UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q


(Mark
One)


x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934





For
the Quarterly Period Ended September 30, 2010




OR





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




For the
transition period from ______________ to ______________




Commission
File No. 000-32429





COMSTOCK MINING
INC.


(Exact
name of small business issuer as specified in its charter)





NEVADA
              
              1040
              
              65-0955118(State or other jurisdiction of
              
              (Primary Standard Industrial
              
              (I.R.S. Employerincorporation or organization)
              
              Classification Code Number)
              
              Identification No.)





P.O. Box
1118


Virginia
City, NV 89440


(Address
of principal executive offices)


(775)
847-5272


(Registrant’s telephone number,
including area code)





N/A


(Former
Name or Former Address, 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  x   No   ̈





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





Large
accelerated filer  ̈        Accelerated
filer  ̈


 ̈ Non-accelerated
filer       x Smaller reporting
company





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




The
number of shares of Common Stock, $0.000666 par value, of the registrant
outstanding at November 11, 2010 was 20,996,234.








TABLE OF
CONTENTS





PART
      I.Item
      1. Financial Statements.
                4CONDENSED
      CONSOLIDATED BALANCE SHEETS
                4CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS
                6CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS
                8CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
                10NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                11Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                33Item
      4. Controls and Procedures.
                42PART
      II.Item
      1. Legal Proceedings.
                43Item
      1A. Risk Factors.
                43Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                43Item
      3. Defaults Upon Senior Securities.
                44Item
      5. Other Information.
                44Item
      6. Exhibits.
                44SIGNATURES
                45EXHIBIT
      INDEXCertification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      Rule 15d-14(a)Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      Section 1350





Statement
Regarding Forward-Looking Statements





This
Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. All statements contained in this report on
Form 10-Q, other than statements of historical facts, are forward-looking
statements within the meaning of applicable securities laws. Forward-looking
statements include statements about matters such as: future prices and sales of
and demand for our products; future industry market conditions; future changes
in our exploration activities, production capacity and operations; future
exploration, production, operating and overhead costs; operational and
management restructuring activities (including implementation of methodologies
and changes in the board of directors); future employment and contributions of
personnel; tax and interest rates; capital expenditures and their impact on us;
nature, timing and accounting for restructuring charges, gains or loses on debt
extinguishment,  derivative liabilities and the impact thereof;
productivity, business process, rationalization, restructuring, investment,
acquisition, consulting, operational, tax, financial and capital projects and
initiatives; contingencies; environmental compliance and changes in the
regulatory environment; offerings, sales and other actions regarding debt or
equity securities; and future working capital, costs, revenues, business
opportunities, debt levels, cash flows, margins, earnings and
growth.  The words "believe," "expect," "anticipate," "estimate,"
"project," "plan," "should," "intend," "may," "will," "would," "potential" and
similar expressions identify forward-looking statements, but are not the
exclusive means of doing so.




2





These
statements are based on assumptions and assessments made by our management in
light of their experience and their perception of historical and current trends,
current conditions, possible future developments and other factors they believe
to be appropriate. Forward-looking statements are not guarantees,
representations or warranties and are subject to risks and uncertainties that
could cause actual results, developments and business decisions to differ
materially from those contemplated by such forward-looking
statements.  Some of those risks and uncertainties include the risk
factors set forth in this report and our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and the following: the current global
economic and capital markets uncertainties; the speculative  nature of
gold or mineral exploration, including risks of diminishing quantities or grades
of qualified resources and reserves; operational or technical difficulties in
connection with  exploration or mining activities; contests over our
title to properties; potential inability to continue to comply with government
regulations; adoption of or changes in legislation or regulation
adversely  affecting our business opportunities that my be presented
to or pursued by us; changes in the United States or other monetary o fiscal
policies o regulations in response to the recent capital markets and economic
crises; interruptions in our production capabilities due to unexpected equipment
failures; fluctuation of  prices for gold or certain other commodities
(such as silver, copper, diesel fuel and electricity);changes in generally
accepted accounting principles; geopolitical events; potential inability to
implement our business strategies;  potential inability to grow
revenues organically; potential inability to attract and retain key personnel;
interruptions in delivery of critical supplies and equipment, raw materials due
to credit or other limitations imposed by vendors; assertion of claims, lawsuits
and proceedings against us; potential inability to list our securities on any
securities exchange or market; and work stoppages or other labor
difficulties.  Occurrence of such events or circumstances could have a
material adverse effect on our business, financial condition, results of
operations or cash flows or the market price of our securities.  All
subsequent written and oral forward-looking statements by or attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
these factors.  All forward-looking statements included in this report
are based on information available to us as of the filing date of this report.
We undertake no obligation to update or revise any forward-looking statement,
whether as a result of new information, future events, changed circumstances or
otherwise.


3





PART I.


Item 1.Financial
Statements.





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS




Sept.
      30,
                                  2010
                                
                                
                                December 31,
                                  2009(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                102,634
                                
                                
                                $
                                246,214Prepaid
      expenses
                                
                                
                                91,764
                                
                                
                                
                                ―Total
      Current Assets
                                
                                
                                194,398
                                
                                
                                
                                246,214MINERAL
      RIGHTS, PLANT AND EQUIPMENTMineral
      rights
                                
                                
                                981,409
                                
                                
                                
                                1,270,547Plant
      and equipment, net
                                
                                
                                3,292,459
                                
                                
                                
                                2,301,466Total
      Mineral Rights, Plant and Equipment
                                
                                
                                4,273,868
                                
                                
                                
                                3,572,013RECLAMATION
      BOND DEPOSIT
                                
                                
                                766,768
                                
                                
                                
                                766,768LONG-LIVED
      DEFERRED RECLAMATION EXPENSE
                                
                                
                                351,973
                                
                                
                                
                                340,159TOTAL
      ASSETS
                                
                                $
                                5,587,007
                                
                                
                                $
                                4,925,154





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4


COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)




Sept. 30,
                                        2010
                                      
                                      
                                      December 31,
                                        2009(Unaudited)LIABILITIES AND STOCKHOLDERS’
      DEFICITCURRENT
      LIABILITIESAccounts
      payable
                                      
                                      $
                                      1,635,552
                                      
                                      
                                      $
                                      1,608,493Accrued
      expenses
                                      
                                      
                                      369,505
                                      
                                      
                                      
                                      271,054Accrued
      interest payable
                                      
                                      
                                      7,027,569
                                      
                                      
                                      
                                      4,870,713Notes,
      convertible notes, and debentures payable
                                      
                                      
                                      17,092,778
                                      
                                      
                                      
                                      15,145,698Other
      debt obligations
                                      
                                      
                                      1,021,061
                                      
                                      
                                      
                                      1,000,000Total
      Current Liabilities
                                      
                                      
                                      27,146,465
                                      
                                      
                                      
                                      22,895,958LONG-TERM
      DEBT AND OTHER LONG-TERM LIABILITIESNotes,
      convertible notes, and debentures payable, net of current
      portion
                                      
                                      
                                      3,871,382
                                      
                                      
                                      
                                      3,025,325Long-term
      debt obligation, net of current portion
                                      
                                      
                                      688,941
                                      
                                      
                                      
                                      490,000Derivative
      liability
                                      
                                      
                                      13,548,862
                                      
                                      
                                      
                                      4,500,189Long-term
      reclamation liability
                                      
                                      
                                      1,309,528
                                      
                                      
                                      
                                      1,186,966Total
      Long-Term Debt and Other Long-Term Liabilities
                                      
                                      
                                      19,418,713
                                      
                                      
                                      
                                      9,202,480Total
      Liabilities
                                      
                                      
                                      46,565,178
                                      
                                      
                                      
                                      32,098,438COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      DEFICITCommon
      stock, $.000666 par value 3,950,000,000 shares authorized, shares issued
      and outstanding were 19,406,382 (Sept.  30, 2010) and 18,310,339
      (Dec. 31, 2009)
                                      
                                      
                                      12,925
                                      
                                      
                                      
                                      12,195Additional
      paid-in capital
                                      
                                      
                                      29,195,009
                                      
                                      
                                      
                                      27,742,913Accumulated
      deficit
                                      
                                      
                                      (70,186,105
                                      )
                                      
                                      
                                      (54,928,392
                                      )Total
      Stockholders’ Deficit
                                      
                                      
                                      (40,978,171
                                      )
                                      
                                      
                                      (27,173,284
                                      )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                                      
                                      $
                                      5,587,007
                                      
                                      
                                      $
                                      4,925,154





On June
4, 2010, we received approval from the Financial Industry Regulatory Authority
(“FINRA”) clearing the one-for-two hundred reverse stock split of our common
stock previously approved by our stockholders and announced on May 10,
2010.   The reverse stock split took effect on Monday, June 7, 2010
(“Effective Date”).  Accordingly, the consolidated balance sheet above
and the following consolidated financial statements reflect post reverse split
common shares.





See
accompanying notes to the condensed consolidated financial
statements.


5





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




Three Months Ended Sept. 30,2010
                                  
                                  
                                  2009REVENUE
      FROM GOLD SALES, Net
                                  
                                  $
                                  ―
                                  
                                  
                                  $
                                  ―COST
      AND EXPENSESDepletion,
      depreciation and amortization
                                  
                                  
                                  31,828
                                  
                                  
                                  
                                  37,604Reclamation,
      exploration and test mining expenses
                                  
                                  
                                  570,616
                                  
                                  
                                  
                                  485,430General
      and administrative
                                  
                                  
                                  583,156
                                  
                                  
                                  
                                  330,453Consultants
      and professional fees
                                  
                                  
                                  471,824
                                  
                                  
                                  
                                  32,204Total
      Cost and Expenses
                                  
                                  
                                  1,657,424
                                  
                                  
                                  
                                  885,691LOSS
      FROM OPERATIONS
                                  
                                  
                                  (1,657,424
                                  )
                                  
                                  
                                  (885,691
                                  )OTHER
      INCOME (EXPENSE):Financing
      cost
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  (111,160
                                  )Gain
      on sale of royalty
                                  
                                  
                                  ―
                                  
                                  
                                  
                                  ―Derivative
      change in fair value
                                  
                                  
                                  (5,953,651
                                  )
                                  
                                  
                                  (42,643
                                  )Interest
      expense
                                  
                                  
                                  (1,093,831
                                  )
                                  
                                  
                                  (1,693,994
                                  )Total
      Other Expense
                                  
                                  
                                  (7,047,482
                                  )
                                  
                                  
                                  (1,847,797
                                  )NET
      LOSS
                                  
                                  $
                                  (8,704,906
                                  )
                                  
                                  $
                                  (2,733,488
                                  )Net
      loss per common share – basic and diluted
                                  
                                  $
                                  (0.45
                                  )
                                  
                                  $
                                  (0.15
                                  )Basic
      and diluted weighted average common shares outstanding
                                  
                                  
                                  19,169,218
                                  
                                  
                                  
                                  18,079,535





See
accompanying notes to the condensed consolidated financial
statements.


6





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




Nine Months Ended
                                    September
      30,2010
                                  
                                  
                                  2009REVENUE
      FROM GOLD SALES, Net
                                  
                                  $
                                  ―
                                  
                                  
                                  $
                                  ―COST
      AND EXPENSESDepletion,
      depreciation and amortization
                                  
                                  
                                  178,884
                                  
                                  
                                  
                                  114,073Reclamation,
      exploration and test mining expenses
                                  
                                  
                                  2,331,869
                                  
                                  
                                  
                                  2,577,821General
      and administrative
                                  
                                  
                                  1,535,503
                                  
                                  
                                  
                                  1,022,670Consultants
      and professional fees
                                  
                                  
                                  855,673
                                  
                                  
                                  
                                  177,610Total
      Cost and Expenses
                                  
                                  
                                  4,901,929
                                  
                                  
                                  
                                  3,892,174LOSS
      FROM OPERATIONS
                                  
                                  
                                  (4,901,929
                                  )
                                  
                                  
                                  (3,892,174
                                  )OTHER
      INCOME (EXPENSE):Financing
      cost
                                  
                                  
                                  (169,247
                                  )
                                  
                                  
                                  (83,500
                                  )Gain
      on sale
                                  
                                  
                                  300,000
                                  
                                  
                                  
                                  25,000Derivative
      change in fair value
                                  
                                  
                                  (7,472,128
                                  )
                                  
                                  
                                  (1,898,838
                                  )Interest
      expense
                                  
                                  
                                  (3,014,408
                                  )
                                  
                                  
                                  (3,296,145
                                  )Total
      Other Expense
                                  
                                  
                                  (10,355,783
                                  )
                                  
                                  
                                  (5,253,483
                                  )NET
      LOSS
                                  
                                  $
                                  15,257,712
                                  )
                                  
                                  $
                                  (9,145,657
                                  )Net
      loss per common share – basic and diluted
                                  
                                  $
                                  (0.81
                                  )
                                  
                                  $
                                  (0.52
                                  )Basic
      and diluted weighted average common shares outstanding
                                  
                                  
                                  18,907,926
                                  
                                  
                                  
                                  17,691,078





See
accompanying notes to the condensed consolidated financial
statements.


