Nayarit Mexico
at any time through a written communication addressed to Prado.





Nayarit
Mexico has the unlimited right to explore the following mining concessions
(“Huajicari Concessions”), in accordance with the terms of and Exploration and
Assignment Option Agreement of Mining Concessions (the “Option Agreement”) dated
May 8, 2008, which was entered into by and between Compañía Minera Huajicari,
S.A. de C.V. (“Huajicari”) and Nayarit Mexico and amendment thereto, dated
December 10, 2009:




CLAIM
                      
                      TITLE NUMBER“San
      Juan Fracc. I”
                      
                      
                      205392“San
      Juan Fracc. II”
                      
                      
                      205393“San
      Francisco Tres”
                      
                      
                      203136“San
      Juan I”
                      
                      
                      221365“Isis”
                      
                      
                      214395“San
      Miguel”
                      
                      
                      224392




For the
exploration rights of the Huajicari Concessions as described above, Nayarit
Mexico has paid up to date the amount of $2,500 as of October 31, 2010.  As
such, Nayarit Mexico has acquired 100% interest in the Huajicari Concessions in
terms of a conveyance agreement that was formalized in early December
2010.





The term
granted to Nayarit Mexico for the exploration of the above mentioned mining
is 2 years commencing as of the date of execution of the Option Agreement but
Nayarit Mexico may terminate the agreement at any time through a written
communication addressed to Huajicari.





Nayarit
Gold Inc. purchased the Orion Concession by Asset Purchase Agreement dated
January 30, 2004. With respect to the Orion concession, Nayarit has granted a
3.5% net smelter return royalty payable to Belitung Limited, an Ontario
incorporated company. Nayarit may purchase the royalty outright at any time for
CDN$250 in cash or non-assessable common shares. In addition, Nayarit is also
subject to a net profits interest on Orion of 10% payable to a previous property
owner.





Table:
Mining Concessions Controlled by Nayarit Gold de Mexico, SA de CV




Concession Name
                        
                        Title
                        
                        
                        File No.
                        
                        Owner
                        
                        Surface (ha)BONANZA
      I
                        
                        
                        227603
                        
                        
                        
                        6923
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        200.00EL
      DORADO
                        
                        
                        228887
                        
                        
                        
                        7013
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        23,001.85EL
      MAGNIFICO
                        
                        
                        221592
                        
                        
                        
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        7,595.74EL
      MAGNIFICO F-I
                        
                        
                        221588
                        
                        
                        
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        6.90EL
      MAGNIFICO F-II
                        
                        
                        221589
                        
                        
                        
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        32.00EL
      MAGNIFICO F-III
                        
                        
                        221590
                        
                        
                        
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        6.96EL
      MAGNIFICO F-IV
                        
                        
                        221591
                        
                        
                        
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        8.84GROSS
      F I
                        
                        
                        228826
                        
                        
                        
                        7002
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        67,148.77GROSS
      F- II
                        
                        
                        228827
                        
                        
                        
                        7002
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        16.00ORION
                        
                        
                        205616
                        
                        
                        
                        6253
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        527.50REESE
                        
                        
                        227775
                        
                        
                        
                        6980
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        
                        
                        3,104.29SAN
      JUAN I
                        
                        
                        221365
                        
                        
                        3/1/639
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        45.63SAN
      FRANCISCO 3
                        
                        
                        203136
                        
                        
                        3/1.3/243
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        32.75SAN
      JUAN F - II
                        
                        
                        205393
                        
                        
                        
                        6250
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        0.81ISIS
                        
                        
                        214395
                        
                        
                        
                        6617
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        101.34SAN
      JUAN F-I
                        
                        
                        205392
                        
                        
                        
                        6250
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        1,339.01SAN
      MIGUEL
                        
                        
                        224392
                        
                        
                        3/1/723
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        
                        
                        1,177.38LA ESTRELLA
                        
                        
                        196009
                        
                        
                        3/1.3/232
                        
                        ADRIAN EVODIO PRADO GÓMEZ
                        
                        
                        146.35


-36-




Nayarit
Gold has initiated the generation of an environmental impact assessment of the
concession(s) (the “EIA”) which is substantially complete. There are no known
environmental liabilities on the Concession.





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





Result
of Operations





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





Net income for the three months ended
October 31, 2010 and 2009 was approximately $2,954 and $2,939, respectively,
representing an increase of approximately 1% over the prior period.  The
primary reason for the slight increase in net income can be attributed to the
increase in sales offset by the increase in general and administrative expenses
incurred during the current period as compared to the same period in the prior
year.  General and administrative costs increased $1,904 or 117% mainly due
to our activity related to the business combination with Nayarit Gold Inc. that
closed on August 2, 2010 and the proposed business combination with Gammon
Gold.  See “General and Administrative Expense” below for more detail of
these costs that were incurred during the current period.





Due to
the business combination with Nayarit Gold Inc. that closed on August 2, 2010,
general and administrative costs, as well as exploration expense, increased for
the three months ended October 31, 2010 by approximately $167 and $195,
respectively, as compared to the prior period.





Revenues & Costs
Applicable to Sales





Gold
sales for the three months ended October 31, 2010 totaled approximately $18,952
as compared to $11,727 in the prior period representing an increase of
approximately $7,225 or 62%.  We sold 14,837 ounces at an average
realizable price per ounce of approximately $1,277 in the current period. 
We sold 11,733 ounces at an average realizable price per ounce of $999 during
the same period last year.





Costs
applicable to sales were approximately $7,210 and $4,110, respectively, for the
three months ended October 31, 2010 and 2009, an increase of approximately
$3,100 or 75%.  Cash costs of $476 per ounce of gold sold for the three
months ended October 31, 2010 was 41% higher than the $338 for the three months
ended October 31, 2009.  The primary reasons for this increase in cash cost
per ounce sold in the current period were attributable to:





·
            An
      increase in mining costs of approximately $1,886 or 72% over the prior
      period.  This was primarily due to higher mining contractor costs of
      approximately $1,142 or 77% compared to the prior period primarily due to
      an increase in tonnage mined of 1,287,143 tonnes or 55%, higher diesel
      fuel consumption of $464 due to an increase in tonnage mined and longer
      haul distance as the pit deepens, and higher explosive costs of $177 due
      to the increase in tonnage mined;





·
            Higher
      crushing costs of approximately of $323, an increase of 42% over the prior
      period, mainly due to: 1) an increase in tonnage going through the
      crushing circuit of 104,000 tonnes or 9% over the prior period;  2)
      an increase in electricity consumption and maintenance costs as well as an
      increase in the usage of crusher parts and supplies with the corresponding
      increase in tonnage; and 3) an increase in labor costs associated with the
      hiring of additional crusher
operators;





·
            An
      increase in leaching and ADR plant costs of approximately $378 or 22%
      mainly due to a general increase in consumption of gold leaching chemicals
      and reagents as well as electricity usage in the processing of ore. 
      The increased consumption can be mainly attributed to the increased
      tonnage processed during the current period as compared to the prior
      period as well as an the result of increasing the gold leaching chemicals
      and solution flow to the leach pad as we increased the level of lifts or
      height of the leach pad as well as the increased surface area under
      leach;


-37-





·
            Higher
      heavy equipment maintenance costs of approximately $131 or 46% over the
      same period in the prior year.  This was primarily due to an increase
      in repair and maintenance costs experienced with our mining fleet. 
      The higher repair and maintenance costs incurred during the current
      quarter were mainly the result of our fleet mining additional tonnage as
      compared to the prior period.  In addition, our mining fleet is
      comprised of used equipment which required a higher level of maintenance
      than the previous period.





Total
costs were $539 per ounce of gold sold for the three months ended October 31,
2010 as compared to $389 total cost per ounce sold in the prior period. 
The primary reason for this increase in total costs can be attributable to the
reasons detailed above as well as the increase in depreciation and amortization
resulting from capital expenditures made in the prior fiscal year that had not
yet had an impact on the results of operations for the three months ended
October 31, 2009.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $547 and $254 for the
three months ended October 31, 2010 and 2009, on silver ounces sold of 25,051
and 15,760, respectively.