7





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
                                        month Period Ended
                                        September 30,2010
                                      
                                      
                                      2009OPERATING
      ACTIVITIES:Net
      loss
                                      
                                      $
                                      (15,257,712
                                      )
                                      
                                      $
                                      (9,145,657
                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                      
                                      
                                      178,884
                                      
                                      
                                      
                                      114,073Stock
      warrants and stock based compensation
                                      
                                      
                                      117,183
                                      
                                      
                                      
                                      2,025,152G
      Gain of sale of royalty interest
                                      
                                      
                                      (300,000
                                      )
                                      
                                      
                                      ―Interest
      paid through the issuance of stock
                                      
                                      
                                      446,913
                                      
                                      
                                      
                                      1,342,979Accretion
      and debt discount interest
                                      
                                      
                                      419,280
                                      
                                      
                                      
                                      1,013,513Payments
      through the issuance of company stock
                                      
                                      
                                      34,000
                                      
                                      
                                      
                                      36,000Financing
      costs
                                      
                                      
                                      169,247
                                      
                                      
                                      
                                      52,500Derivative
      change fair value
                                      
                                      
                                      7,472,128
                                      
                                      
                                      
                                      42,643Net
      loss adjusted for non-cash operating activities
                                      
                                      
                                      (6720,077
                                      )
                                      
                                      
                                      (4,518,797
                                      )Changes
      in operating assets and liabilities:Prepaid
      and other current assets
                                      
                                      
                                      (91,764
                                      )
                                      
                                      
                                      ―Accounts
      payable
                                      
                                      
                                      27,059
                                      
                                      
                                      
                                      410,423Accrued
      expenses
                                      
                                      
                                      2,255,307
                                      
                                      
                                      
                                      1,150,945Other,
      net
                                      
                                      
                                      ―
                                      
                                      
                                      
                                      ―NET
      CASH USED IN OPERATING ACTIVITIES
                                      
                                      
                                      (4,529,475
                                      )
                                      
                                      
                                      (2,957,429
                                      )INVESTING
      ACTIVITIES:Proceeds
      received from sale of royalty less acquisition of mineral
      claims
                                      
                                      
                                      520,000
                                      
                                      
                                      
                                      ―Acquisition  of
      plant and equipment
                                      
                                      
                                      (329,107
                                      )
                                      
                                      
                                      (128,880
                                      )NET
      PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES
                                      
                                      
                                      190,893
                                      
                                      
                                      
                                      (128,880
                                      )FINANCING
      ACTIVITIES:Principal
      payments on other debt obligations
                                      
                                      
                                      (504,998
                                      )
                                      
                                      
                                      (37,040
                                      )Net
      proceeds from the issuance of company stock
                                      
                                      
                                      ―
                                      
                                      
                                      
                                      902,500Proceeds
      from the issuance of convertible debentures, net of financing
      cost
                                      
                                      
                                      4,700,000
                                      
                                      
                                      
                                      1,995,000NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                                      
                                      
                                      4,195,002
                                      
                                      
                                      
                                      2,860,460DECREASE
      IN CASH AND CASH EQUIVALENTS
                                      
                                      
                                      (143,580
                                      )
                                      
                                      
                                      (225,849
                                      )CASH
      AND CASH EQUIVALENTS, BEGINNING OF QUARTER
                                      
                                      
                                      246,214
                                      
                                      
                                      
                                      322,938CASH
      AND CASH EQUIVALENTS, END OF QUARTER
                                      
                                      $
                                      102,634
                                      
                                      
                                      $
                                      97,089SUPPLEMENTAL
      CASH FLOW INFORMATION:INCOME
      TAXES
                                      
                                      $
                                      ―
                                      
                                      
                                      $
                                      ―INTEREST
      PAID
                                      
                                      $
                                      55,475
                                      
                                      
                                      $
                                      8,917




8





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)





Nine
                  month Period Ended
                  September 30,2010
                
                
                2009Supplemental
      disclosure of non-cash investing and financing activities:Issuance
      of company stock for interest
                
                $
                446,913
                
                
                $
                1,342,979Conversion
      of convertible debenture principal into company’s common
      shares
                
                $
                835,483
                
                
                $
                ―Seller
      note for acquisition of land
                
                $
                725,000
                
                
                $
                120,000





See
accompanying notes to the condensed consolidated financial
statements.


9





COMSTOCK
MINING INC.


CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT


For
the Nine months Period Ended September 30, 2010





(Common
Stock Par value $.000666 per share; 3,950,000,000 shares authorized


Preferred
Stock Par Value $.000666 per share; 50,000,000 shares authorized)





Common
                              Shares Issued
                            
                            
                            Par value
                              $.000666
                              per share
                            
                            
                            Additional
                              Paid-in
                              Capital
                            
                            
                            Accumulated
                              Deficit
                            
                            
                            TotalDecember
      31, 2008
                            
                            
                            16,904,742
                            
                            
                            $
                            11,259
                            
                            
                            $
                            24,961,957
                            
                            
                            $
                            (48,863,723
                            )
                            
                            $
                            (23,890,507
                            )Common
      stock issued for:Debenture
      principal
                            
                            
                            133,264
                            
                            
                            
                            89
                            
                            
                            
                            192,179
                            
                            
                            
                            —
                            
                            
                            
                            192,268Debenture
      interest
                            
                            
                            751,833
                            
                            
                            
                            501
                            
                            
                            
                            1,477,096
                            
                            
                            
                            —
                            
                            
                            
                            1,477,597Employees
                            
                            
                            27,500
                            
                            
                            
                            19
                            
                            
                            
                            67,231
                            
                            
                            
                            —
                            
                            
                            
                            67,250Private
      placement
                            
                            
                            493,000
                            
                            
                            
                            327
                            
                            
                            
                            902,173
                            
                            
                            
                            —
                            
                            
                            
                            902,500Subtotal
                            
                            
                            1,405,597
                            
                            
                            
                            936
                            
                            
                            
                            2,638,679
                            
                            
                            
                            —
                            
                            
                            
                            2,639,615Warrant
      cost and stock based option compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            142,277
                            
                            
                            
                            
                            
                            
                            
                            142,277Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (6,064,669
                            )
                            
                            
                            (6,064,669
                            )December
      31, 2009
                            
                            
                            18,310,339
                            
                            
                            $
                            12,195
                            
                            
                            $
                            27,742,913
                            
                            
                            $
                            (54,928,392
                            )
                            
                            $
                            (27,173,284
                            )Common
      stock issued for:Debenture
      principal
                            
                            
                            703,770
                            
                            
                            
                            468
                            
                            
                            
                            835,015
                            
                            
                            
                            —
                            
                            
                            
                            835,483Debenture
      interest
                            
                            
                            359,630
                            
                            
                            
                            240
                            
                            
                            
                            446,673
                            
                            
                            
                            —
                            
                            
                            
                            446,913Employees
                            
                            
                            7,500
                            
                            
                            
                            5
                            
                            
                            
                            10,470
                            
                            
                            
                            —
                            
                            
                            
                            10,475Consultant
                            
                            
                            25,000
                            
                            
                            
                            17
                            
                            
                            
                            33,983
                            
                            
                            
                            —
                            
                            
                            
                            34,000Subtotal
                            
                            
                            1,095,900
                            
                            
                            
                            730
                            
                            
                            
                            1,326,141
                            
                            
                            
                            —
                            
                            
                            
                            1,326,871Stock
      based option compensation and other, net
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            125,955
                            
                            
                            
                            —
                            
                            
                            
                            125,955Other,
      net
                            
                            
                            143
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (1
                            )
                            
                            
                            142Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (15,257,712
                            )
                            
                            
                            (15,257,712
                            )September
      30, 2010
                            
                            
                            19,406,382
                            
                            
                            $
                            12,925
                            
                            
                            $
                            29,195,009
                            
                            
                            $
                            (70,186,105
                            )
                            
                            $
                            (40,978,171
                            )





See
accompanying notes to the condensed consolidated financial
statements.


10





COMSTOCK
MINING INC.


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010 and 2009





Note
1 - Basis of Presentation




COMSTOCK
MINING Inc. is a Nevada-based gold and silver mining company with extensive,
contiguous property in the Comstock Lode Mining District. The Comstock Mine
Project is located in Storey County, Nevada, approximately 3 miles south of
Virginia City and 30 miles southeast of Reno, Nevada. Access to the property is
by State Route 342, a paved highway. The Comstock District is located within the
western portion of the Basin and Range Province of Nevada, between Reno and
Carson City. The majority of our activities occur in three major structural
zones: (1) the northeast striking, (2) the east dipping Comstock and Occidental
fault zones and (3) the northwest striking, east dipping Silver City fault
zone.





On June
4, 2010, we received approval from the Financial Industry Regulatory Authority
(“FINRA”) clearing the one-for-two hundred reverse stock split of our common
stock previously approved by our stockholders and announced on May 10,
2010.   The reverse stock split took effect on Monday, June 7, 2010
(“Effective Date”).  Accordingly, the consolidated balance sheet above
and the following consolidated financial statements reflect post reverse split
common shares.





On July
21, 2010, we changed our name from “GoldSpring, Inc.” to “Comstock Mining Inc.,”
by way of a merger with a wholly owned subsidiary Comstock Mining Inc. that was
formed solely for the purpose of changing our name.  Pursuant to
Section 92A.180 of the Nevada Revised Statutes, the merger did not require
stockholder approval.  An OTC Equity Issuer Notification Form was
filed with the Financial Industry Regulatory Authority (“FINRA”) on July 9,
2010, and the name change was approved by FINRA, effective July 21,
2010.  On the effective date, the name changed with the
Over-the-Counter Bulletin Board and the Company’s shares of common stock began
trading under the ticker symbol “LODE.”





Our
Company began acquiring properties in the Comstock district in 2003. Since then,
we have secured permits, built an infrastructure and brought the exploration
project into test mining production. We began further consolidating the Comstock
district in 2005, by acquiring additional properties in the district, expanding
our footprint and creating opportunities for exploration and mining. Because of
the Comstock district’s historic significance and its world class bonanza
precious metal grades, the geology is well known and extensively studied in
detail by our Company, our advisors and many independent researchers. We have
amassed the largest known library of historical data and detailed surface
mapping and, in conjunction with drilling programs designed to expand the known
historical data base, we have invested in our understanding of the Comstock’s
structural geology and its broader geological footprint.





Our
Company now owns or controls 6,412 acres of active lode mining claims in the
Comstock district. The acreage is comprised of 892 acres of patented claims
(private lands) and 5,520 acres of unpatented claims, Bureau of Land Management
(BLM) administered. The project includes a heap leach processing facility that
we will upgrade to accommodate our current production plans.


11


Note
2 — Interim Financial Statements




The
accompanying interim unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 8 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 2010
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2010. For further information, refer to the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2009.





Note
3 — Going Concern





The
accompanying consolidating financial statements have been prepared on a going
concern basis, which assumes the Company will realize its assets and discharge
its liabilities in the normal course of business. As reflected in the
accompanying financial statements, the Company has losses from operations and
has no revenues from operations during the nine months ended September 30, 2010.
During the nine months ended September 30, 2010, the Company incurred a net loss
of $15,257,712. For the nine months ended September 30, 2010 the net cash used
in operating activities was $4,529,475. The Shareholders’ deficit at September
30, 2010, totaled $40,978,171.




On
October 20, 2010, the Company exchanged $29.4 million of note principal and
related obligations, representing substantially all of its senior secured
convertible and senior indebtedness, for shares of its newly created Series A
Preferred Convertible Stock. This transaction cured all defaults under the terms
of the notes being converted. On the same day, the Company received gross
proceeds of $35.75 million ($32.6 million, net of transaction expenses) in
conjunction with an equity raise to fund its working capital, exploration and
capital requirements to commence mine production. The Company’s believes that it
has sufficient funds to maintain and develop its operations beyond the next
twelve months. The Company’s ability to continue as a going concern is dependent
upon its ability to generate future profitable operations to meet its
obligations and repay its liabilities arising from normal business operations
when they come due.






Note
4 — Summary of Significant Accounting Policies




Terms
and Definitions




Company
              
              COMSTOCK
      MINING Inc. and SubsidiariesAPB
              
              Accounting
      Principles BoardARB
              
              Accounting
      Review BoardASC
              
              Accounting
      Standards Codification TopicASU
              
              Accounting
      Standards UpdateEITF
              
              Emerging
      Issues Task ForceFASB
              
              Financial
      Accounting Standards BoardFSP
              
              FASB
      Staff PositionPlum
      LLC
              
              Plum
      Mining Company, LLCSAB
              
              SEC
      Staff Accounting BulletinSEC
              
              Securities
      Exchange CommissionSOP
              
              Statement
      of Position




Summarized
below are the significant accounting policies of COMSTOCK MINING
Inc.





Principles
of Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries: GoldSpring, LLC, The Plum Mining Company, LLC, and
the Plum Mine Special Purpose Company LLC. All material inter-company
transactions and balances have been eliminated in
consolidation.


12





Cash
and Cash Equivalents




We
consider all highly liquid debt securities purchased with original or remaining
maturities of three months or less to be cash equivalents. The carrying value of
cash equivalents approximates fair value.




Fair
Value of Financial Instruments





The
carrying amounts of cash and cash equivalents, accounts payable, and accrued
expenses approximate fair market value because of the short maturity of those
instruments. Furthermore, convertible debenture, other notes obligations, and
long-term debt and other liabilities payable amounts approximate fair value at
September 30, 2010 and December 31, 2009.





Credit
Risk





It is our
practice to place our cash equivalents in high-quality money market securities
with a major banking institution. Certain amounts of such funds in excess of
limits are not insured by the Federal Deposit Insurance Corporation. However, we
consider our credit risk associated with cash and cash equivalents to be
minimal.





Impairment
of Long Lived Assets and Long Lived Assets to be Disposed Of





The
Company accounts for impairment and disposal of long-lived assets in accordance
with ASC 360 Property, Plant, and Equipment. ASC 360 establishes the accounting
model for long-lived assets to be disposed of by sale and applies to all
long-lived assets, including discontinued operations. This standard requires
those long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or
discontinued operations.




We
implemented ASC 360 in our evaluation of the fair value of certain assets
described in Notes 5 and 6.




Revenue
Recognition




The
Company recognizes revenue in accordance with the provisions of ASC 605 Revenue,
which states that revenue is realized or realizable and earned when all of the
following four criteria are met:




1)
            Persuasive evidence of an
      arrangement exists,


2)
            Delivery has occurred or services
      have been rendered,


3)
            The seller’s price to the buyer
      is fixed or determinable,
and


4)
            Collectability is reasonably
      assured.