Depreciation and
Amortization





Depreciation and amortization expense
during the three months ended October 31, 2010 and 2009 was approximately $960
and $601, respectively.  The primary reason for the increase of
approximately $359, or 60%, in the current period was due to an increase in
depreciation and amortization charges related to property, plant and equipment
additions made during the last nine months of the fiscal year ended July 31,
2010.





General and Administration
Expense





General
and administrative expenses during the three months ended October 31, 2010 were
approximately $3,534, an increase of approximately $1,904, or 117%, from the
three months ended October 31, 2009. The primary reason for the increase in
general and administrative expenses was due to:  1) investment advisory
fees incurred as a result of the closing of the Nayarit Gold Inc. business
combination as of August 2, 2010 ($880); 2) fees associated with obtaining a
fairness opinion related to entering into a definitive agreement with Gammon
Gold Inc. ($401); and 3) legal and professional fees associated with the above
referenced merger and acquisition activity including work related to regulatory
filings and litigation made up the majority of the remaining increase in general
and administrative expense.





Exploration
Expense





Exploration
expense during the three months ended October 31, 2010 and 2009 was
approximately $623 and $331, respectively, or a increase of $292, or 88%. 
The primary reason for the increase in exploration expense can be attributed to
on-going exploration work being conducted at our Orion Project in Nayarit State,
Mexico.  We closed our business combination with Nayarit Gold Inc. on
August 2, 2010, and incurred exploration costs of $195 during the current
period.





In
addition, we initiated a reverse circulation drill program in April 2010. 
The primary reason for the drilling is to potentially replace depleted reserves
and improve the forecast accuracy of our mine plan going forward with in-fill
drill holes.  This program is also designed to test the north pit wall for
mineralization as well as outer limits of the pit and outlying prospective
areas.  We anticipate this program continuing until April 2011.  The
data from this drill program will be used to update the geological block model
for mine planning purposes and to potentially update our reserve estimate before
the end of our fiscal year ended July 31, 2011.  Since April 2010, we have
drilled 118 reverse circulation holes totaling approximately 13,600
meters.


-38-





Other Income and
Expense





Interest expense was approximately
$302 for the three months ended October 31, 2010 compared to approximately $376
for the same period a year earlier.  This decrease was due to lower
interest charges incurred during the current period, based on a lower average
debt balance compared to the prior period.  As of October 31, 2010 and
2009, there was $3,500 and $7,100, respectively, outstanding on our term note
with Standard Bank.





Changes in Foreign Exchange
Rates





During the three months ended October
31, 2010 and 2009, we recorded equity adjustments from foreign currency
translations of approximately $2,468 and $188, respectively.  These
translation adjustments are related to changes in the rates of exchange between
the Mexican Peso, Canadian dollar and the U.S. dollar and are included as a
component of other comprehensive income.  The Mexican Peso and the U.S.
dollar exchange rate as of October 31, 2010 was 12.3642.  The Canadian
dollar and the U.S. dollar exchange rate as of October 31, 2010 was
$1.0199.  As of July 31, 2010, the Mexican Peso and the U.S. dollar
exchange rate was 12.7012.





Summary of Quarterly
Results


(000’s except per share
Data)





For the three
                  
                  
                  For the threemonths ended
                  
                  
                  months endedOctober 31,
                    2010
                  
                  
                  October 31,
                    2009Revenues
                  
                  
                  18,952
                  
                  
                  
                  11,727Net
      Income
                  
                  
                  2,954
                  
                  
                  
                  2,939Basic
      net income per share
                  
                  
                  0.05
                  
                  
                  
                  0.06Diluted
      net income per share
                  
                  
                  0.05
                  
                  
                  
                  0.06Gold
      ounces sold
                  
                  
                  14,837
                  
                  
                  
                  11,733Average
      price received
                  
                  $
                  1,277
                  
                  
                  $
                  999Cash
      cost per ounce sold(1)
                  
                  $
                  476
                  
                  
                  $
                  338Total
      cost per ounce sold(1)
                  
                  $
                  539
                  
                  
                  $
                  389





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





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





For the Three
                        
                        For the ThreeMonths Ended
                        
                        Months EndedReconciliation from non-GAAP measure to US GAAP
                        October 31,
                          2010
                        
                        October 31,
                          2009Cash
      cost per ounce sold
                        
                        $
                        476
                        
                        
                        $
                        338Intercompany
      management fee
                        
                        
                        13
                        
                        
                        
                        14Other
                        
                        
                        (3
                        )
                        
                        
                        (2
                        )Costs
      applicable to sales per ounce sold*
                        
                        $
                        486
                        
                        
                        $
                        350




*This
measurement excludes depreciation and amortization.


-39-





Summary of Results of
Operations





For the three
                    
                    
                    For the threemonths ended
                    
                    
                    months endedOctober 31,
                      2010
                    
                    
                    October 31,
                      2009Tonnes
      of ore mined
                    
                    
                    1,221,240
                    
                    
                    
                    1,135,892Tonnes
      of waste removed
                    
                    
                    2,394,621
                    
                    
                    
                    1,192,826Ratio
      of waste to ore
                    
                    
                    1.96
                    
                    
                    
                    1.05Tonnes
      of ore processed
                    
                    
                    1,226,137
                    
                    
                    
                    1,122,183Grade
      (grams/tonne)
                    
                    
                    0.64
                    
                    
                    
                    0.70Gold
      (ounces)- 
        Produced(1)
                    
                    
                    14,804
                    
                    
                    
                    11,908- 
        Sold
                    
                    
                    14,837
                    
                    
                    
                    11,733


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





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the three months ended October 31, 2010 and 2009 was
$1,425 and $2,931, respectively.  The primary reason for
the period-to-period decrease in cash flow provided by operating activities was
due to a decrease in accounts payable balances during the current period of $318
versus a corresponding increase in accounts payable in the prior period of
$958.  In addition, we experienced an increase in other current assets in
the current period of $522 versus a corresponding decrease in the prior period
of $53.




Investing
Activities




Cash used in investing
activities during the three months ended October 31, 2010, amounted to
approximately $3,552, primarily due to leach pad expansion costs incurred during
the current period, the procurement of agglomeration equipment and payments made
regarding the Huajicari concessions.  Cash used in investing
activities during the three months ended October 31, 2009, amounted to
approximately $1,948, primarily for the acquisition of an additional tertiary
crusher and screen plant, additional water rights, as well as costs incurred for
leach pad expansion.





In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
aggregate capacity will be approximately 20.1 million tonnes.  As of
October 31, 2010, we have expended $1,098 towards the construction of this new
leach pad. The remaining capital expenditure is anticipated to be expended over
the next nine months.  Site clearing was initiated in May 2010 and
construction commenced in July 2010.  We have completed construction on
this new leach pad and we anticipate stacking on the first panel by the end of
December 2010.  Complete construction of this new leach pad is anticipated
to be completed by May 2011.


-40-




In July
2010, the Company commenced the use of belt agglomeration with cement which is
added to the crushed ore at the El Chanate mine to improve the flow of leaching
solution.   We have engaged an independent consultant with respect to heap
leaching optimization, which has resulted in recommendations to increase the
barren solution flow to the leach pad, increase the pregnant solution flow to
the recovery plant, and redirect the low grade solution to the leach pads.
 When fully implemented, these operational changes combined with the
agglomeration with cement and barren solution may result in immediate
improvements in leaching time.  We ordered two agglomeration drums which
are expected to arrive by January 2011.  The current belt agglomeration is
a temporary measure until the drums are delivered.  The use of
agglomeration drums will allow for better mixing of cement and lime with the
crushed ore, producing a consistent quality control of the product.  The
cost of these agglomeration drums and an additional overland conveyor is
anticipated to be $2,000.  As of October 31, 2010, we have made payments
amounting to $1,067 on the agglomeration equipment.





For the
exploration rights of the Huajicari Concessions, Nayarit Mexico paid the
remaining $500 that was due under this agreement during the current
quarter.  As such, Nayarit Mexico has acquired a 100% interest in the
Huajicari Concessions under the terms of a conveyance agreement that was
formalized in early December 2010.