Specifically,
when we are in operational status, sales of gold and silver Dore are recorded
when we issue a sell order instruction to our refiner, Johnson Matthey, to sell
a specified quantity of metals. Sales orders are typically executed within 48
hours of receipt. Upon receipt of the sale order, Johnson-Matthey confirms
quantities available and executes the sale at the current market price of the
metals on the day and time of the sales order. We record revenues on the day the
sales order is issued based on the confirmed quantity of metal at the confirmed
market price. Proceeds from the sale of metals are typically wired to our bank
within twenty-four hours.





Stock Issued For
Services




We base
the value of stock issued for services on the market value of our common stock
at the date of issue and our estimate of the fair value of the services
received.




Plant and
Equipment




We state
plant and equipment at cost. We provide depreciation and amortization in amounts
sufficient to recognize the expense of depreciable assets to operations over
their estimated service lives.


13





We
capitalize expenditures for renewals and improvements that significantly extend
the useful life of an asset. We charge expenditures for maintenance and repairs
to operations when incurred. When assets are sold or retired, the cost of the
asset and the related accumulated depreciation are removed from the accounts and
any gain or loss is recognized at such time. We use the straight-line method of
depreciation for financial reporting purposes, depreciating assets over useful
lives ranging from 3 to 15 years.




We review
the carrying value of our plant and equipment assets on a quarterly basis. Where
information and conditions suggest impairment, we write-down these assets to net
recoverable amount, based on estimated future cash flows that may be attained
from them.




Mineral
Rights




We defer
acquisition costs until we determine the viability of the property. Since we do
not have proven and probable reserves as defined by SEC Industry Guide 7,
exploration expenditures are expensed as incurred.




We
expense holding costs to maintain a property on a care and maintenance basis as
incurred.




We review
the carrying value of our interest in each mineral claim on a quarterly basis to
determine whether impairment has incurred in accordance with ASC 360 (formerly
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”).




Where
information and conditions suggest impairment, we write-down these properties to
net recoverable amount, based on estimated future cash flows. Our estimate of
gold price, mineralized materials, operating capital, and reclamation costs are
subject to risks and uncertainties affecting the recoverability of our
investment in property, plant, and equipment. Although we have made our best
estimate of these factors based on current conditions, it is possible that
changes could occur in the near term that could adversely affect our estimate of
net cash flows expected to be generated from our operating properties and the
need for possible asset impairment write-downs.




Where
estimates of future net operating cash flows are not available and where other
conditions suggest impairment, we assess if carrying value can be recovered from
net cash flows generated by the sale of the asset or other means.




Reclamation
Liabilities and Asset Retirement Obligations




Minimum
standards for site reclamation and closure have been established by various
government agencies that affect certain of our operations. We calculate our
estimates of reclamation liability based on current laws and regulations and the
expected undiscounted future cash flows to be incurred in reclaiming, restoring,
and closing our operating mine sites. When we incur reclamation liabilities that
are not related to asset retirements we recognize the obligations in accordance
with ASC 410-30 (formerly SOP No. 96-1).




The
Company accounts for its reclamation liabilities and asset retirement
obligations in accordance with ASC 410 Asset Retirement and Environmental
Obligations (ASC 410). ASC 410 requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred. ASC 410 requires us to record a liability for the present value of our
estimated environmental remediation costs and the related asset created with it
when a recoverable asset (long-lived asset) can be realized.





Stock
Based Compensation





The
Company accounts for share based compensation in accordance with ASC 718
Compensation – Stock Compensation. Accordingly, the Company measures the cost of
employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award and recognizes cost over the requisite
service period.


14





Earnings
Per Common Share




In
calculating earnings per common share, we compute basic earnings per share by
dividing net loss by the weighted average number of common shares outstanding,
excluding the dilutive effects of common stock equivalents. For the three months
ended September 30, 2010 and 2009, we had net losses for which the effect of
common stock equivalents would be anti-dilutive. Accordingly only basic loss per
share is presented.




Use
of Estimates




In
preparing financial statements in conformity with generally accepted accounting
principles, we are required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenditures during the reported periods. Actual results could differ materially
from those estimates. Estimates may include those pertaining to the estimated
useful lives of property and equipment and software, determining the estimated
net realizable value of receivables, and the realization of deferred tax
assets.




Risks
and Uncertainties




We
regularly evaluate risks and uncertainties and, when probable that a loss or
expense will be incurred, record a charge to current period
operations.




Income
Taxes




We
recognize deferred tax assets and liabilities based on differences between the
condensed consolidated financial statement carrying amounts and tax bases of
assets and liabilities (using the applicable enacted tax rates and laws). We
provide a valuation allowance for deferred tax assets for which we do not
consider realization of such assets to be likely.




ACCOUNTING
STANDARDS UPDATES (ASU’s)




We do not
expect any significant impact on our Company’s consolidated financial position
or results of operations from other ASU’s issued but not effective until after
September 30, 2010,




Note
4 — Mineral Rights




Mineral
rights at September 30, 2010 and December 31, 2009, consisted of the
following:




Sept.
      30,
                      2010
                    
                    
                    December 31,
                      2009Comstock
      Placer Claims
                    
                    $
                    100,000
                    
                    
                    $
                    100,000Big
      Mike Copper Claims
                    
                    
                    —
                    
                    
                    
                    69,138Comstock
      Lode Claims
                    
                    
                    791,409
                    
                    
                    
                    1,011,409Water
      rights
                    
                    
                    90,000
                    
                    
                    
                    90,000Total
      Mineral Rights
                    
                    $
                    981,409
                    
                    
                    $
                    1,270,547




In
January 2010, we sold a 0.61% net smelter royalty on our Obester Property for
$550,000 to Precious Royalties, LLC, resulting in a gain of $300,000.
Accordingly, we adjusted our mining claim values to reflect the impact of the
net smelter royalty.





We
determined the Big Mike copper project in Northern Nevada to be impaired and to
have no fair value. In accordance with ASC 360, we recorded an impairment
expense of $69,138, which is included in the depreciation, depletion and
amortization expense on the Statement of Operations.





During
the third quarter 2010, we acquired additional mineral claims that totaled
$30,000.


15





Note
5 — Property and Equipment, net




Plant and
equipment at September 30, 2010 and December 31, 2009, consisted of the
following:




Sept
      30,
                        2010
                      
                      
                      December 31,
                        2009Land
      and Building
                      
                      $
                      3,352,443
                      
                      
                      $
                      2,327,443Vehicle
      and Equipment
                      
                      
                      314,094
                      
                      
                      
                      302,094Processing
      and Lab
                      
                      
                      719,528
                      
                      
                      
                      704,528Furniture
      and Fixtures
                      
                      
                      51,496
                      
                      
                      
                      49,390Property
      and Equipment
                      
                      
                      4,437,561
                      
                      
                      
                      3,383,455Less
      accumulated depreciation
                      
                      
                      (1,145,102
                      )
                      
                      
                      (1,081,989
                      )Total
      Property and Equipment, net
                      
                      $
                      3,292,459
                      
                      
                      $
                      2,301,466





On July
1, 2010, the Company obtained an exclusive 180-day exploration license with
option to purchase four patented lode claims totaling 95 acres known as the
Dayton property for $70,000.  This property is contiguous with the
Company’s Spring Valley Dondero holdings.  Under the purchase option,
the price for the property is $3,000,000 plus a 3% Net Smelter Return
(NSR).  The Company will receive credit for the full purchase price
through a reduction in the NSR by 75% until such time as the full $3,000,000
purchase price has been credited back.  The purchase price will be
paid through an initial payment of $500,000, with the balance payable in 20
equal, quarterly installments of $125,000, with no interest.





On July
20, 2010, we acquired  seven patented mining claims totaling 48 acres,
surface rights to two additional patented mining claims totaling 15 acres, 12
unpatented lode claims, and 15 acre-feet of water rights, all located in Storey
County, Nevada. The purchase price was $1,025,000, with an initial payment of
$300,000.  We financed the remaining $725,000 with an installment note
bearing 6% interest, requiring 60 monthly payments of $6,178 and a final payment
of then-unpaid principal and interest. The former owners of the parcel will
retain a 1.5% Net Smelter Royalty (NSR) on all future mineral production from
these claims.





During
the nine month period ended September 30, 2010, we purchased additional
equipment totaling $24,105.  The property and equipment additions
include $10,000 for processing equipment, $12,000 for a used pickup truck and
$2,105 for computers.





Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $63,114 and
$63,049, respectively.  We use the straight-line method of
depreciation for financial reporting purposes, depreciating buildings over 15
years and other assets over useful lives ranging from 3 to 10
years.




Note
6 – Reclamation Bond Deposit





We are
generally required to mitigate long-term environmental impacts by stabilizing,
contouring, re-sloping, and re-vegetating various portions of a site after
mining and mineral processing operations are completed. These reclamation
efforts are conducted in accordance with detailed plans that require review and
approval by the appropriate regulatory agencies.




The
Nevada Revised Statutes and regulations promulgated thereunder by the Nevada
State Environmental Commission and the Nevada Division of Environmental
Protection, Bureau of Mining and Reclamation require posted bonds for mining
projects that assure safe, stable and productive post-mining land use. We
secured a $1,106,882 mine reclamation financial assurance instrument through the
Nevada Division of Minerals' Bond Pool Program pursuant to the approved
Reclamation Plan, including a required cash deposit of
$766,768.


16





Note
7 — Long-term Reclamation Liability and Deferred Reclamation
Expense





Our
long-term reclamation liability was $1,323,131 and $1,186,966 as of September
30, 2010 and December 31, 2009, respectively. This obligation provides
reclamation for our Comstock Mine facility reclamation plan.  Our plan
was submitted and approved by the Nevada State Environmental Commission and
Division of Environmental Protection. We also recorded a deferred reclamation
expense of which the value is being amortized over the period of the anticipated
land disturbance. Costs of future expenditures for environmental remediation are
discounted to their present value. Such costs are based on management’s current
estimate of amounts expected to be incurred when the remediation work is
performed within current laws and regulations. It is reasonably possible that,
due to uncertainties associated with the application of laws and regulations by
regulatory authorities and changes in reclamation or remediation technology, the
ultimate cost of reclamation and remediation could change in the future. We
periodically review accrued liabilities for such reclamation and remediation
costs as evidence becomes available indicating that our liabilities have
potentially changed. The reclamation expense and the amortization of defined
reclamation expense for the nine month period ended September 30, 2010 and 2009
were $110,748 and $112,242, respectively.





Following
is a reconciliation of the aggregate retirement liability associated with our
reclamation plan for our Comstock Project:




9/30/10
                      
                      
                      12/31/09Long-term
      reclamation liability beginning of period
                      
                      $
                      1,186,966
                      
                      
                      $
                      1,105,342Additional
      obligations incurred
                      
                      
                      58,447
                      
                      
                      
                      ―Liabilities
      settled during the period
                      
                      
                      ―
                      
                      
                      
                      ―Increase
      in present value of the reclamation obligation (accretion
      expense)
                      
                      
                      64,115
                      
                      
                      
                      81,624Long-term
      asset reclamation liability
                      
                      $
                      1,309,528
                      
                      
                      $
                      1,186,966





Following
is a reconciliation of the aggregate long-lived deferred reclamation expense
associated with on our reclamation plan for our Comstock Project:




9/30/10
                      
                      
                      12/31/09Net
      long-lived deferred reclamation expense beginning of
period
                      
                      $
                      340,159
                      
                      
                      $
                      408,190Additional
      obligations incurred
                      
                      
                      58,447
                      
                      
                      
                      ―Amortization
      of deferred reclamation expense
                      
                      
                      (46,633
                      )
                      
                      
                      (68,031
                      )Long-lived
      deferred reclamation expense
                      
                      $
                      351,973
                      
                      
                      $
                      340,159




Note
8 - Notes, Convertible Notes and Debentures Payable




Notes, Convertible Notes and Debentures
Payable




9/30/10
                    
                    
                    12/31/09Convertible
      Debentures Payable – 2004 through August 2009
                    
                    $
                    14,442,778
                    
                    
                    $
                    15,278,261Promissory
      Notes Payable - 2005 through 2008
                    
                    
                    2,650,000
                    
                    
                    
                    2,650,000Convertible
      Notes Payable – December 2009 through June 2010, net
                    
                    
                    3,064,533
                    
                    
                    
                    242,762Convertible
      Notes Payable – June 2010, net
                    
                    
                    806,849
                    
                    
                    
                    ―Subtotal
                    
                    
                    20,964,160
                    
                    
                    
                    18,171,023Less
      current portion
                    
                    
                    (17,092,778
                    )
                    
                    
                    (15,145,698
                    )Long
      term portion
                    
                    $
                    3,871,382
                    
                    
                    $
                    3,025,325












9/30/10
                    
                    
                    12/31/09Convertible
      Debentures Payable – Investors
                    
                    $
                    1,078,157
                    
                    
                    $
                    1,105,908Convertible
      Debentures Payable - Mandatory Redemption payment
                    
                    
                    4,412,058
                    
                    
                    
                    4,412,058Convertible
      Notes Payable - 2006 & 2007
                    
                    
                    2,170,000
                    
                    
                    
                    2,170,000Convertible
      Notes Payable:  June – November 2008
                    
                    
                    2,500,000
                    
                    
                    
                    2,500,000Convertible
      Notes Payable – July 2008 Longview Amended and Restated
                    
                    
                    2,782,563
                    
                    
                    
                    2,782,563Convertible
      Notes Payable – December 2008
                    
                    
                    500,000
                    
                    
                    
                    500,000Convertible
      Notes Payable – May – August 2009
                    
                    
                    1,000,000
                    
                    
                    
                    1,807,732Total
                    
                    
                    14,442,778
                    
                    
                    
                    15,278,261




17


The terms
of the convertible debentures payable included above are as
follows:




Convertible
Debentures Payable – Investors





During
March 2004, we completed a private placement of securities (the “March
Offering”), to a group of accredited institutional and individual investors
,which generated $10 million in gross proceeds . On November 30, 2004, we
restructured the March Offering and entered into a new agreement (the
“Subscription Agreement”) whereby we exchanged 108,696 shares of common stock
and 108,696 warrants issued for convertible notes. These notes accrue interest
at 15% per annum.  The principal amount of the note and related
interest is convertible into Comstock Mining Common Stock at the lesser of (A)
$2.00 per share, or (B) eighty-five percent (85%) of the average of the five (5)
lowest closing bid prices of the common stock as reported by Bloomberg L.P. for
the twenty (20) trading days preceding the date the Company was obligated to pay
the debentures.  These notes and related interest are currently due
and payable.