Financing
Activities




Cash used in financing
activities during the three months ended October 31, 2010 amounted to
approximately $702, primarily from the repayment of the Credit Agreement in the
amount of $900.  We also received proceeds of approximately $196 in the
current period from the issuance of common stock upon the exercising of 56,303
options.  Cash used in
financing activities during the three months ended October 31, 2009
amounted to approximately $846, primarily from the repayment of the Credit
Agreement in the amount of $900.  We also received proceeds of
approximately $53 in the current period from the issuance of common stock upon
the exercising of 125,000 options.




Business
Combination Agreements





On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) entered into a
definitive merger agreement pursuant to which Gammon Gold offered to acquire all
of the issued and outstanding common shares of Capital Gold in a cash and share
transaction (the “Gammon Transaction”). The total consideration for the purchase
of 100% of the fully diluted shares of Capital Gold is approximately US$288
million or US$4.57 per Capital Gold share based on Gammon Gold’s closing price
on September 24, 2010 on the NYSE. The Gammon Transaction has the unanimous
support of both companies’ Boards of Directors and Officers.  Under the
terms of the Gammon Transaction, each common share of Capital Gold will be
exchanged for 0.5209 common shares of Gammon Gold and a cash payment in the
amount of US$0.79 per share. Based on the September 24, 2010 closing price of
Capital Gold’s shares on the NYSE EURONEXT, the acquisition price represents a
20% premium to the close on September 24th and a 30% premium to the 20-day
volume weighted average price on the NYSE EURONEXT ending on that date. 
The consummation of the Gammon Transaction is subject to numerous contingencies
as described in the related merger agreement including, but not limited to,
Capital Gold stockholder approval.





On August
2, 2010, the Company acquired Nayarit Gold, Inc. (“Nayarit”). As a result of the
Business Combination, Nayarit became a wholly-owned subsidiary of the
Company.  In connection with the Business Combination, each outstanding
share of Nayarit common stock was converted into 0.134048 shares of Capital Gold
common stock, with cash paid in lieu of any fractional share.  Capital Gold
issued 12,454,354 shares of its common stock in the Business Combination to
Nayarit's current stockholders and has reserved for issuance an additional
1,621,981 and 903,483 shares of Capital Gold common stock upon the exercise of
former Nayarit warrants and options, respectively.  Based on the number of
outstanding shares of Nayarit common stock and Capital Gold common stock, after
the consummation of the Business Combination, the stockholders of Nayarit own
approximately 20.4% of Capital Gold on a non-diluted basis.


-41-


Labor
issues





The
workforce at the El Chanate mine is currently non-unionized, however, a national
labor union is seeking to permit workers to vote on whether or not they would
like to organize under such labor union. CGC is reviewing its options with
respect to the union’s activities. If the workforce were permitted to unionize,
such activity could result in higher production costs at the El Chanate mine.
The Labor Board of Mexico City has granted the aforementioned national labor
union the right to vote to determine if such union should be permitted to
represent the workforce. Prior to the date of the vote, CGC may enter into a
voluntary agreement with the union. If CGC does not arrive at a voluntary
agreement with the union, and the workforce votes to permit the union to
represent it, CGC will be required to negotiate an agreement with the union. If
the national labor union does not represent CGC’s workforce, CGC could continue
as a non-unionized mine or elect to negotiate with a different union. The
national labor union seeking to unionize CGC’s workforce may illegally interrupt
operations at the El Chanate mine, which could have a material adverse effect on
CGC’s business, financial condition or results of operations.  A vote to
unionize is currently set to be held at the mine site on January 12,
2011.




Term
loan and Revolving Credit Facility





In September 2008, we closed an Amended
And Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), us,
as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender.  The
Credit Agreement amends and restates the prior credit agreement between the
parties dated August 15, 2006.  Under the Credit Agreement, MSR and Oro
borrowed money in an aggregate principal amount of up to $12,500 (the “Term
Loan”) for the purpose of constructing, developing and operating the El Chanate
gold mining project in Sonora State, Mexico.  We guaranteed the repayment
of the Term Loan and the performance of the obligations under the Credit
Agreement.  As of October 31, 2010, the outstanding amount on the term note
was $3,500 and accrued interest on this agreement was approximately
$8.





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





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





On June
30, 2010, Capital Gold Corporation (“Capital Gold” or the “Company”) entered
into the First Amendment to the Amended and Restated Credit Agreement (the
“Amendment”) by and among the Borrowers (as defined above), the Company, as
guarantor, and Standard Bank, as the lender.  The Amendment amends the
Credit Agreement the parties entered into on September 18, 2008 with retroactive
effect from July 17, 2008, which amended and restated the Credit Agreement
between the parties dated August 15, 2006.  The Credit Agreement provided
for a senior secured term credit facility in the aggregate amount of $12,500
(the “Term Facility”) and provided for a senior secured revolving credit
facility in the aggregate principal amount of $5,000 (the “Revolving
Facility”).   Capital Gold guarantees all obligations of the Borrowers
under the Term Facility and the Revolving Facility. The material amendments to
the Credit Agreement contained in the Amendment are as follows:





The
Amendment increases the Revolving Facility to $7,500.  The Revolving
Facility is available for a two-year period commencing June 30, 2010.  The
Borrowers may request a borrowing of the Revolving Facility from time to time,
provided that each borrowing shall be in a minimum aggregate amount of
$500.  All amounts due under the Revolving Facility, including all accrued
interest and other amounts described in the Credit Agreement, shall be due and
payable on June 30, 2012.





Amounts
borrowed under the Term Facility and the Revolving Facility 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.  The applicable
margin for the Revolving Facility was increased in the Amendment to 3.0% per
annum.


-42-





The
Borrowers are to use the proceeds of the Revolving Facility to fund general
corporate and working capital requirements in connection with the El Chanate
gold mining project and the Saric gold exploration project.





Debt
Covenants





Capital
Gold’s Credit Agreement with Standard Bank, as amended, requires it, among other
obligations, to meet certain financial covenants including, but not limited to,
(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. $30,000, (iii) maintain a ratio of  debt to cash flow from
operations of no greater than 2.50:1.00, and (iv) a quarterly average minimum
liquidity of U.S. $500.  In addition, the Credit Agreement restricts, among
other things, Capital Gold’s ability to incur additional debt, create liens on
its property, dispose of any assets, merge with other companies, enter into
hedge agreements, organize or invest in subsidiaries or make any investments
above a certain dollar limit.  A failure to comply with the restrictions
contained in the Credit Agreement could lead to an event of default thereunder
which could result in an acceleration of such indebtedness. As a condition to
closing the Nayarit Business Combination, Capital Gold obtained the consent of
Standard Bank.




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





Environmental
and Permitting Issues





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





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





We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the future. 
As of October 31, 2010, we have estimated the reclamation costs for the El
Chanate site to be approximately $4,606 if we had to reclaim the property as of
that date.  Reclamation costs are allocated to expense over the life of the
related assets and are periodically adjusted to reflect changes in the estimated
present value resulting from the passage of time and revisions to the estimates
of either the timing or amount of the reclamation and closure costs. The asset
retirement obligation is based on when the spending for an existing
environmental disturbance and activity to date will occur. We review, on an
annual basis, unless otherwise deemed necessary, the asset retirement obligation
for the mine site.  We reviewed the estimated present value of the El
Chanate mine reclamation and closure costs as of October 31, 2010 primarily due
to the addition of the new leach pad in accordance with ASC guidance for asset
retirement and environmental obligations.  As of October 31, 2010, our
reclamation and remediation liability was $2,665.





Recently
Issued Accounting Pronouncements





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





Disclosure
About Off-Balance Sheet Arrangements





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


-43-





Critical
Accounting Policies





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




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




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




Ore
on Leach Pads




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




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




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




In-process Inventory




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




Precious
Metals Inventory




Precious metals inventories include
gold doré and/or gold bullion. Precious metals that result from the Company’s
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.


-44-


Materials
and Supplies
 
 Materials
and supplies are valued at the lower of average cost or net realizable value.
Cost includes applicable taxes and freight.
 
 Mineral
Reserves
 
 Critical
estimates are inherent in the process of determining our reserves. Our reserves
are affected largely by our assessment of future metals prices, as well as by
engineering and geological estimates of ore grade, accessibility and production
cost. Metals prices are estimated at long-term averages. Our assessment of
reserves occurs periodically and we utilize external firms to conduct such
reserve estimates.
 