Convertible
Debentures Payable – Mandatory Redemption Payment




On
March 31, 2005, the Winfield Group entered into a Settlement Agreement with the
Company whereby the Winfield Group agreed to convert the $6.9 million obligation
into Convertible Debentures (“the Debentures”).  These Debentures
accrue interest at 18% per annum.  The principal amount of the
Debentures and related interest is convertible into Comstock Mining Common Stock
at the lesser of (A) $2.00 per share, or (B) eighty-five percent (85%) of the
average of the five (5) lowest closing bid prices of the common stock as
reported by Bloomberg L.P. for the twenty (20) trading days preceding the date
the Company was obligated to pay the Debentures.  These Debentures and
related interest are currently due and payable.




Convertible
Notes Payable – 2006 & 2007




In August
2006, the Company entered into a loan agreement with the Winfield Group and
Longview LP whereby they agreed to loan up to $2,200,000 in exchange for
convertible debt and warrants.  A total of $2,170,000 was funded under
this loan agreement. These notes accrue interest at 18% per
annum.  The principal amount of the notes and related interest is
convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per
share, or (B) eighty-five percent (85%) of the average of the five (5) lowest
closing bid prices of the common stock as reported by Bloomberg L.P. for the
twenty (20) trading days preceding the date the Company was obligated to pay the
debentures.  These notes and related interest are currently due and
payable.





Convertible
Notes Payable: June – November 2008




In June
2008, the Company entered into a Loan Agreement with Winfield Group pursuant to
which Winfield Group agreed to loan the Company $2,500,000 no later than
December 31, 2008 through issuance of a series of secured notes (the “Notes”).
These Notes accrue interest at 9% per annum.  The principal amount of
the Notes and related interest is convertible into Comstock Mining Common Stock
at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume
Weighted Average Price” for the Borrower’s Common Stock for the five trading
days immediately prior to the Conversion Date.  These Notes have been
in default since late 2008 because we failed to make any monthly payment on the
Notes. Pursuant to the terms and conditions of this Loan Agreement, the Notes
become immediately payable upon default and thus the note balance has been
recorded as a current liability.


18


Convertible
Notes Payable – July 2008 (Longview Amended and Restated Note)




On July
10, 2008, the Company amended $2,175,000 principal amount of unsecured
promissory notes issued to Longview Fund, L.P. through the issuance of an
Amended and Restated $2,782.563 Promissory Note issued by the Company in favor
of Longview Fund, L.P. This note accrues interest at 11% per annum and is due
and payable on July 10, 2011.  The principal amount of the note and
related interest is convertible into Comstock Mining Common Stock at the lesser
of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average
Price” for the Borrower’s Common Stock for the five trading days immediately
prior to the Conversion Date.




Convertible
Notes Payable –December 2008





On
December 8, 2008, we completed a $500,000 financing transaction with Winfield
Group. In conjunction with this financing we issued to the Winfield Group notes
that accrue interest at 9% per annum.  The principal amount of these
notes and related interest is convertible into Comstock Mining Common Stock at
the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted
Average Price” for the Borrower’s Common Stock for the five trading days
immediately prior to the Conversion Date.  Pursuant to the terms and
conditions of the note agreement, the notes became immediately payable upon
default and thus the note balance has been recorded as a current liability since
December 31, 2009.





Convertible
Notes Payable – May 2009- August 2009




On May 1,
2009, the Company secured a $2,000,000 commitment for additional convertible
debt financing. The agreement, upon 30 days prior written notice, permitted the
Company to request financing in tranches between $250,000 and $500,000 per
request. Funding requests were permitted at any time between May 1, 2009 and
August 28, 2009. The Company requested and received $2,000,000 from this
financing.  These notes accrue interest at 9% per
annum.  The principal amount of these notes and related interest is
convertible into Comstock Mining Common Stock at the lesser of (A) $4.00 per
share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the
Borrower’s Common Stock for the five trading days immediately prior to the
Conversion Date. Pursuant to the terms and conditions of the loan agreement, the
notes became immediately payable upon default and thus the note balance has been
recorded as a current liability.





The
following summarizes the activity for Convertible Notes
Payable:





Note Balance
                        9/30/10
                      
                      
                      Note Balance
                        12/31/09Balances
      beginning of period
                      
                      $
                      1.807,732
                      
                      
                      $
                      —Convertible
      Note
                      
                      
                      —
                      
                      
                      
                      2,000,000Principal
      Payments
                      
                      
                      (807,732
                      )
                      
                      
                      (192,268
                      )Note
      Balance
                      
                      
                      1,000,000
                      
                      
                      
                      1,807,732





Promissory Notes Payable
–2005 through 2008





The
Company has the following promissory notes payable as of September 30, 2010
and December 31, 2009:





9/30/10
                        
                        
                        12/31/09Promissory
      Notes Payable-July 2005 Financing
                        
                        $
                        1,200,000
                        
                        
                        $
                        1,200,000Promissory
      Notes Payable-December 2007 Financing
                        
                        
                        600,000
                        
                        
                        
                        600,000Promissory
      Notes Payable-January 2008 Financing
                        
                        
                        600,000
                        
                        
                        
                        600,000Promissory
      Notes Payable-January 2008 Financing
                        
                        
                        250,000
                        
                        
                        
                        250,000$
                        2,650,000
                        
                        
                        $
                        2,650,000




19





Promissory
Notes Payable - July 2005 Financing





In July
of 2005, we borrowed $1.2 million from companies controlled by the Winfield
Group. Proceeds from the notes were reduced by a 33.3% original issue discount
and other origination fees. Net proceeds received by the Company from the
borrowing were $740,000. The notes accrued interest at 17% per annum and were
payable in monthly installments of principal and interest over a 24 month period
with the remaining entire balance of unpaid principal and interest due on July
15, 2007.  The notes are collateralized by substantially all of the
Company’s assets subject to the security interest of the Brockbank Trust. We
failed to make any payments on the notes; hence, they are in default and
the original issue discount is fully amortized.





Promissory
Notes Payable – December 2007 Financing





In
December 2007, we completed a financing transaction with the Winfield Group. The
notes evidencing the loan bear interest at the rate of 18% per annum, payable on
or prior to the one year anniversary of the respective loan date. We failed to
make any payments on the notes; hence, they are in default and the original
issue discount is fully amortized.





Promissory
Notes Payable – January 2008 Financing





On
January 31, 2008, we completed a financing transaction with the Winfield Group.
The notes evidencing the loan bear interest at the rate of 18% per annum,
payable on or prior to the one year anniversary of the respective loan
date.  We failed to make any payments on the notes; hence, they are in
default and the original issue discount is fully amortized.





Promissory
Notes Payable – Plum Mine





We have a
5% interest bearing note payable note related to our purchase of the Plum Mining
property. The note was payable on June 2006 and we are in default on this note.
As of June 30, 2010 and December 31, 2009, we still had a $250,000 note balance
due.  There is a first security interest on the assets of Plum Mining
Property for this note.




Convertible Notes Payable–
December 2009 through June 2010, net




On
December 10, 2009, we secured a $4,500,000 commitment for additional convertible
debt financing. This $4,500,000 convertible debt financing commitment was fully
funded by the end of June 2010. These notes bear interest at a rate of 8% per
annum and are payable on or prior to the three (3) year anniversary of the
respective Loan Dates.  The terms of the notes provide a security
interest in all of the assets of the Company and required the issuance of
1,125,000 warrants shares with an exercise price of $3.50 and a three (3) year
term.   In addition, the Warrant Agreements contain anti-dilution
protection provisions.   The principal amount of the notes and
related interest amounts is convertible into Comstock Mining Common Stock at the
lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted
Average Price” for the Borrower’s Common Stock for the five trading days
immediately prior to the Conversion Date.




The
following summarizes the activity for Convertible Notes
Payable:




Note Balance
                            as
      of
                            9/30/10
                          
                          
                          Note Balance
                            as of
                            12/31/09Beginning
      of period
                          
                          $
                          242,762
                          
                          
                          $
                          —Convertible
      Note
                          
                          
                          3,750,000
                          
                          
                          
                          750,000Debt
      Discount, net
                          
                          
                          (928,229
                          )
                          
                          
                          (507,238
                          )End
      of period
                          
                          $
                          3,064,533
                          
                          
                          $
                          242,762




20





Note Principal
                    
                    
                    Debt Discount
                    
                    
                    Conversion
                      Price per
                      Share
                    
                    
                    Number of
                      Shares
                      Underlying
                      Convertible
                      Note
                    
                    
                    Effective
                      Interest Rate
                    
                    
                    Earnings per
                      Share Impact$
                    750,000
                    
                    
                    $
                    518,030
                    
                    
                    $
                    1.34
                    
                    
                    
                    559,701
                    
                    
                    
                    23.0
                    %
                    
                    
                    0.031,750,000
                    
                    
                    
                    498,720
                    
                    
                    
                    1.34
                    
                    
                    
                    1,305,970
                    
                    
                    
                    9.5
                    %
                    
                    
                    0.072,000,000
                    
                    
                    
                    753,105
                    
                    
                    
                    1.34
                    
                    
                    
                    1,492,537
                    
                    
                    
                    12.6
                    %
                    
                    
                    0.08$
                    4,500,000
                    
                    
                    $
                    1,769,855
                    
                    
                    $
                    1.34
                    
                    
                    
                    3,358,208
                    
                    
                    
                    13.1
                    %
                    
                    
                    0.18





The debt
discount consists of the initial fair value of the warrant liability of
($541,741) and the embedded conversion option liability of ($1,228,114), for a
total of ($1,769,855).  (See Note 11)





Debt
Discount at September 30, 2010 and December 31, 2009:




9/30/10
                    
                    
                    12/31/09Debt
      discount beginning balance – beginning of period
                    
                    $
                    (507,238
                    )
                    
                    $
                    —Debt
      discount – embedded conversion feature
                    
                    
                    (911,512
                    )
                    
                    
                    (316,602
                    )Debt
      discount – detachable warrants
                    
                    
                    (340,313
                    )
                    
                    
                    (201,428
                    )Less
      amortization of debt discount
                    
                    
                    323,596
                    
                    
                    
                    10,792Unamortized
      debt discount
                    
                    $
                    (1,435,467
                    )
                    
                    $
                    (507,238
                    )





Convertible Notes Payable–
June 2010, net




On June
15, 2010 we completed a financing transaction through the issuance of
convertible notes which provided us with $1,100,000 in funding.  The notes
bear interest at a rate of 8% per annum and are payable on or prior to the three
(3) year anniversary of the respective Loan Dates.  The terms of the
notes provide a security interest in all of the assets of the Company and
required the issuance of 275,000 warrants shares with an exercise price of
$3.50 and a three (3) year term.   In addition, the Warrant
Agreements contain anti-dilution protection provisions.   The
principal amount of the notes and related interest amounts is convertible into
Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85
multiplied by the “Volume Weighted Average Price” for the Borrower’s Common
Stock for the five trading days immediately prior to the Conversion
Date.





The
following summarizes the activity for Convertible Notes
Payable:





Note Balance
                        as of 9/30/10
                      
                      
                      Note Balance
                        as of 12/31/09Beginning
      of period
                      
                      $
                      —
                      
                      
                      $
                      —Convertible
      Note
                      
                      
                      1,100,000
                      
                      
                      
                      —Debt
      Discount, net
                      
                      
                      (293,151
                      )
                      
                      
                      —End
      of period
                      
                      $
                      806,849
                      
                      
                      $
                      —





Note Principal
                    
                    
                    Debt Discount
                    
                    
                    Conversion
                      Price per
                      Share
                    
                    
                    Number of
                      Shares
                      Underlying
                      Convertible
                      Note
                    
                    
                    Effective
                      Interest Rate
                    
                    
                    Earnings per
                      Share Impact$
                    1,100,000
                    
                    
                    $
                    324,721
                    
                    
                    $
                    1.34
                    
                    
                    
                    783,582
                    
                    
                    
                    10.3
                    %
                    
                    
                    0.04




21





The debt
discount consists of the fair value of the warrant liability of ($104,054)
and the embedded conversion option of ($220,667), for a total of $(324,721).
(See Note 11)





Debt
Discount at September 30, 2010 and December 31, 2009:




9/30/10
                    
                    
                    12/31/09Debt
      discount beginning balance – beginning of period
                    
                    $
                    —
                    
                    
                    $
                    —Debt
      discount – embedded conversion feature
                    
                    
                    (220,667
                    )
                    
                    
                    —Debt
      discount – detachable warrants
                    
                    
                    (104,054
                    )
                    
                    
                    —Less
      amortization of debt discount
                    
                    
                    31,570
                    
                    
                    
                    —Unamortized
      debt discount
                    
                    $
                    (293,151
                    )
                    
                    $
                    —





Note
9 - Debt Concentration





The
Winfield Group is the largest lender to the Company.  At September 30,
2010, we had approximately $23.0 million of outstanding note principal of which
$15.1 million or 66% was held by the Winfield Group.  In addition to
the $15.1 principal owed to the Winfield Group, $6.0 million of unpaid interest
was also due.  Had the Winfield Group converted all of its convertible
principal and interest of $16.3 million into our common stock at
September 30, 2010, we would have been obligated to issue the Winfield Group
10.1 million of our common shares representing 34.3% of our then outstanding
common shares.   The amounts listed below have been reflected in
the schedules presented in Note 8 and Note 10. Also, see Note 15 – Subsequent
Events.