 Reserves
are a key component in valuation of our properties, plants and equipment.
Reserve estimates are used in determining appropriate rates of
units-of-production depreciation, with net book value of many assets depreciated
over remaining estimated reserves. Reserves are also a key component in
forecasts, with which we compare future cash flows to current asset values to
ensure that carrying values are reported appropriately. Reserves also play a key
role in the valuation of certain assets in the determination of the purchase
price allocations for our acquisitions.  Reserves are a culmination of many
estimates and are not guarantees that we will recover the indicated quantities
of metals.
 
 Property, Plant and Mine
Development
 
 Expenditures
for new facilities or equipment and expenditures that extend the useful lives of
existing facilities or equipment are capitalized and depreciated using the
straight-line method at rates sufficient to depreciate such costs over the
estimated productive lives, which do not exceed the related estimated mine
lives, of such facilities based on proven and probable reserves.
 
 Mineral
exploration costs are expensed as incurred. When it has been determined that a
mineral property can be economically developed as a result of establishing
proven and probable reserves, costs incurred prospectively to develop the
property will be capitalized as incurred and are amortized using the
units-of-production (“UOP”) method over the estimated life of the ore body based
on estimated recoverable ounces or pounds in proven and probable
reserves.
 
 Goodwill
 
 Goodwill
is not amortized and is assessed for impairment at the reporting unit level on
at least an annual basis. Any potential goodwill impairment is identified by
comparing the fair value of a reporting unit to its carrying value. If the fair
value of the reporting unit exceeds its carrying value, goodwill is considered
not to be impaired. If the carrying value of the reporting unit exceeds its fair
value, a potential goodwill impairment has been identified and must be
quantified by comparing the estimated fair value of the reporting unit’s
goodwill to its carrying value. Any goodwill impairment will result in a
reduction in the carrying value of goodwill on the consolidated balance sheet
and in the recognition of a non-cash impairment charge in operating
income.
 
 The
Company’s goodwill relates exclusively to the acquisition of Nayarit Gold Inc.
including its mineral property and exploration property interests.
  -45-
 Impairment of Long-Lived
Assets
  We review
and evaluate our long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
An impairment is considered to exist if the total estimated future cash flows on
an undiscounted basis are less than the carrying amount of the assets, including
goodwill, if any. An impairment loss is measured and recorded based on
discounted estimated future cash flows. Future cash flows are estimated based on
quantities of recoverable minerals, expected gold and other commodity prices
(considering current and historical prices, price trends and related factors),
production levels and operating costs of production and capital, all based on
life-of-mine plans. Existing proven and probable reserves and value beyond
proven and probable reserves, including mineralization other than proven and
probable reserves and other material that is not part of the measured, indicated
or inferred resource base, are included when determining the fair value of mine
site reporting units at acquisition and, subsequently, in determining whether
the assets are impaired. The term “recoverable minerals” refers to the estimated
amount of gold or other commodities that will be obtained after taking into
account losses during ore processing and treatment. Estimates of recoverable
minerals from such exploration stage mineral interests are risk adjusted based
on management’s relative confidence in such materials. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of future cash flows from other asset
groups. Our estimates of future cash flows are based on numerous assumptions and
it is possible that actual future cash flows will be significantly different
than the estimates, as actual future quantities of recoverable minerals, gold
and other commodity prices, production levels and operating costs of production
and capital are each subject to significant risks and
uncertainties.
 
 Reclamation and Remediation
Costs (Asset Retirement Obligations)
 
 Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation at our mine
site in accordance with ASC guidance for asset retirement and environmental
obligations.
 
 Deferred Financing
Costs
 
 Deferred
financing costs which were included in other assets relate to costs incurred in
connection with bank borrowings and are amortized over the term of the related
borrowings.
 
 Intangible
Assets
 
 Purchased
intangible assets consisting of rights of way, easements, net profit interests,
etc. are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic lives of the respective assets,
generally five years or using the units of production method. It is our policy
to assess periodically the carrying amount of our purchased intangible assets to
determine if there has been an impairment to their carrying value. Impairments
of intangible assets are determined in accordance with ASC guidance for
intangibles. There was no impairment at October 31, 2010.
 
 Fair Value of Financial
Instruments
 
 The
carrying value of our financial instruments, including cash and cash
equivalents, marketable securities, loans receivable, accrued expenses and
accounts payable approximated fair value because of the short maturity of these
instruments.  The carrying amount of the Company’s accounts receivable
balance approximates fair value.  The carrying value of the Company’s
long-term debt approximates fair value due to the variable nature of its
interest rate.
  -46-
 Revenue
Recognition
  Revenue
is recognized from the sale of gold doré when persuasive evidence of an
arrangement exists, the price is determinable, the product has been shipped to
the refinery, the title has been transferred to the customer and collection of
the sales price is reasonably assured from the customer.  The Company sells
its precious metal content to a financial institution. Revenues are determined
by selling the precious metal content at the spot price. Sales are calculated
based upon assay of the doré’s precious metal content and its weight.  The
Company sells approximately 95% of the precious metal content contained within
the doré from the refinery based upon the preliminary assay of the Company. The
residual ounces are sold upon obtaining the final assay and settlement for the
shipment. The Company forwards an irrevocable transfer letter to the refinery to
authorize the transfer of the precious metal content to the customer.  The
sale is recorded by the Company upon the refinery pledging the precious metal
content to the customer.  The Company waits until the doré precious metal
content is pledged to the customer at the refinery to recognize the sale because
collectability is not ensured until the doré precious metal content is
pledged.  The sale price is not subject to change subsequent to the initial
revenue recognition date.
 
 Revenues
from by-product sales, which consist of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $547 and $254 for the
three months ended October 31, 2010 and 2009.
 
 Foreign Currency
Translation
 
 Assets
and liabilities of the Company's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).
 
 Comprehensive Income
(Loss)
 
 Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in our interest rate swap agreement and net unrealized gains and
losses on available-for-sale securities.
 
 Income
Taxes
 
 On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with the
regular income tax system and is based on cash-basis net income that includes
only certain receipts and expenditures.  The flat tax is set at 17.5% of
cash-basis net income for tax year 2010, which increased from 17% for tax year
2009.  If the flat tax is positive, it is reduced by the regular income tax
and any excess is paid as a supplement to the regular income tax.  For the
tax year 2010, the Mexican Government introduced a reform where if the flat tax
is negative, companies will not be permitted to reduce the income tax, as it may
only serve to reduce the regular flat tax payable in that year or can be carried
forward for a period of up to ten years to reduce any future flat
tax.
 
 On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate will
decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
 
 Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
This legislation remains subject to ongoing varying interpretations.  There
is the possibility of implementation amendments by the Mexican government and
the estimated future income tax liability recorded at the balance sheet date may
change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
  -47-
  Equity Based
Compensation
 
 In
connection with offers of employment to our executives as well as in
consideration for agreements with certain consultants, we issue options and
warrants to acquire our common stock. Employee and non-employee awards are made
in the discretion of the Board of Directors.
 
 We
account for stock compensation under ASC guidance for compensation – stock
compensation, which requires the Company to expense the cost of employees
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This expense must be recognized ratably over
the requisite service period following the date of grant.
 
 Accounting for Derivatives
and Hedging Activities
 
 On
October 11, 2006, prior to our initial draw on the Credit Agreement, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Agreement, which requires that we hedge at least 50% of our outstanding debt
under this agreement.  The agreements entered into cover $9,375 or 75% of
the outstanding debt. Both swaps covered this same notional amount of $9,375,
but over different time horizons.  The first covered the six months that
commenced on October 11, 2006 and terminated on March 31, 2007 and the second
covers the period from March 30, 2007 through December 31, 2010. We intend
to use discretion in managing this risk as market conditions vary over time,
allowing for the possibility of adjusting the degree of hedge coverage as we
deem appropriate.  However, any use of interest rate derivatives will be
restricted to use for risk management purposes.
 
 We used
variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
debt obligations expose us to variability in interest payments due to changes in
interest rates.  As a result of these arrangements, we will continuously
monitor changes in interest rate exposures and evaluate hedging opportunities.
Our risk management policy permits us to use any combination of interest rate
swaps, futures, options, caps and similar instruments, for the purpose of fixing
interest rates on all or a portion of variable rate debt, establishing caps or
maximum effective interest rates, or otherwise constraining interest expenses to
minimize the variability of these effects.
 