Debt Position with the Winfield GroupAt September
      30, 2010Note Descriptions (Winfield Group)
                          
                          Principal
                          
                          
                          Unpaid
                            Interest
                          
                          
                          Total15%
      Convertible Notes Payable – Investors
                          
                          $
                          687,928
                          
                          
                          $
                          67,862
                          
                          
                          $
                          755,79018%
      Convertible Debentures Payable - Mandatory Redemption
    Payment
                          
                          
                          4,412,058
                          
                          
                          
                          1,592,889
                          
                          
                          
                          6,004,94718%
      Convertible Notes Payable - 2006 – 2007
                          
                          
                          1,620,000
                          
                          
                          
                          1,151,338
                          
                          
                          
                          2,771,33811%
      Convertible Notes Payable - June - November 2008
                          
                          
                          2,500,000
                          
                          
                          
                          675,076
                          
                          
                          
                          3,175,07611%
      Convertible Notes Payable - December 2008
                          
                          
                          500,000
                          
                          
                          
                          114,837
                          
                          
                          
                          614,8379%
      Convertible Notes Payable - May - August 2009
                          
                          
                          1,000,000
                          
                          
                          
                          120,754
                          
                          
                          
                          1,120,7548%
      Convertible Notes Payable - December 2009
                          
                          
                          1,500,000
                          
                          
                          
                          58,779
                          
                          
                          
                          1,558,7798%
      Convertible Notes Payable – June 2010
                          
                          
                          250,000
                          
                          
                          
                          5,453
                          
                          
                          
                          255,45317%
      Promissory Note Payable - July 2005
                          
                          
                          1,200,000
                          
                          
                          
                          1,671,915
                          
                          
                          
                          2,871,91518%
      Promissory Note Payable - December 2007 Financing
                          
                          
                          600,000
                          
                          
                          
                          263,921
                          
                          
                          
                          863,92118%
      Promissory Note Payable - January 2008 Financing
                          
                          
                          600,000
                          
                          
                          
                          248,612
                          
                          
                          
                          848,6125%
      Debt Seller Note (Plum Mine)
                          
                          
                          250,000
                          
                          
                          
                          65,625
                          
                          
                          
                          315,625Total
      at September 30, 2010
                          
                          $
                          15,119,986
                          
                          
                          $
                          6,037,061
                          
                          
                          $
                          21,157,047





Note
10—Other Debt Obligation





Our other
debt obligations as of September 30, 2010 and December 31, 2009 include the
following:




9/30/10
                      
                      
                      12/31/09Debt
      –Note (Obester Property)
                      
                      
                      900,000
                      
                      
                      
                      1,400,000Debt  -
      Note (Petrini)
                      
                      
                      90,000
                      
                      
                      
                      90,000Debt  -
      Note (Donavan Property)
                      
                      
                      720,002
                      
                      
                      
                      —Subtotal
                      
                      
                      1,710,002
                      
                      
                      
                      1,490,000Less
      current portion
                      
                      
                      (1,021,061
                      )
                      
                      
                      (1,000,000
                      )Long
      term portion of debt obligations
                      
                      $
                      688,941
                      
                      
                      $
                      490,000




22





The
terms of the other debt obligations listed above are as follows;




Debt - Note (Obester
Property)





In
December 2009, we completed the acquisition of mineral properties, which we had
been leasing, from Claire Obester, Jim Obester, Alan Obester, and Julian Smith
(“sellers”) for $1,650,000 plus a 1% royalty.  Pursuant to the
purchase agreement, we made initial payments of $250,000 and we issued a note to
the “sellers” for $1,400,000.  The note bears interest of six percent
(6%) per annum. Interest and principal payments shall be made in quarterly
installments of $250,000 with the first payment due on or before April 1, 2010
and continuing on the first day of each quarter, until July 1, 2011, when the
then unpaid principal and accrued interest is due and payable.





Debt
– Note (Obester Property) at September 30, 2010 and December 31,
2009:




9/30/10
                      
                      
                      12/31/09Beginning
      balance – beginning of period
                      
                      $
                      1,400,000
                      
                      
                      $
                      —Seller
      Note
                      
                      
                      —
                      
                      
                      
                      1,400,000Payments
                      
                      
                      (500,000
                      )
                      
                      
                      —Note
      balance
                      
                      $
                      900,000
                      
                      
                      $
                      1,400,000





Debt - Note (Petrini
Property)





On
February 17, 2009 we purchased 4.79 acres in the Comstock District for
$130,000.  We paid $40,000 in cash and financed the balance of $90,000
through a first deed of trust.  The note is interest only for two
years and bears interest at 16% per annum. We have made our scheduled
interest payments to date.  The note is due and payable on February
17, 2011.





Debt - Note (Donovan
Property)





On July
20, 2010, we acquired  seven patented mining claims totaling 48 acres,
surface rights to two additional patented mining claims totaling 15 acres, 12
unpatented lode claims, and 15 acre-feet of water rights, all located in Storey
County, Nevada. The purchase price was $1,025,000, with an initial payment of
$300,000.  We financed the remaining $725,000 with an installment note
bearing 6% interest, requiring 60 monthly payments of $6,178 and a final payment
of then-unpaid principal and interest. The former owners of the parcel will
retain a 1.5% Net Smelter Royalty (NSR) on all future mineral production from
these claims.





Debt
– Note (Donovan Property) at September 30, 2010 and December 31,
2009:




9/30/10
                      
                      
                      12/31/09Beginning
      balance – beginning of period
                      
                      $
                      —
                      
                      
                      $
                      —Seller
      Note
                      
                      
                      725,000
                      
                      
                      
                      —Payments
                      
                      
                      (4,998
                      )
                      
                      
                      —Note
      balance
                      
                      $
                      720,002
                      
                      
                      $
                      —





Note
11 – Financial Instruments and Derivatives





The
Company issues various note instruments with various terms but they are
typically convertible into the Company’s common stock and issued with detachable
warrants.  The following sections discuss in general those conversion
features and warrants.


23





Conversion
Features





The terms
of the conversion feature of our debt instruments will differ between specific
notes but their typical terms contain the following
characteristics.  Specific terms for each note are discussed in Notes
8 – 10 as appropriate.





·
            The conversion feature is an
      embedded beneficial conversion feature, whereby debt is convertible into
      Comstock Mining’s Common Stock at approximately the lesser of (a) a fixed
      price or (b) 85% of market price (based on a “lookback”
      formula),


·
            The embedded beneficial
      conversion feature is immediately
  exercisable,


·
            Exercising the embedded
      beneficial conversion feature is not contingent on a future
      event,


·
            The embedded beneficial
      conversion feature may be converted into cash or stock at the discretion
      of the issuer (Comstock Mining),
and


·
            The variable component of the
      conversion price is a fixed discount, there is no stated price floor or
      shares issued to cap to the potential number of conversion
      shares.





Although
such conversion features are typically considered equity instruments, because
the conversion feature has a component which is a fixed discount from our traded
stock price without a limit to the number of shares that may be issued, the
Company cannot be assured that it has sufficient authorized shares to execute
the conversion if presented.  Accordingly, the Company is not “in
control” of the conversion and recognition of the value of the conversion
feature is deemed a derivative liability for financial reporting purposes under
the guidance offered in ASC 815.  As liabilities related to financial
instruments, we therefore apply fair value measurement to each conversion
feature liability at each reporting period.  See Note 12 for a
discussion of fair value measurement.





Warrants





The terms
of the warrants attached to our debt instruments will differ between specific
notes but their typical terms contain the following
characteristics.  Specific terms for each note are discussed in Notes
8 – 10 as appropriate.





·
            Detachable warrants are included
      with the debt offering, as debt “sweeteners,” that generally provide for
      exercise at a fixed price,


·
            The
      warrants have anti-dilution
protection,


·
            There is no active trading market
      for our warrants, and


·
            Comstock Mining may lack
      sufficient authorized shares to satisfy all conversion options if
      presented.





Although
such warrants are typically considered equity instruments, the Company cannot be
assured that it has sufficient authorized shares to execute the exercise if
presented.  Accordingly, the Company is not “in control” of the
exercise and recognition of the value of the conversion feature is deemed a
liability for financial reporting purposes under the guidance offered in ASC
815.  In addition, the guidance offered in ASC 815, indicates
that “if share settlement
is not within the control of the Company an asset or liability classification is
required.”  Consequently, we classified our warrants as
liabilities and began to measure them at fair value in each subsequent reporting
period.  See Note 12 for a discussion of fair value
measurement.





A summary
of the embedded conversion option liability and warrant liability is as
follows:


24





Embedded
                          Conversion
                          Option
                          Liability
                        
                        
                        Warrant
                          Liability
                        
                        
                        TotalBeginning
      balance Dec. 31, 2008
                        
                        $
                        5,088,333
                        
                        
                        $
                        280,000
                        
                        
                        $
                        5,368,333Initial
      issuance note liability of new convertible notes and
    warrants
                        
                        
                        1,214,469
                        
                        
                        
                        746,832
                        
                        
                        
                        1,961,301Change
      in Fair Value of liability during 2009
                        
                        
                        (3,558,743
                        )
                        
                        
                        729,298
                        
                        
                        
                        (2,829,445
                        )Liability
      at Dec. 31, 2009
                        
                        
                        2,744,059
                        
                        
                        
                        1,756,130
                        
                        
                        
                        4,500,189Initial
      issuance note liability of new convertible notes
                        
                        
                        1,132,178
                        
                        
                        
                        444,367
                        
                        
                        
                        1,576,545Change
      in Fair Value of liability during 2010
                        
                        
                        5,415,679
                        
                        
                        
                        2,056,449
                        
                        
                        
                        7,472,128Liability
      at Sept. 30, 2010
                        
                        
                        9,291,916
                        
                        
                        $
                        4,256,946
                        
                        
                        $
                        13,548,862




Note
12 – Fair Value Measurements





ASC 820
defines fair value as the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in principal or most advantageous
market for that asset or liability.  The fair value should be
calculated based on assumptions that market participants would use in pricing
the asset or liability, not on assumptions specific to the entity.  In
addition, the fair value of liabilities should include consideration of
non-performance risk, including the Company’s own credit risk.





In
addition to defining fair value, ASC 820 expands the disclosure requirements
around fair value and establishes a fair value hierarchy for valuation
inputs.  The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the
market.  Each fair value measurement is reported in one of three
levels, which is determined by the lowest level input that is significant to the
fair value measurement in its entirety.  These levels
are:




·
            Level 1 – inputs are based upon
      unadjusted quoted prices for identical instruments traded in active
      markets.


·
            Level 2 – inputs are based upon
      quoted prices for similar instruments in active markets, quoted prices for
      identical or similar instruments in markets that are not active, and
      model-based valuation techniques for which all significant assumptions are
      observable in the market or can be corroborated by observable market data
      for substantially the full term of the assets or
      liabilities.


·
            Level 3 – inputs are generally
      unobservable and typically reflect management’s estimates of assumptions
      that market participants would use in pricing the asset or
      liability.  The fair values are therefore determined using
      model-based techniques that include option pricing models, discontinued
      cash flow models, and similar
techniques.





The
following describes the valuation methodologies the Company uses to measure
financial assets and liabilities at fair value.





Liabilities Measured at Fair
Value on a Recurring Basis





The
following table presents our liabilities at September 30, 2010 and December 31,
2009, which are measured at fair value on a recurring basis:





Fair Value Measurements at September 30, 2010Total
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Liabilities:Convertible
      features and warrants
                        
                        $
                        13,548,862
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        13,548,862Total
      Liabilities
                        
                        $
                        13,548,862
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        13,548,862




25





Fair Value Measurements at December 31, 2009Total
                        
                        
                        Level 1
                        
                        
                        Level 2
                        
                        
                        Level 3Liabilities:Convertible
      features and warrants
                        
                        $
                        4,500,189
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        4,500,189Total
      Liabilities
                        
                        $
                        4,500,189
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        4,500,189





As
discussed in Note 11, the conversion feature liability represents the derivative
component of convertible notes proceeds associated with the fair value of the
embedded conversion features of our notes.  Warrant liabilities
represent detachable warrants issued in association with various notes
payable.





The fair
values for the conversion feature and warrant liabilities included in Level 3
are estimated using industry standard valuation models, such as the
Black-Scholes-Merton model.