 The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense.  No component of hedge results is excluded from the
assessment of hedge effectiveness.
 
 We are
exposed to credit losses in the event of non-performance by counterparties to
these interest rate swap agreements, but we do not expect any of the
counterparties to fail to meet their obligations. To manage credit risks, we
select counterparties based on credit ratings, limit our exposure to a single
counterparty under defined guidelines, and monitor the market position with each
counterparty as required by ASC guidance for derivatives and
hedging.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
  -48-
  Item 3.  Quantitative and
Qualitative Disclosures About Market Risk.(in thousands, except for per
share and ounce amounts)
 
 Metal
Price
 
 Changes
in the market price of gold significantly affects our profitability and cash
flow.  Gold prices can fluctuate widely due to numerous factors, such as
demand; forward selling by producers; central bank sales, purchases and lending;
investor sentiment; the relative strength of the U.S. dollar and global mine
production levels.
 
 Foreign
Currency
 
 Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow.  Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic conditions.  Most
of our assets and operations are in Mexico; therefore, we are more susceptible
to fluctuations in the Mexican peso / U.S. dollar exchange.  Our Mexico
operations sell their metal production based on a U.S. dollar gold price as is
the general, world-wide convention.  Fluctuations in the local currency
exchange rates in relation to the U.S. dollar can increase or decrease profit
margins to the extent costs are paid in local currency at foreign
operations.  Foreign currency exchange rates in relation to the U.S. dollar
have not had a material impact on our determination of proven and probable
reserves.  However, if a sustained weakening of the U.S. dollar in relation
to the Mexican peso that impacts our cost structure was not mitigated by
offsetting increases in the U.S. dollar gold price or by other factors, then
profitability, cash flows and the amount of proven and probable reserves in the
applicable foreign country could be reduced.  The extent of any such
reduction would be dependent on a variety of factors including the length of
time of any such weakening of the U.S. dollar, and management’s long-term view
of the applicable exchange rate.  We believe, however, that this exchange
rate variability has not had a material impact on our financial
statements.
 
 Interest
Rate Swap Contracts
 
 On
October 11, 2006, prior to our initial draw on the Credit Agreement, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Agreement.  Although the Credit 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.
 
 Market
Risk Disclosures
 October
31, 2010
 (in
thousands)
  Instruments
entered into for hedging purposes -
 
 Type of Derivative
                      
                      Notional Size
                      
                      
                      Fixed Price or
                        Strike Price
                      
                      Underlying Price
                      
                      Termination or
                        Expiration
                      
                      Fair ValueInterest
      Rate Swaps
                      
                      $
                      1,313
                      (1)
                      
                      
                      5.30
                      %
                      3
      Mo. USD LIBOR
                      
                      12/31/2010
                      
                      $
                      (17
                      )
  (1)The value shown reflects
the notional as of September 30, 2010; the start date for the final period of
the swap.
 
 As of
October 31, 2010, the dollar value of a basis point for this interest rate swap
was approximately $0, suggesting that a one-basis point rise (fall) of the yield
curve would likely foster an increase (decrease) in the interest rate swaps
value by approximately $0.  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.
  -49-
  Item
4. Controls and
Procedures.
 
 The term
"disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 
This term refers to the controls and procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized, and
reported within the required time periods.  In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.  Our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report.  They have concluded that, as of that date, our disclosure controls
and procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange
Act.
 
 No change
in our internal control over financial reporting occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
  -50-
  PART
II - OTHER INFORMATION
 
 Item
      1.
              Legal
      Proceedings.
 
 Subsequent
to the announcement of the merger, eleven putative shareholder class action
complaints were filed challenging the transaction. Five complaints were filed in
the Supreme Court of the State of New York, New York County, the New York
Actions, and six were filed in the Delaware Court of Chancery, the Delaware
Actions. The New York complaints captioned Jenkins v. Capital Gold Corp., et
al., Index No. 651651/2010; Schroeder v. Capital Gold Corp., et
al., Index No. 651652/2010; and Leone v. Capital Gold Corp., et
al., Index No. 651690/2010, name as defendants the directors of CGC, as
well as CGC and Gammon Gold. The New York complaint captioned Kramer v. Capital Gold Corp., et
al., Index No. 651678/2010, names as defendants the directors of CGC,
CGC’s Chief Financial Officer and Secretary as well as CGC and Gammon Gold. The
New York complaint captioned Stanford v. Cooper, et al.,
Index No. 651827/2010, names as defendants the directors of CGC, as well as CGC,
Gammon Gold and Capital Gold AcquireCo, Inc., Gammon Gold’s wholly-owned
subsidiary. The New York plaintiffs allege generally that the CGC officers and
directors breached their fiduciary duties to CGC stockholders by agreeing to an
unfair price and an inappropriate sale process, and that the individual
defendants agreed to the merger to benefit themselves personally at the expense
of stockholder interests. The Kramer and Stanford complaints allege in
addition that the proposed transaction involves unreasonable deal protection
devices, including a nonsolicitation agreement, matching rights, and an
unreasonable termination fee. The New York Actions further claim that CGC and
Gammon Gold aided and abetted the purported breaches of fiduciary duties. The
New York Actions seek injunctive relief, including enjoining the transaction and
rescinding all agreements made in anticipation of the transaction or awarding
the plaintiffs and the purported class rescissory damages. The New York Actions
additionally seek attorneys’ and other fees and costs, in addition to seeking
other relief.
 
 The
Delaware complaints captioned Boehm v. Capital GoldCorp.,
et al. Case No. 5887-VCL; and Wood v. Capital Gold Corp., et
al., Case No. 5920- , name as defendants the directors of CGC, as well as
CGC, Gammon Gold, and Capital Gold AcquireCo, Inc. The Delaware complaint
captioned Pait v. Sutherland,
et al., Case No. 5899-VCN, names as defendants the directors of CGC and
Gammon Gold. The Delaware complaints captioned Reggio v. Capital Gold Corp., et
al., Case No. 5939- , Blumenthal v. Capital Gold
Corp., Case No. 5940- , and McClure v. Capital Gold Corp., et
al., Case No. 5945- , name as defendants CGC and its directors, as well
as Gammon Gold. The Delaware Actions allege generally that the CGC directors
breached their fiduciary duties to CGC’s stockholders by agreeing to an unfair
price, an inappropriate sale process, and unreasonable deal protection devices,
including a non-solicitation agreement, matching rights, an unreasonable
termination fee, and an impermissible director voting agreement. The Boehm, Wood, Reggio, BlumenthalandMcClure
complaints further claim that CGC, Gammon Gold, and/or Capital Gold AcquireCo,
Inc. aided and abetted the purported breaches of fiduciary duties. The Delaware
Actions seek injunctive relief, including enjoining the transaction, rescinding
all agreements made in anticipation of the transaction or awarding the plaintiff
and the purported class rescissory damages, and directing the individual
defendants to account to the plaintiff and the purported class upon any damages
suffered as a result of individual defendant wrongdoing. The Delaware Actions
also seek attorneys’ and other fees and costs, in addition to seeking other
relief.
 
 On
November 2, 2010, a putative shareholder class action was filed regarding the
Company’s merger with Gammon:  Bromberg v. Capital Gold Corp., Case No.
651904/2010 (NY Sup.). The claims stated and relief sought are substantially
identical to the claims made and relief sought in the Jenkins and Schroeder
lawsuits referred above.
 