Gains
(losses) from changes in fair values of the conversion feature and warrant
liabilities that are not designated as hedges are recognized in other income
(expense).   The amounts recognized during the fiscal quarter
ended September 30, 2010 and the year ended December 31, 2009 are as
follows:





LiabilitiesAs of September 30, 2010
                                  
                                  As of December 31, 2009Balance Sheet
                                    Location
                                  
                                  Fair Value
                                  
                                  Balance Sheet
                                    Location
                                  
                                  Fair ValueDerivative
      not designated as hedging Instruments under ASC 815Convertible
      features and warrants
                                  
                                  Long-term liabilities
                                  
                                  $
                                  13,548,862
                                  
                                  Long-term
      liabilities
                                  
                                  $
                                  4,500,189Total
      Instruments not designated as hedging instruments under ASC
      815
                                  
                                  
                                  
                                  $
                                  13,548,862
                                  
                                  
                                  
                                  $
                                  4,500,189




Amount of Loss Recognized in Income on
                              DerivativeDerivatives Not
                              Designated as Hedging
                              Instruments under ASC
                              815
                            
                            Location of Loss
                              Recognized in income on
                              Derivative
                            
                            For the nine
      months ended
                              September 30, 2010
                            
                            
                            For the year ended
                              December 31, 2009Convertible
      features and warrants
                            
                            Interest Expense
                            
                            $
                            355,165
                            
                            
                            $
                            1,454,063Total:
                            
                            
                            
                            $
                            355,165
                            
                            
                            $
                            1,454,063





The
following table indicates the changes in fair value of the
instruments:





Convertible
                          Features and
                          WarrantsBalances
      as of January 1, 2009
                        
                        $
                        5,368,333Additions
                        
                        
                        1,961,302Reductions
                        
                        
                        (2,829,446
                        )Balances
      as of December 31, 2009
                        
                        
                        4,500,189Additions
                        
                        
                        9,048,673Reductions
                        
                        
                        —Balances
      as of September 30, 2010
                        
                        $
                        13,548,862




26





Note
13 — Stockholders’ Equity





Common
stock was issued during the nine months ended September 30, 2010 and December
31, 2009 for the following purposes:





Nine months ended 9/30/10
                      
                      
                      Year ended 12/31/09Share Issuances
                      
                      
                      Share Value
                      
                      
                      Share Issuances
                      
                      
                      Share ValueDebenture
      principal
                      
                      
                      703,770
                      
                      
                      $
                      835,483
                      
                      
                      
                      133,264
                      
                      
                      $
                      192,268Debenture
      Interest
                      
                      
                      359,630
                      
                      
                      
                      446,913
                      
                      
                      
                      751,833
                      
                      
                      
                      1,477,597Private
      placements
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      493,000
                      
                      
                      
                      986,000Consulting
                      
                      
                      25,000
                      
                      
                      
                      34,000
                      
                      
                      
                      —
                      
                      
                      
                      —Employees
      and directors
                      
                      
                      7,500
                      
                      
                      
                      10,475
                      
                      
                      
                      27,500
                      
                      
                      
                      67,250Other
                      
                      
                      143
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      
                      1,096,043
                      
                      
                      $
                      1,326,871
                      
                      
                      
                      1,405,597
                      
                      
                      $
                      2,723,115





The
following schedules provide additional detail on the summary listed
above.





Debenture Principal and
Debenture Interest for the nine month period ended September 30,
2010





The
following represents principal and interest payments on debt, made during the
nine months ended September 30, 2010, with the issuance of our common
stock.  The shares were valued in accordance with each respective
convertible note's term as disclosed in Note 8.




Principal Payment
                            
                            
                            Interest PaymentNote Description
                            
                            Number of
                              Shares
                            
                            
                            Value of
                              Shares
                            
                            
                            Number of
                              shares
                            
                            
                            Value of
                              SharesConvertible
      Debentures Payable-Investors
                            
                            
                            25,467
                            
                            
                            $
                            27,751
                            
                            
                            
                            60,000
                            
                            
                            $
                            67,728Convertible
      Debentures Payable- Mandatory Redemption payment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            125,000
                            
                            
                            
                            141,000Long-Term
      Convertible Notes – July 2008 (Longview Amended and Restated
      Note)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            96,655
                            
                            
                            
                            153,041Convertible
      Notes:  May 2009 – Aug. 2009
                            
                            
                            678,303
                            
                            
                            
                            807,732
                            
                            
                            
                            77,975
                            
                            
                            
                            85,144703,770
                            
                            
                            $
                            835,483
                            
                            
                            
                            359,630
                            
                            
                            $
                            446,913





Debenture Principal and
Debenture Interest for the year ended December 31, 2009





The
following represents principal and interest payments on debt, made in 2009 with
the issuance of our common stock.  The shares were valued in accordance
with each respective convertible note's term as disclosed in Note
8.


27





Note Description
                          
                          Principal
                            Payment
                            Number of
                            Shares
                          
                          
                          Value of
                            Shares
                          
                          
                          Interest
                            Payment
                            Number of
                            shares
                          
                          
                          Value of
                            SharesConvertible
      Debentures Payable-Investors
                          
                          
                          —
                          
                          
                          $
                          —
                          
                          
                          
                          29,373,214
                          
                          
                          $
                          257,618Convertible
      Debentures Payable- Mandatory Redemption payment
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          99,000,000
                          
                          
                          
                          990,000Long-Term
      Convertible Notes – July 2008 (Longview Amended and Restated
      Note)
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          21,993,369
                          
                          
                          
                          229,979Convertible
      Notes:  May 2009 – Aug. 2009
                          
                          
                          26,652,890
                          
                          
                          
                          192,268
                          
                          
                          
                          —
                          
                          
                          
                          —26,652,890
                          
                          
                          $
                          192,268
                          
                          
                          
                          150,366,583
                          
                          
                          $
                          1,477,597





Note
14 - Earnings Per Share





Basic
earnings per share is computed by dividing net loss, after deducting preferred
stock dividends accumulated during the period, by the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed by
dividing net income, after deducting preferred stock dividends accumulated
during the period, by the weighted average number of shares of common stock and
dilutive common stock equivalent shares outstanding.   For the
nine month period ended September 30, 2010 and September 30, 2009, there were
approximately 25.2 million and 12.3 million, respectively, of common stock
equivalent shares excluded from the dilutive earnings per share calculation
because they were anti-dilutive. The following is a reconciliation of the number
of shares used in the basic and diluted computation of net income per share (in
millions):




For the nine Months Ended
                        September 30
                        (in Thousands)2010
                      
                      
                      2009Weighted
      average number of common shares outstanding – basic
                      
                      
                      18,908
                      
                      
                      
                      17,691Dilution
      from convertible debt, stock options and warrants
                      
                      
                      25,187
                      
                      
                      
                      12,302Weighted
      average number of common shares outstanding – diluted
                      
                      
                      44,095
                      
                      
                      
                      29,993





Note 15 – Subsequent Events (Debt
Restructuring and Racapitalization)





On
October 20, 2010, the Company completed three principal features of its
previously announced restructuring and recapitalization plan. The completed
features of the plan include (i) raising $35.75 million of new equity, (ii)
exchanging all of the Company’s previously defaulted senior secured debt and
related obligations for new equity and (iii) securing integral land mineral
rights. The Board approved the strategic plan in April 2010 designed to
restructure and recapitalize the Company, accelerate mine development and
production and continue exploration.  The principal features of the
plan encompassed a recapitalization and balance sheet restructuring (which
included a reverse stock split, a debt-for-equity exchange, a land-for-debt
exchange and a new capital raise to fund gold mine operations, exploration and
development) and an operational and management restructuring.  The
goal of the plan is to deliver stockholder value by commencing commercial mining
and processing operations by 2011, with annual production rates of 20,000 gold
equivalent ounces and by validating qualified resources (at least measured and
indicated) and reserves (probable and proven) of 3,250,000 gold equivalent
ounces by 2013.




Debt
for Equity Exchange and New Equity Raise of $35.75 million




The
Company exchanged substantially all of its senior secured convertible and senior
indebtedness for shares of its newly created Series A-1 Preferred Convertible
Stock (“Series A-1”) and Series A-2 Preferred Convertible Stock (“Series A-2,”
and together with Series A-1, the “Series A”) pursuant to a Securities Purchase
Agreement dated as of August 31, 2010 (the “Series A Purchase Agreement”). Each
share of the Series A is convertible at the holder’s election into 1,536 shares
of common stock, therefore converting into common stock at a conversion price
per share of $0.6510. The common stock underlying the Series A is issuable at a
fixed conversion rate (subject to anti-dilution adjustments) currently equal to
45.1 million shares of common stock.  The Company has approximately
20.9 million shares of common stock outstanding.


28


The notes
and related interest exchanged for equity are as follows:




Debt
      Exchanged for Series A Preferred Convertible StockAt August 31, 2010Note Descriptions
                          
                          Principal
                          
                          
                          Unpaid
                            Interest
                          
                          
                          Total15%
      Convertible Notes Payable – Investors
                          
                          $
                          1,078,157
                          
                          
                          $
                          264,131
                          
                          
                          $
                          1,342,28818%
      Convertible Debentures Payable - Mandatory Redemption
    Payment
                          
                          
                          4,412,058
                          
                          
                          
                          1,505,343
                          
                          
                          
                          5,917,40118%
      Convertible Notes Payable - 2006 – 2007
                          
                          
                          2,170,000
                          
                          
                          
                          1,498,063
                          
                          
                          
                          3.668,06311%
      Convertible Notes Payable - June - November 2008
                          
                          
                          2,500,000
                          
                          
                          
                          643,457
                          
                          
                          
                          3,143,45711%
      Convertible Note Payable - July 2008 Amended and Restated
                          
                          
                          2,782,563
                          
                          
                          
                          204,776
                          
                          
                          
                          2,987,33911%
      Convertible Notes Payable - December 2008
                          
                          
                          500,000
                          
                          
                          
                          108,803
                          
                          
                          
                          608,8039%
      Convertible Notes Payable - May - August 2009
                          
                          
                          1,000,000
                          
                          
                          
                          112,300
                          
                          
                          
                          1,112,3008%
      Convertible Notes Payable - December 2009
                          
                          
                          4,500,000
                          
                          
                          
                          165,135
                          
                          
                          
                          4,665,1358%
      Convertible Notes Payable - June 2010
                          
                          
                          1,100,000
                          
                          
                          
                          16,558
                          
                          
                          
                          1,116,55817%
      Promissory Notes Payable - July 2005
                          
                          
                          1,200,000
                          
                          
                          
                          1,631,552
                          
                          
                          
                          2,831,55218%
      Promissory Notes Payable - December 2007 Financing
                          
                          
                          600,000
                          
                          
                          
                          251,154
                          
                          
                          
                          851,15418%
      Promissory Notes Payable - January 2008 Financing
                          
                          
                          600,000
                          
                          
                          
                          236,071
                          
                          
                          
                          836,0715%
      Debt Seller Note (Plum Mine)
                          
                          
                          250,000
                          
                          
                          
                          64,584
                          
                          
                          
                          314,584Total
      at August 31, 2010
                          
                          $
                          22,692,778
                          
                          
                          $
                          6,701927
                          
                          
                          $
                          29,394,705





On
October 20, 2010,  the Company also raised $35.75 million in gross
proceeds ($32.6 million, net of commissions and transaction related expenses) by
issuing newly created Series B Preferred Convertible Stock (“Series B,” and
together with the Series A, the “Preferred”) pursuant to a Securities Purchase
Agreement dated as of October 20, 2010 (the “Series B Purchase Agreement”). Each
share of the Series B is convertible at the holder’s election into 606.0606
shares of common stock, therefore converting into common stock at a conversion
price per share of $1.6500. The common stock underlying the Series B is issuable
at a fixed conversion rate (subject to anti-dilution adjustments) currently
equal to 21.7 million shares of common stock.





The net
proceeds the Company received from the sale of the Series B Preferred Stock was
approximately $32.6 million after deducting commissions and the estimated
expenses of the offering payable by the Company.  The Company intends
to use the net proceeds to meet its initial capital and operating needs for the
first three years of its strategic plan to accelerate mine development and
production and continue exploration.   This includes approximately $8
million of capital expenditures associated with its leach pad expansion, new
crushing unit and lab refurbishment and rolling stock, approximately $19 million
for mine development, exploration and production start up costs and
approximately $4 million for land acquisitions.  The remaining $1.75
million is reserved for general corporate purposes, including remaining
feasibility studies.




US$
                    (in
      millions)Capital
      Required for Production:Mobile
      Mine Equipment
                  
                  $
                  2.50Leach
      Pad Expansion
                  
                  
                  2.50Crushing
      Plant & Lab Refurbishment
                  
                  
                  3.00Exploration
      and Start Up:Exploration
      & Mine Development
                  
                  
                  15.00Production
      Start up
                  
                  
                  4.00General
      Corporate Purposes/Feasibility
                  
                  
                  1.75Land
      Acquisition
                  
                  
                  4.00Transaction
      Fees and Related Expenses
                  
                  
                  3.00Total:
                  
                  $
                  35.75




29




Pending
the use of the proceeds described above, the Company may invest all or a portion
of the proceeds of the offering in short-term deposits, including banker
acceptances and short- term, high quality, interest bearing corporate,
government-issued or government-guaranteed securities.





Each
share of the Preferred has a stated value of $1,000 per share (the “Stated
Value”) and a liquidation and change of control preference equal to the Stated
Value plus accrued and unpaid dividends.  Each share of Series A-2 and
Series B will automatically convert into shares of common stock at the
conversion rates and prices then in effect any time after which the common stock
is listed on an exchange and the volume weighted average price for each of any
20 trading days during any 30 consecutive trading day period exceeds $4.50 per
share (as adjusted for stock splits and similar transactions). In the event that
the Series A-2 and Series B is automatically converted, the holders of the
Preferred will be entitled to a payment equal to the then net present value of
future dividend payments such holders would have received up until the third
anniversary of the issuance of such securities.




The
Preferred is senior to all other classes of equity of the Company in the event
of the liquidation or change of control of the Company and, commencing January
1, 2011, is entitled to semi-annual dividends at a rate of 7.5% per annum,
payable in cash, common stock, preferred stock or any combination of the
foregoing. The Preferred also contain provisions providing weighted average
anti-dilution protection.




Each
share of Preferred will entitle the holder to vote with the holders of common
stock as a single class on all matters submitted to the vote of the common stock
(on an as-converted basis); provided, that, for purposes of voting only, each
share of Series A-1 held by Mr. John V. Winfield or his affiliates (the
“Winfield Group”) shall be entitled to 5 times the number of votes per share of
common stock to which it would otherwise be entitled. As long as 25% or more of
the Preferred issued on or prior to October 20, 2010 is outstanding, the Company
will not be permitted (subject to limited exceptions) without the consent of the
Preferred, to incur indebtedness, grant liens, repurchase more than 5% of the
common stock outstanding, enter into any transaction with an affiliate of the
Company which is not on an arm’s length basis, enter into transactions with
affiliates of officers or directors that provide for the payment of services in
securities of the Company, amend its certificate of incorporation, by-laws, or a
certificate of designations of the Preferred in a manner that adversely affects
the interests of the Preferred, issue new series of preferred stock, pay
dividends on equity junior to the Preferred, adopt an executive equity incentive
plan which provides for the issuance of not greater than 6.0% of the fully
diluted equity of the Company, enter into any transaction for the sale or pledge
of a material asset of the Company, approve or consent to the initiation of a
bankruptcy proceeding or issue any securities of the Company in exchange for
services to a consultant.  A majority of the Preferred is generally
required to provide consent; provided, that the Winfield Group must be part of
that majority so long as the Winfield Group holds 25% or more of the
Preferred.




In
addition, as long as at least 25% of the Preferred issued on or prior to October
20, 2010, is still outstanding, and as long as the Winfield Group still holds at
least 25% of the Preferred, the Company shall not, without the affirmative vote
of the Winfield Group, enter into any transaction for the acquisition of any
business, property or asset pursuant to which the Company will incur
indebtedness to finance such acquisition in principal amount in excess of
$500,000, pay any dividends to holders of Preferred in cash in an amount to
exceed $500,000, engage in a private placement or public offering of any common
stock or common stock equivalents of the Company, enter into a Change of Control
Transaction (as defined in each certificate of designation) or enter into any
transaction that would constitute a Fundamental Transaction (as defined in each
certificate of designation).


30


In
addition, as long as the Winfield Group holds 25% or more of the Preferred, (i)
Mr. Winfield will be a member of the Company’s board of directors and (ii) the
Winfield Group shall have the right, upon written request to the Company, to
nominate a member of the Company’s board of directors (“Board Nominee”) and the
Company shall take or cause to be taken all actions so that Mr. Winfield and the
Board Nominee are each nominated and recommended for re-election to the board.
The Board Nominee shall meet the requirements for an “independent director”
under the listing rules of the principal exchange or market on which the common
stock of the Company is then listed, satisfy the requirements set forth in the
Company’s Corporate Governance Guidelines and Nominating and Governance
Committee Charter as reasonably determined by the Nominating and Governance
Committee of the board, and not be prohibited from serving as a director of the
Company under Section 8 of the Clayton Antitrust Act or any other applicable
law.  Alternatively, the Winfield Group can designate as the Board
Nominee a member of the board of directors existing on the date
hereof.




Holders
of the Preferred will have registration rights with respect to the shares of
common stock underlying the Preferred and also preemptive rights.  The
Company will be obligated to file a registration statement or registration
statements with respect to common stock underlying the Preferred within 45 days
of filing its annual report on Form 10-K for the year ended December 31, 2010,
and cause such registration statement(s) to be declared effective within one
year from the date of issuance of the Preferred. The foregoing description of
the Preferred and the specific terms of the Preferred, the Series A Purchase
Agreement, the Series B Purchase Agreement and the registration rights is
qualified in its entirety by reference to the provisions of the Series A
Purchase Agreement, the Series B Purchase Agreement, the Series A-1 Certificate
of Designations, the Series A-2 Certificate of Designations, the Series B
Certificate of Designations, the Registration Rights Agreement pertaining to the
Series A and the Registration Rights Agreement pertaining to the Series B as
Exhibits 10.1, 10.2, 4.1, 4.2, 4.3, 10.3 and 10.4, respectively to the Company’s
current report on Form 8-K filed with the SEC on October 21, 2010.




Joint
Operating Venture for Production and Exploration Rights of Integral Comstock
Properties




On
October 21, 2010, the Company also announced its entry into an operating
agreement to form an operating joint venture.  Consistent with the
Company’s strategic plan, the Company will obtain the exclusive rights of
production and exploration over certain property owned by DWC Resources, Inc. in
Storey County, Nevada (the “DWC Property”) and two parcels leased by Mr.
Winfield from the Sutro Tunnel Company in Storey County, Nevada (the “Sutro
Property”) and Virginia City Ventures, Inc. (the “VCV
Property”).  Pursuant to the terms of the Limited Liability Company
Operating Agreement (“Operating Agreement”) for Northern Comstock LLC (“Northern
Comstock”), a newly formed Nevada limited liability company, DWC Resources, Inc.
will contribute the DWC Property to Northern Comstock, Mr. Winfield will
contribute his rights to the Sutro Property and the VCV Property to Northern
Comstock and the Company will contribute 862.5 shares of Series A-1 and its
services in the area of mine exploration, development and production to Northern
Comstock. The terms of the Operating Agreement will provide that on each
anniversary of the Operating Agreement, up to and including the thirty-ninth
(39th) anniversary, the Company will make additional capital contributions in
the amount of $862,500.00, in the form of shares of Series A-1 or cash upon
request of Northern Comstock (which request can be denied by the Company in
certain circumstances). Under certain circumstances, the additional capital
contributions can be accelerated.  The Company had previously entered
into letters of intent with respect to the DWC Property and Sutro Property on
August 13, 2008, the terms of which are expressly superseded by the Operating
Agreement. The Operating Agreement further provides the Company with the
exclusive rights of development, production, mining and exploration on the
respective properties and requires the Company to make certain capital
expenditures toward that end. Under the terms of the Operating Agreement (i) all
cash flows from the bullion or other minerals recovered from the ore mined out
of the ground but untreated and minerals produced from the milling or reduction
of ore to a higher grade produced from the DWC Property, Sutro Property or VCV
Property, as applicable, or finished products produced from any such property,
will be distributed to the Company after certain distributions to the other
members of Northern Comstock; (ii) an annual distribution of 500 and 362.5
shares of Series A-1 will be set aside for distribution to DWC Resources, Inc.
and Mr. Winfield, respectively, but such distribution will be retained by
Northern Comstock unless DWC Resources, Inc. and Mr. Winfield otherwise instruct
the Company to distribute the shares to them; and (iii) all other distributions
of cash or other property of Northern Comstock shall be permitted only with the
prior written consent of all members. The foregoing description of the Operating
Agreement, and the specific terms of the Operating Agreement, is qualified in
its entirety by reference to the provisions of Operating Agreement included as
Exhibit 10.5 to the Company’s report on Form 8-K filed with the SEC on October
21, 2010.




31


The
following table sets forth outstanding common shares of the Company as at
October 20, 2010, (i) on an actual basis, and (ii) on an as adjusted
basis giving effect to the issuance of the Series A Preferred and the Series B
Preferred:





As
      of October 20, 2010Actual
                
                
                As AdjustedCommon
      and Preferred StockCommon
      Stock Outstanding on October 20, 2010
                
                
                20,484,456
                
                
                
                20,484,456
                (1)Series
      A-1 Preferred Stock (on an as converted basis)
                
                
                
                
                
                
                32,122,883
                (2)Series
      A-2 Preferred Stock (on an as converted basis)
                
                
                
                
                
                
                13,030,274Series
      B Preferred Stock (on an as converted basis)
                
                
                
                
                
                
                21,666,666Total  Shares
      Outstanding (on an as converted basis)
                
                
                20,484,456
                
                
                
                87,304,279




(1) Does
not include performance based management incentive program designed not to
exceed 6% of the fully diluted equity of the Corporation after taking into
account the recapitalization and balance sheet
restructuring.  Includes 1,078,074 shares of common stock issued in
October upon the cashless exercise of warrants issued in 2006 and 2007 to
certain debt holders, 804,829 of which were issued to the Winfield
Group.




(2) Does
not include the issuance of shares of Series A-1 Preferred Stock potentially
issuable as capital contributions to Northern Comstock LLC in the amount of
862.5 shares of Series A-1 Preferred Stock (convertible into approximately 1.3
million shares of Common Stock) on an annual basis. Under the terms of the
Operating Agreement, if all required capital contributions were made in the form
of Series A-1 Preferred Stock, up to 34,500 shares of Series A-1 Preferred Stock
in the aggregate could be issued over the potential 40-year term of the
Operating Agreement.  However, under the terms of the Operating
Agreement, such capital contributions could also take the form of cash on an
annual basis in the amount of $862,500.




Accounting
for the Preferred Convertible Stock [and the Recapitalization]





Extinguishment
of Debt





On
October 20, 2010 the Company exchanged substantially all of its senior secured
convertible and senior indebtedness for shares of its newly created Series A
pursuant to the Series A Purchase Agreement. This exchange of Series A for debt
was contingent on the successful closing of the issue of the Series B described
earlier. This resulted in a substantial change between the embedded conversion
rate in the original senior secured convertible debt and the Series A fixed
conversion price of $0.6510 per share. In accordance with ASC 470-50 we have
determined that the reacquisition price of the senior secured convertible and
senior indebtedness will be based on the fair value of the Series A shares
issued. We are at present completing an estimate of the fair value of the Series
A issued and based on our preliminary estimate  believe that this
value will exceed the existing carrying value of the senior secured convertible
and senior indebtedness . As a result, we believe that a non-cash loss will
result from the exchange of the Series A for the outstanding indebtedness and
this loss on extinguishment of debt could be material.


32


Preference
Convertible Shares





The newly
created Series A and Series B have a coupon rate of 7.5%, liquidation
preference, anti-dilutive protection and can be converted to common shares upon
issuance.  Based on our review of ASC 480 and the applicable terms and
conditions of the Series A, we concluded that these convertible preferred equity
instruments are classified as temporary equity in the Company’s balance
sheet.  We are also in the process of considering the accounting and
classification of certain embedded features and terms attached to the Series A,
and have concluded on a preliminary basis that the conversion feature is
considered an embedded derivative that is required to be bifurcated from the
carrying value of the equity instrument and will be accounted for as a
derivative liability at fair value. This determination is based on the
conclusion that certain of the anti-dilution adjustments attached to the Series
A result in the conversion option not being indexed to the Company’s underlying
equity.  Based on our preliminary estimates, we believe that this fair
value of the derivative liability will be significant and may represent a
majority of the carrying value of the Series A. As we continue to address the
accounting for these shares further derivatives may be identified and bifurcated
if they meet the separation criteria as prescribed by US GAAP.  The
fair value of the derivatives will be determined each reporting period and any
change in fair value will be recorded as “Derivative change in Fair Value” in
the Statement of Operations.





Note
16 – Subsequent Events (Exercise of Warrants and Options)




In
October 2010, all debt holders who were issued warrants in conjunction with the
2006 and 2007 convertible debt financing exercised 100% of those
warrants.  The warrants had an exercise price of $0.8187 and the
warrant holders elected the cashless exercise option.  The Company
issued 1,078,075 shares of common stock to the warrant holders.




On
November 2, 2010, Grenville Financial exercised 425,049 warrant shares electing
the cashless exercise option and the Company issued 226,044 common
shares.  The Company issued Grenville Financial 200,000 warrants with
an exercise of $4.00 in conjunction with the May 2009 financing, but due to the
anti–dilution provisions in the warrant agreement and subsequent financing, the
warrant shares increased to 425,049 and the exercise price was reset to
$1.88.  Although the Company had issued similar warrant agreements
during 2009 and 2010, the other warrant holders, as part of the debt to equity
exchange and recapitalization expressly agreed that the issuance of preferred
stock shall not constitute a “Trigger Issuance” or any other similarly described
event that would provide for an adjustment to the warrant shares.




On
November 9, 2010, Legend Merchant Group, Inc. exercised 50,000 warrant shares
electing the net issuance option (cashless exercise) and the Company issued
42,430 common shares.  These warrant shares were issued pursuant to a
“Non-exclusive Financial Advisor Agreement” where Legend Merchant earned a fee
of 10% of the monies raised for the December 2009 $4.5 million convertible debt
financing in the form of warrant shares with an exercise price of $3.00 and a
term of three (3) years.  The exercise price was reset to $0.651 due
to the anti-dilution provisions in the Warrant Agreement and subsequent share
issuances.




On
November 3, 2010, the former Chief Operating Officer exercised 450,000 options
using the net issue election (cashless exercise) and the Company issued 195,020
of its common shares.  The option exercise price was
$1.926.




On
November 9, 2010, two investors who had been issued warrants in conjunction with
the January 2009 private placement exercised 162,500 warrants with an exercise
price of $3.00 and a term of six years.  This was a cashless exercise
and the Company issued 48,283 common shares.




Item 2. Management’s Discussion and Analysis
or Plan of Operations





The
following discussion provides information that we believe is relevant to an
assessment and understanding of the consolidated results of operations and
financial condition of our company. It should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes also included in this
10-Q and our Annual Report on Form 10-K as of and for the fiscal year ending
December 31, 2009.


33





The
following discussion addresses matters we consider important for an
understanding of our financial condition and results of operations as of and for
the three months and nine months ended September 30, 2010, as well as our future
results.





Overview





Comstock
Mining Inc. (the “Company”) is a Nevada-based, gold and silver mining company
with extensive, contiguous property in the historic Comstock district.  The
Company began acquiring properties in the Comstock in 2003.  Since
then, the Company has consolidated a substantial potion of the Comstock
district, secured permits, built an infrastructure and brought the exploration
project into test mining production.  We continue acquiring additional
properties in the Comstock district, expanding our footprint and creating
opportunities for exploration and mining.  The goal of our strategic
plan is to deliver stockholder value by validating qualified resources (measured
and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent
ounces by 2013, and commencing commercial mining and processing operations by
2011, with annual production rates of 20,000 gold equivalent
ounces.





The
Lucerne Project is located in Storey County, Nevada, approximately 3 miles south
of Virginia City and 30 miles southeast of Reno, Nevada. The Dayton Project is
located in Lyon County Nevada, approximately six [6] miles south of Virginia
City.  Access to the properties is by State Route 342, a paved
highway. The Comstock District is located within the western portion of the
Basin and Range Province of Nevada, between Reno and Carson City. The majority
of our activities occur in three major structural zones: (1) the northeast
striking, (2) the east dipping Comstock and Occidental fault zones and (3) the
northwest striking, east dipping Silver City fault zone.