 On Nov.
12, 2010, the Delaware Court of Chancery entered an Order of Consolidation and a
Stipulation and Scheduling Order, whereby the Court, inter alia, consolidated
the Delaware Actions except for Boehm, which had been
withdrawn, and set a schedule for expedited discovery.  On November 16,
2010, plaintiffs in the Delaware Actions filed an amended and consolidated class
action complaint in the Court of Chancery.
  -51-
  On
November 22, 2010, Helmut Boehm filed a suit in the United States District Court
for the Southern District of New York, captioned Boehm v. Capital Gold, et
al., 10-CIV-8818 (RMB), naming as defendants CGC and its directors, as
well as Gammon Gold and Capital Gold AcquireCo.  The complaint alleges that
CGC and its directors violated Section 14(a) and Section 20(a) of the Securities
Exchange Act by issuing or causing to be issued a registration statement
containing material misleading statements and omissions.  The complaint
also asks the District Court to exercise its jurisdiction over putative class
action claims under Delaware law against CGC and its directors for breach of
fiduciary duty and against CGC, Gammon and Capital Gold AcquireCo for aiding and
abetting breach of fiduciary duty.  The basis for all claims and request
for relief are substantially identical to those in the amended and consolidated
class action complaint filed in Delaware.
 
 The
defendants believe the Delaware Actions and the New York Actions lack merit and
will contest them vigorously.
 
 Item
      1A.
              Risk
      Factors
 
 The
risks described below should not be considered to be comprehensive and
all-inclusive.  Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations.  If
any events occur that give rise to the following risks, our business, financial
condition, cash flow or results of operations could be materially and adversely
affected, and as a result, the trading price of our common stock could be
materially and adversely impacted.  These risk factors should be read in
conjunction with other information set forth in this report, including our
Consolidated Financial Statements and the related Notes.
 
 Risks related to our
business and operations
 
 While
Capital Gold believes that it will continue to generate positive cash flow and
profits from operations, if it encounters unexpected problems, it may need to
raise additional capital.   If additional capital is required and
Capital Gold is unable to obtain it from outside sources, Capital Gold may be
forced to reduce or curtail its operations or its anticipated exploration
activities.
 
 Prior to
the first fiscal quarter of 2008, Capital Gold was not able to generate cash
flow from operations.  While it is now generating positive cash flow and
profits, if Capital Gold encounters unexpected problems and it is unable to
continue to generate positive cash flow and profits, it may need to raise
additional capital.  Capital Gold also may need to raise additional capital
for property acquisition and development and new exploration. To the extent that
Capital Gold needs to obtain additional capital, management intends to raise
such funds through the sale of its securities and/or joint venturing with one or
more strategic partners.  Capital Gold cannot assure that adequate
additional funding, if needed, will be available or on terms acceptable to
it.  If Capital Gold needs additional capital and it is unable to obtain it
from outside sources, Capital Gold may be forced to reduce or curtail its
operations or its anticipated exploration activities.
 
 Capital
Gold’s Credit Agreement with Standard Bank plc (“Standard Bank”) imposes
restrictive covenants on it.
 
 Capital
Gold’s Credit Agreement with Standard Bank requires it, among other obligations,
to meet certain financial covenants including, but not limited to, (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. $30,000,000, (iii) maintain a ratio of  debt to cash flow from
operations of no greater than 2.50:1.00, and (iv) a quarterly average minimum
liquidity of U.S. $500,000.  In addition, the Credit Agreement restricts,
among other things, Capital Gold’s ability to incur additional debt, create
liens on its property, dispose of any assets, merge with other companies, enter
into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with the
restrictions contained in the Credit Agreement could lead to an event of default
thereunder which could result in an acceleration of such indebtedness. As a
condition to closing the Nayarit Business Combination, Capital Gold obtained the
consent of Standard Bank.
  -52-
  Capital
Gold’s mining contractor is using some reconditioned equipment which could
adversely affect its cost assumptions and its ability to economically and
successfully mine the project.
 
 Sinergia
Obras Civiles Y Mineras, S.A. de C.V. (“Sinergia”), Capital Gold’s mining
contractor, is using a combination of fully functioning new and older
equipment.  Such older equipment is subject to the risk of more frequent
breakdowns and need for repair than new equipment.  If the equipment that
Capital Gold or Sinergia uses breaks down and needs to be repaired or replaced,
Capital Gold will incur additional costs and operations may be delayed,
resulting in lower amounts of gold recovered.  In such event, Capital
Gold’s capital and operating cost assumptions may be inaccurate and its ability
to economically and successfully mine the El Chanate project may be hampered,
resulting in decreased revenues and, possibly, a loss from
operations.
 
 The
gold deposit Capital Gold has identified at El Chanate is relatively
low-grade.  If Capital Gold’s estimates and assumptions are inaccurate, its
results of operation and financial condition could be materially adversely
affected.
 
 The gold
deposit Capital Gold is mining at its El Chanate mine 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 Capital Gold experiences problems related to the mining,
processing, or recovery of gold from ore at the mine, Capital Gold’s 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 Capital Gold’s best estimates.  There can be no assurance
that Capital Gold’s operations at El Chanate will continue to be
profitable.
 
 Gold
prices can fluctuate on a material and frequent basis due to numerous factors
beyond Capital Gold’s control.  Capital Gold’s 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 Capital Gold has an
interest will be significantly affected by changes in the market price of
gold.  Gold prices fluctuate on a daily basis.  During the year ended
October 31, 2010, the spot price for gold on the London Exchange has fluctuated
between $1,058.00 and $1,373.30 per ounce.  Gold prices are affected by
numerous factors beyond Capital Gold’s control, including:
  ·
                        industrial
      and commercial demand for gold,·
                        the
      level of interest rates,·
                        the
      rate of inflation,·
                        central
      bank sales,·
                        world
      supply of gold and·
                        stability
      of exchange
rates.
  Each of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments.  The current significant
instability in the financial markets heightens these fluctuations. 
 The price of gold has historically fluctuated widely and, depending on the
price of gold, revenues from mining operations may not be sufficient to offset
the costs of such operations.
 
 Capital
Gold may not be successful in hedging against interest rate fluctuations and may
incur mark-to-market losses and lose money through its hedging
programs.
 
 Capital
Gold has entered into interest rate swap agreements.  The terms of Capital
Gold’s Credit Agreement with Standard Bank require that it hedge at least 50% of
its outstanding loan balance.  There can be no assurance that Capital Gold
will be able to successfully hedge against interest rate
fluctuations.
  -53-
  Further,
there can be no assurance that the use of hedging techniques will always be to
Capital Gold’s benefit.  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 Capital Gold’s financial condition, results of operations and
cash flows.
 
 Capital
Gold’s material property interests are in Mexico. Risks of doing business in a
foreign country could adversely affect its results of operations and financial
condition.
 
 Capital
Gold faces risks normally associated with any conduct of business in a foreign
country with respect to its El Chanate Project in Sonora, Mexico, and its wholly
owned subsidiary’s Orion Gold Project in the State of Nayarit, 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 Capital Gold’s
efforts or operations which, in turn, could have a material adverse impact on
its cash flows, earnings, results of operations and financial condition. 
These risks include the following:
  ·
                                      labor
      disputes,·
                                      invalidity
      of governmental orders,·
                                      uncertain
      or unpredictable political, legal and economic
    environments,·
                                      war
      and civil disturbances,·
                                      changes
      in laws or policies,·
                                      taxation,·
                                      delays
      in obtaining or the inability to obtain necessary governmental
      permits,·
                                      governmental
      seizure of land or mining claims,·
                                      limitations
      on ownership,·
                                      limitations
      on the repatriation of earnings,·
                                      increased
      financial costs,·
                                      import
      and export regulations, including restrictions on the export of gold,
      and·
                                      foreign
      exchange
controls.
  These
risks may limit or disrupt Capital Gold’s projects, restrict the movement of
funds or impair contract rights or result in the taking of property by
nationalization or expropriation without fair compensation.
 
 High
levels of violence in Mexico may adversely affect Capital Gold’s exploration of
its Saric concessions.
 
 Recently,
fighting among rival drug cartels has led to unprecedented levels of violent
crime in Mexico. The security of Capital Gold’s exploration activities is an
important consideration, and this situation presents several risks to Capital
Gold’s exploration activity in Saric, including, among others, that our
employees or contractors may be directly affected by the violence which could
delay the Company’s ability to execute its strategic plans. In response to such
threats, Capital Gold may reduce its exploration activities in the areas of and
surrounding its Saric concessions, and it may further reduce or cease entirely
such activities in these areas. Such reduction or cessation of exploration
could materially and adversely affect Capital Gold’s exploration
efforts.
 
 A
national labor union has expressed interest in organizing the workers at Capital
Gold’s El Chanate Mine.
 
 The
workforce at El Chanate is currently non-unionized; however, a national labor
union is seeking to permit workers to vote on whether or not they would like to
organize under such labor union. Capital Gold is reviewing its options with
respect to the union’s activities. If the workforce were permitted to unionize,
such activity could result in higher production costs at the El Chanate mine;
however the Company would work to execute a favorable union contract. In
addition, although we have not experienced a work stoppage to date, if the
workforce chose not to unionize, the national labor seeking to unionize may
choose to illegally interrupt operations at El Chanate, which could have a
material adverse effect on our business, financial condition or results of
operations.
  -54-
  Capital
Gold sells gold in U.S. dollars; however, it incurs a significant amount of its
expenses in Mexican pesos.  If applicable currency exchange rates
fluctuate, Capital Gold’s revenues and results of operations may be materially
and adversely affected.
 
 Capital
Gold sells gold in U.S. dollars.  It incurs a significant amount of its
expenses in Mexican pesos.  As a result, Capital Gold’s 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 Capital Gold’s 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 Capital Gold’s ability to undertake exploration and
development activities in respect of future properties in the manner currently
contemplated, as well as its ability to continue to explore, develop and operate
those properties in which it has an interest or in respect of which it has
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.
 
 As
Capital Gold currently does not enter into forward sales, commodity, derivatives
or hedging arrangements with respect to its future gold production, it is
exposed to the impact of any significant decrease in the gold
price.
 
 As a
general rule, Capital Gold sells its gold at the prevailing market price.
Currently, Capital Gold generally does not enter into forwardsales,
commodity, derivative or hedging arrangements to establish a price in advance
for the sale of future gold production, although it may do so in the future. As
a result, Capital Gold may realize the benefit of any short-term increase in the
gold price, but is not protected against decreases in the gold price, and if the
price of gold decreases significantly, Capital Gold’s revenues may be materially
adversely affected.
 
 Compliance
with environmental regulations could adversely affect Capital Gold’s exploration
and future production activities.
 
 With
respect to environmental regulation, future environmental legislation could
require:
  ·
                                stricter
      standards and
enforcement,
  -55-
  ·
              increased
      fines and penalties for non-compliance,·
              more
      stringent environmental assessments of proposed projects
    and·
              a
      heightened degree of responsibility for companies and their officers,
      directors and employees.
  There can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect Capital Gold’s operations.
Capital Gold could be held liable for environmental hazards that exist on the
properties in which it holds interests, whether caused by previous or existing
owners or operators of the properties. Any such liability could adversely affect
its business and financial condition.
 
 Capital
Gold has insurance against losses or liabilities that could arise from its
operations.  If it incurs material losses or liabilities in excess of its
insurance coverage, its 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 Capital Gold’s future business
and operations.  Capital Gold currently maintains general liability,
business interruption, auto and property insurance coverage.   Capital
Gold cannot be certain that the insurance it has in place will cover all of the
risks associated with mining or that it will be able to maintain insurance to
cover these risks at economically feasible premiums. Capital Gold also might
become subject to liability for pollution or other hazards which it cannot
insure against or which it may elect not to insure against because of premium
costs or other reasons. Losses from such events may have a material adverse
effect on Capital Gold’s 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
Capital Gold’s 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 Capital Gold’s 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.
  -56-
  Capital
Gold is dependent on the efforts of certain key personnel and contractors to
develop Capital Gold’s El Chanate Project and Orion Project.  If Capital
Gold loses the services of these persons and contractors and it is unable to
replace them, Capital Gold’s operations at its El Chanate Project may be
disrupted and/or materially adversely affected.
 
 Capital
Gold is dependent on a relatively small number of key personnel who oversee the
El Chanate Project and the Orion Project.  The loss of any one of Capital
Gold’s key personnel could have an adverse effect on Capital Gold.  Capital
Gold also is dependent upon Sinergia to provide mining services.  Sinergia
commenced mining operations on March 25, 2007, and transitioned from the
pre-production to production phase of the mining contract in July 2007. 
Sinergia’s mining fleet is comprised of new and reconditioned equipment. 
If Capital Gold loses the services of its key personnel, or if Sinergia is
unable to effectively maintain its fleet, operations at its El Chanate Project
may be disrupted and/or materially adversely affected.
 
 There
are uncertainties as to title matters in the mining industry.  Capital Gold
believes that it has good title to its properties; however, any defects in such
title that cause Capital Gold to lose its rights in mineral properties could
jeopardize its business operations.
 
 Capital
Gold has investigated its rights to explore, exploit and develop its concessions
in manners consistent with industry practice and, to the best of Capital Gold’s
knowledge, those rights are in good standing.  However, Capital Gold cannot
assure that the title to or its rights of ownership in the El Chanate, Orion and
Huajicari concessions will not be challenged by third parties or governmental
agencies.  In addition, there can be no assurance that the concessions in
which Capital Gold has 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 Capital
Gold.
 
 Capital
Gold’s ability to maintain long-term profitability eventually will depend on its
ability to find, explore and develop additional properties.  Capital Gold’s
ability to acquire such additional properties could be hindered by competition.
If Capital Gold is unable to acquire, develop and economically mine additional
properties, it most likely will not be able to be profitable on a long-term
basis.
 
 Gold is a
non-renewable resource and gold mines continue to deplete their reserves while
in operation.  They eventually become depleted of ore or become
uneconomical to sustain mining operations.  The acquisition of gold
properties and their exploration and development are subject to intense
competition.  Companies with greater financial resources and larger staffs
for exploration and development may be in a better position than Capital Gold to
compete for such mineral properties.  If Capital Gold is unable to find,
develop and economically mine new properties, Capital Gold most likely will not
be able to be profitable on a long-term basis.
 
 Capital
Gold’s ability on a going forward basis to discover additional viable and
economic mineral reserves is subject to numerous factors, most of which are
beyond Capital Gold’s control and are not predictable. If Capital Gold is unable
to discover such reserves, it 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, Capital Gold’s
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.
  -57-
  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
      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 Capital Gold Stock
 
 The
issuance of a significant number of Capital Gold shares could adversely affect
the market price of Capital Gold shares.
 
 We
completed the business combination with Nayarit on August 2, 2010; consequently,
a significant number of additional shares of Capital Gold common stock became
available for trading in the public market.  The increase in the number of
Capital Gold shares may lead to sales of such shares or the perception that such
sales may occur, either of which may adversely affect the market for, and the
market price of, Capital Gold shares.
 
 The
NYSE EURONEXT may delist Capital Gold’s securities from its exchange which could
limit investors’ ability to make transactions in Capital Gold’s common stock and
subject it to additional trading restrictions.
 
 Capital
Gold’s common stock is listed on the NYSE EURONEXT, a national securities
exchange.  Although Capital Gold expects to continue to meet the minimum
continued listing standards, it cannot assure you that its securities will
continue to be listed on the NYSE EURONEXT in the future.
 
 If the
NYSE EURONEXT delists Capital Gold’s common shares from trading on its exchange,
Capital Gold could face significant material adverse consequences,
including:
 
 ·
              a
      limited availability for market quotations for Capital Gold’s common
      stock;
 
 ·
              reduced
      liquidity with respect to Capital Gold’s common
  stock;
 
 ·
              a
      determination that Capital Gold’s common stock is a “penny stock,” which
      will require brokers trading in the common stock to adhere to more
      stringent rules and possibly result in a reduced level of trading activity
      in the secondary trading market for Capital Gold’s common
      stock;
 
 ·
              limited
      amount of news and analyst coverage for Capital Gold’s common stock;
      and
 
 ·
              a
      decreased ability to issue additional securities or obtain additional
      financing in the future.
 
 In
addition, Capital Gold would no longer be subject to NYSE EURONEXT rules,
including rules requiring Capital Gold to have a certain number of independent
directors and to meet other corporate governance standards.
  -58-
  Capital
Gold does not intend to pay cash dividends in the near future.
 
 Capital
Gold’s board of directors determines whether to pay cash dividends on its issued
and outstanding shares.  The declaration of dividends will depend upon
Capital Gold’s future earnings, its capital requirements, its financial
condition and other relevant factors.  Capital Gold’s board does not intend
to declare any dividends on its shares for the foreseeable future.  Capital
Gold anticipates that it will retain any earnings to finance the growth of its
business and for general corporate purposes.
 
 Additional Risks and
Uncertainties related to the Business Combination with Nayarit completed August
2, 2010, and the combined entity
 
 Having
a reduced share position, as a result of the Nayarit Business Combination, may
reduce the influence that Capital Gold’s stockholders have on the management of
Capital Gold.
 
 On August
2, 2010, Capital Gold issued approximately 12,454,354 shares of its common stock
in the Nayarit Business Combination to Nayarit's then current stockholders and
assumed warrants and options to purchase an additional approximately 1,621,981
and 903,483 shares of Capital Gold common stock held by Nayarit's warrant and
option holders, respectively.  Based on the number of outstanding shares of
Nayarit common stock and Capital Gold common stock, after the Amalgamation, the
former stockholders of Nayarit own approximately 20.4% of Capital Gold. 
Consequently, the ability of the continuing stockholders of Capital Gold
following the Nayarit Business Combination to influence management of Capital
Gold through the election of directors has been substantially
reduced.
 
 If
the Nayarit Business Combination’s benefits do not meet the expectations of
financial or industry analysts, the market price of Capital Gold’s securities
may decline.
 
 The
market price of Capital Gold’s securities may decline as a result of the
consummation of the Nayarit Business Combination if:
 
 ·
              the
      Company does not achieve the perceived benefits of the Nayarit Business
      Combination as rapidly, or to the extent anticipated by, financial or
      industry analysts; or
 
 ·
              the
      effect of the Nayarit Business Combination on Capital Gold’s financial
      results is not consistent with the expectations of financial or industry
      analysts.
 
 Accordingly,
investors may experience a loss as a result of a decline in the market price of
Capital Gold’s securities.   A decline in the market price of Capital
Gold’s securities also could adversely affect its ability to issue additional
securities and its ability to obtain additional financing in the
future.
 
 The
combined company may not realize the benefits currently anticipated due to
challenges associated with integrating the operations of Capital Gold and
Nayarit.
 
 The
success of the combined company will depend in large part on the success of
management of the combined company integrating the operations of Nayarit with
those of Capital Gold going forward.  The failure of the combined company
to achieve such integration could result in the failure of the combined company
to realize the anticipated benefits of the Nayarit Business Combination and
could impair the results of operations, profitability, and financial results of
the combined company.
 
 There
can be no assurance that Capital Gold or Nayarit uncovered every item that could
have a material adverse effect on the combined company.
  Although
Capital Gold conducted business, financial and legal due diligence in connection
with the Nayarit Business Combination, there can be no assurance that due
diligence uncovered every item that could have a material adverse effect on the
combined company.  Accordingly, there may be matters involving Nayarit and
its financial statements that were not identified during their due
diligence.  Any of these issues could materially and adversely affect the
combined company’s financial condition.
  -59-
 
 Additional
risks and uncertainties related to our proposed merger with Gammon Gold Inc.
which could materially adversely affect our business, financial condition or
operating results.
 
 Our
merger with Gammon Gold is subject to certain conditions to closing that could
result in the merger not being consummated or being delayed, either of which
could negatively impact our stock price and future business and results of
operations.
 
 Consummation
of the merger is subject to a number of customary conditions, including, but not
limited to, the approval of the agreement and plan of merger by the stockholders
of Capital Gold, the effectiveness of a Form F-4 registration statement to be
filed by Gammon with the Securities and Exchange Commission to register the
shares of Gammon common stock to be issued in connection with the merger and
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. There is no assurance that Capital Gold will
receive the necessary approvals or satisfy the other conditions necessary for
completion of the merger. If any of the conditions to the merger are not
satisfied or, where waiver is permissible, not waived, the merger will not be
consummated. Failure to complete the merger would prevent Capital Gold from
realizing the anticipated benefits of the merger. Capital Gold has already and
expects to continue to incur significant costs associated with transaction fees,
professional services, taxes and other costs related to the merger. In the event
that the merger is not completed, Capital Gold will remain liable for these
costs and expenses. Furthermore, if the merger is not consummated, under some
circumstances we may be required to promptly pay a $10.3 million breakup fee to
Gammon, which could impact Capital Gold’s liquidity and results of
operations.In addition,
the current market price of Capital Gold common stock may reflect a market
assumption that the merger will occur, and a failure to complete the merger
could result in a negative perception by the market of us generally and a
resulting decline in the market price of our common stock. Any delay in the
consummation of the merger or any uncertainty about the consummation of the
merger could also negatively impact Capital Gold’s stock price and future
business and results of operations. We cannot assure you that the merger will be
consummated, that there will be no delay in the consummation of the merger or
that the merger will be consummated on the terms contemplated by the merger
agreement.
 
 Whether
or not the merger is completed, the announcement and pendency of the merger
could impact or cause disruptions in our business, which could have an adverse
effect on our business and results of operations.
 
 Whether
or not the merger is consummated, the announcement and pendency of the merger
could cause disruptions in or otherwise negatively impact our business and
results of operations. Among others:
 
 ·
              our
      employees may experience uncertainty about their future roles with the
      combined company, which might adversely affect our ability to retain and
      hire key personnel and other
employees;
 
 ·
              the attention of our management
      may be directed toward the completion of the merger and
      transaction-related considerations and may be diverted from the day-to-day
      operations and pursuit of other opportunities that could have been
      beneficial to our business;
and
  ·
              distributors
      or other vendors or suppliers may seek to modify or terminate their
      business relationships with us.
 
 These
disruptions could be exacerbated by a delay in the completion of the merger or
termination of the merger agreement and could have an adverse effect on our
business, results of operations or prospects if the merger is not completed or
the business, results of operations or prospects of the combined company if the
merger is completed.
  -60-
  Several
lawsuits have been filed against Capital Gold and other parties challenging the
Gammon Transaction, and an adverse judgment in such lawsuits may prevent the
Merger from becoming effective or from becoming effective within the expected
timeframe.
 
 Capital
Gold, the members of Capital Gold’s board of directors, Gammon Gold, and in some
instances Capital Gold’s CFO or Capital Gold AcquireCo have been named as
defendants in purported class action lawsuits brought by Capital Gold
stockholders challenging the proposed Gammon Transaction, seeking, among other
things, to enjoin the defendants from consummating the Gammon Transaction on the
agreed-upon terms.
 
 The
outcome of the pending and potential future litigation is difficult to predict
and quantify and the defense of such claims or actions can be costly. In
addition to diverting financial and management resources and general business
disruption, we may suffer from adverse publicity that could harm our reputation,
regardless of whether the allegations are valid or whether we are ultimately
held liable. A temporary or permanent injunction could delay or prevent
completion of the Gammon Transaction and such delay or failure of the
transaction could cause the adverse results discussed above.
 
 A
judgment or settlement that is not covered by or is significantly in excess of
our insurance coverage for any claims, or our obligations to indemnify the
individual defendants, could materially and adversely affect our financial
condition, results of operations and cash flows.
 
 See "Item
1. Legal Proceedings" for more information about the putative class action
lawsuits related to the Gammon Transaction that have been filed.
 
 Item
      2.
              Unregistered Sales of
      Equity Securities and Use of
Proceeds.
 
 None.
 
 Item
      3.
              Defaults Upon Senior
      Securities.
 
 None.
 
 Item
      4
              Submission of Matters
      to a Vote of Security
Holders.
 
 None.
 
 Item
      5.
              Other
      Information.
 
 None.
 
 Item
      6.
              Exhibits.
 
 31.1
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Executive Officer.
 31.2
              Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Financial Officer.
 32.1
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Executive Officer.
 32.2
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
      Company's Chief Financial Officer.
  -61-
  SIGNATURES
 
 Pursuant
to the requirements of the Exchange Act, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  CAPITAL GOLD CORPORATIONDate:
      December 10, 2010
                    By:
                    /s/ Colin SutherlandColin
      SutherlandPresident
      and Director(Principal
      Executive Officer)Date:
      December 10, 2010
                    By:
                    /s/ Christopher M. ChipmanChristopher
      M. ChipmanChief
      Financial Officer(Principal
      Financial
Officer)
  -62-