Because
of the Comstock district’s historic significance and its world class bonanza of
precious metal grades, the geology is well known and extensively studied by the
Company, our advisors and many independent researchers. We have amassed the
largest known library of historical data and detailed surface mapping. In
conjunction with current drilling programs designed to expand the known
historical data base, we have invested in our understanding of the Comstock’s
structural geology as well as its broader geological footprint.





The
Company’s Comstock Mine Project now consists of approximately 6,412 acres of
active lode mining claims in the Comstock district. The acreage is comprised of
892 acres of patented claims (private lands) and 5,520 acres of unpatented
claims, Bureau of Land Management (BLM) administered. The Project includes the
Comstock Mine heap leach processing facility, which will be redesigned and
constructed to accommodate our new production plans. In excess of 700 Reverse
Circulation (RC) holes, drilled by the Company and our predecessors, have
further defined our mine plan at the Lucerne and Billie the Kid open pits
together with those along strike and down-dip. For our exploration and
development campaigns, all drilling, surface and down-hole surveying, hole
abandonment, geologic logging, sampling, and assays were performed to
industry-recognized standards.





We
produced over 12,000 ounces of gold and over 53,000 ounces of silver from
2004-2006, at our Comstock Lode test mining operation and existing heap leach
processing facilities.  Our test mining activities were concluded in
January 2007, when we prioritized land consolidation and mine planning as our
critical prerequisites for our longer-term production plans.





Strategic
Plan and Management Reorganization





The Board
approved a strategic plan in April 2010, designed to restructure and
recapitalize the Company, accelerate mine development and production and
continue exploration.  The principal features of the plan encompass a
recapitalization and balance sheet restructuring (which included a reverse stock
split, a debt-for-equity exchange, the securing of certain critical mineral
rights and a new capital raise to fund gold mine operations, exploration and
development) and an operational and management restructuring.  The
goal of the plan is to deliver stockholder value by validating qualified
resources (at least measured and indicated) and reserves (probable and proven)
of 3,250,000 gold equivalent ounces by 2013, and commencing commercial mining
and processing operations by 2011, with annual production rates of 20,000 gold
equivalent ounces.


34





On June
4, 2010, we received approval from the Financial Industry Regulatory Authority
(“FINRA”) clearing the one-for-two hundred reverse stock split of our common
stock previously approved by our stockholders.   The reverse stock
split took effect on Monday, June 7, 2010




On
October 20, 2010, the Company completed the three principal features of its
previously announced restructuring and recapitalization plan. The completed
features of the plan include (i) exchanging all of the Company’s previously
defaulted senior secured debt and related obligations for new equity, (ii)
raising $35.75 million of new equity, and (iii) securing integral land mineral
rights.




Debt
for Equity Exchange




The
Company exchanged substantially all of its senior secured convertible and senior
indebtedness for shares of its newly created Series A pursuant to the Series A
Purchase Agreement. Each share of the Series A is convertible at the holder’s
election into 1,536 shares of common stock, therefore converting into common
stock at a conversion price per share of $0.6510. The common stock underlying
the Series A is issuable at a fixed conversion rate (subject to anti-dilution
adjustments) currently equal to 45.1 million shares of common
stock.  The Company has approximately 20.9 million shares of common
stock outstanding.




The notes
and related interest exchanged for equity are as follows:




Debt
      Exchanged for Series A Preferred Convertible StockAt August 31, 2010Note Descriptions
                          
                          Principal
                          
                          
                          Unpaid
                            Interest
                          
                          
                          Total15%
      Convertible Notes Payable - Investors
                          
                          $
                          1,078,157
                          
                          
                          $
                          264,131
                          
                          
                          $
                          1,342,28818%
      Convertible Debentures Payable - Mandatory Redemption
    Payment
                          
                          
                          4,412,058
                          
                          
                          
                          1,505,343
                          
                          
                          
                          5,917,40118%
      Convertible Notes Payable - 2006 – 2007
                          
                          
                          2,170,000
                          
                          
                          
                          1,498,063
                          
                          
                          
                          3.668,06311%
      Convertible Notes Payable - June - November 2008
                          
                          
                          2,500,000
                          
                          
                          
                          643,457
                          
                          
                          
                          3,143,45711%
      Convertible Note Payable - July 2008 Amended and Restated
                          
                          
                          2,782,563
                          
                          
                          
                          204,776
                          
                          
                          
                          2,987,33911%
      Convertible Notes Payable - December 2008
                          
                          
                          500,000
                          
                          
                          
                          108,803
                          
                          
                          
                          608,8039%
      Convertible Notes Payable - May - August 2009
                          
                          
                          1,000,000
                          
                          
                          
                          112,300
                          
                          
                          
                          1,112,3008%
      Convertible Notes Payable - December 2009
                          
                          
                          4,500,000
                          
                          
                          
                          165,135
                          
                          
                          
                          4,665,1358%
      Convertible Notes Payable - June 2010
                          
                          
                          1,100,000
                          
                          
                          
                          16,558
                          
                          
                          
                          1,116,55817%
      Promissory Notes Payable - July 2005
                          
                          
                          1,200,000
                          
                          
                          
                          1,631,552
                          
                          
                          
                          2,831,55218%
      Promissory Notes Payable - December 2007 Financing
                          
                          
                          600,000
                          
                          
                          
                          251,154
                          
                          
                          
                          851,15418%
      Promissory Notes Payable - January 2008 Financing
                          
                          
                          600,000
                          
                          
                          
                          236,071
                          
                          
                          
                          836,0715%
      Debt Seller Note (Plum Mine)
                          
                          
                          250,000
                          
                          
                          
                          64,584
                          
                          
                          
                          314,584Total
      at August 31, 2010
                          
                          $
                          22,692,778
                          
                          
                          $
                          6,701927
                          
                          
                          $
                          29,394,705





New Equity Raise of $35.75
million





The
Company raised $35.75 million in gross proceeds ($32.6 million, net of
commissions and transaction related expenses) by issuing newly created Series B
pursuant to a the Series B Purchase Agreement. Each share of the Series B is
convertible at the holder’s election into 606.0606 shares of common stock,
therefore converting into common stock at a conversion price per share of
$1.6500. The common stock underlying the Series B is issuable at a fixed
conversion rate (subject to anti-dilution adjustments) currently equal to 21.7
million shares of common stock.


35





The net
proceeds the Company received from the sale of the Series B Preferred Stock was
approximately $32.6 million after deducting commissions and the estimated
expenses of the offering payable by the Company.  The Company intends
to use the net proceeds to meet its initial capital and operating needs for the
first three years of its strategic plan to accelerate mine development and
production and continue exploration.   This includes approximately $8
million of capital expenditures associated with its leach pad expansion, new
crushing unit and lab refurbishment and rolling stock, approximately $19 million
for mine development, exploration and production start up costs and
approximately $4 million for land acquisitions.  The remaining $1.75
million is reserved for general corporate purposes, including remaining
feasibility studies.




US$
                    (in
      millions)Capital
      Required for Production:Mobile
      Mine Equipment
                  
                  $
                  2.50Leach
      Pad Expansion
                  
                  
                  2.50Crushing
      Plant & Lab Refurbishment
                  
                  
                  3.00Exploration
      and Start Up:Exploration
      & Mine Development
                  
                  
                  15.00Production
      Start up
                  
                  
                  4.00General
      Corporate Purposes/Feasibility
                  
                  
                  1.75Land
      Acquisition
                  
                  
                  4.00Transaction
      Fees and Related Expenses
                  
                  
                  3.00Total:
                  
                  $
                  35.75




Pending
the use of the proceeds described above, the Company may invest all or a portion
of the proceeds of the offering in short-term deposits, including banker
acceptances and short- term, high quality, interest bearing corporate,
government-issued or government-guaranteed securities.





Automatic
conversion of Series A-2 and Series B





If the
daily volume weighted average price exceeds $4.50 for any 20 Trading Days during
any 30 consecutive Trading Day period starting on or after the
Effective Date (Effective Date means the date that all common stock
underlying the Series A and Series B have been registered for resale or may be
sold without volume or manner of sale restrictions under Rule 144), then all
outstanding shares of Series A-2 and Series B will be forced to convert into
shares of common stock, based on the then-effective conversion price. The
Company will provide each holder with notice within one trading day of meeting
the requirements specifying the shares of preferred stock held by each holder
and the date three trading days later when the conversion will take
effect.





Securing
Integral Land Mineral Rights.




On
October 21, 2010, the Company also announced its entry into an operating
agreement to form an operating joint venture.  Consistent with the
Company’s strategic plan, the Company will obtain the exclusive rights of
production and exploration the DWC Property,  the Sutro Property and
the VCV Property.  Pursuant to the terms of the Operating Agreement
for Northern Comstock, DWC Resources, Inc. will contribute the DWC Property to
Northern Comstock, Mr. Winfield will contribute his rights to the Sutro Property
and the VCV Property to Northern Comstock and the Company will contribute 862.5
shares of Series A-1 and its services in the area of mine exploration,
development and production to Northern Comstock. The terms of the Operating
Agreement will provide that on each anniversary of the Operating Agreement, up
to and including the thirty-ninth (39th) anniversary, the Company will make
additional capital contributions in the amount of $862,500.00, in the form of
shares of Series A-1 or cash upon request of Northern Comstock (which request
can be denied by the Company in certain circumstances). Under certain
circumstances, the additional capital contributions can be
accelerated.  The Company had previously entered into letters of
intent with respect to the DWC Property and Sutro Property on August 13, 2008,
the terms of which are expressly superseded by the Operating Agreement. The
Operating Agreement further provides the Company with the exclusive rights of
development, production, mining and exploration on the respective properties and
requires the Company to make certain capital expenditures toward that end. Under
the terms of the Operating Agreement all cash flows from the bullion or other
minerals recovered from the ore mined out of the ground but untreated and
minerals produced from the milling or reduction of ore to a higher grade
produced from the DWC Property, Sutro Property or VCV Property, as applicable,
or finished products produced from any such property, will be distributed to the
Company.


36


2010
Developments





Our
strategic plan calls for additional infill drilling and metallurgical testing
prior to the resumption of mining.  Two drilling programs began late
in the first quarter 2010 and were complete in June.  These drilling
programs were managed by Larry Martin, CPG, our Chief Geologist.





The first
program was a reverse circulation drilling program designed to provide
additional information for a detailed mine design.  It included 51
infill holes in the Lucerne area and the historic Hartford and Justice
areas.  The drilling consisted of two drilling rigs and crews supplied
by George DeLong Construction, Inc., of Winnemucca, Nevada.





The
second drilling program included drilling eight core holes, using a diamond
drilling rig and crews supplied by KB Drilling, of Moundhouse,
Nevada.  The cores are being used for metallurgical testing required
for final design of the processing flow design and for geotechnical testing to
determine final slope stability calculations for the open pit
walls.





The
information from these drill programs are be used in the development of a
detailed mine design for reopening the mine, fine-tune our mineral processing
procedures to maximize gold and silver recovery and updating our global resource
estimates.  We continue to take all steps to resume production and we
published our updated global resource report in August 2010.





The
Company announced on November 8, 2010that it has begun a new drilling program at
its Comstock Mine Project, under the direction of Mr. Larry Martin, Comstock
Mining’s Chief Geologist.  The program includes over 100,000 feet of
reverse circulation (RC) drilling, and has a planned duration of about seven
months.  It includes development drilling in the Lucerne and Dayton
Resource Areas, exploration drilling on certain high priority targets within the
Company’s extensive Comstock district land holdings, and condemnation drilling
in the areas designated for possible heap leach pad expansion.





The
Company is currently preparing an application for a major modification to our
Air Quality Permit and an application for a new Mercury Emissions Permit
scheduled for completion in the second half of 2010, under the direction of
Dennis Anderson, PE, our Senior Engineer. These permits, to be issued by the
Nevada Division of Environmental Protection (NDEP), are required before mining
and processing can begin.





In
mid-2009, the Company was contacted by the United State Environmental Protection
Agency (EPA) regarding the selection of the Company’s Plum Mine to be audited
under the EPA’s Toxic Release Inventory (TRI) program. The Company engaged
Enviroscientists, Inc., to assist it in managing the EPA audit as well as the
Company’s TRI reporting requirements. We have submitted all required reports for
all periods under audit and believe the reporting for these periods are now in
compliance. The audit may determine that the Company was not in compliance with
the TRI reporting requirements and, as a result, the EPA may take action against
the Company, including the imposition of fines and penalties or other
enforcement action, based on the results of the audit. The Company believes it
has since complied with these reporting requirements and does not believe this
action or any possible penalties would be material.




37





Land and
Mineral Right Acquisitions





We will
continue to increase our footprint in the Comstock Lode District through
strategic acquisitions.  We consider the historic Comstock Lode
central to our growth strategy. We work collaboratively with Federal, State, and
local regulatory agencies to ensure that we obtain all remaining permits needed
to resume mining.





On April
2, 2010, we completed the acquisition of 11 patented lode mining claims in
Storey and Lyon counties, which we had been leasing, from Claire Obester, Jim
Obester, Alan Obester, and Julian Smith (“sellers”) for $1,650,000 plus a 1%
royalty.  Pursuant to the purchase agreement, we made initial payments
of $250,000 and we issued a note to the “sellers” for $1,400,000.  The
note bears interest of six percent (6%) per annum. Interest and principal
payments shall be made in quarterly installments of $250,000 with the first
payment due on or before April 1, 2010 and continuing on the same day of each
consecutive quarter, until July 1, 2011, when the then unpaid principal and
accrued interest is due and payable.





On June
2, 2010, we entered into Mineral Exploration and Mining Lease agreement with New
Daney Company, Inc. covering 7 unpatented lode claims.  These claims
are located Lyon County and are contiguous with the company’s Spring Valley
mineral holdings.





On July
1, 2010, we acquired a purchase option to acquire 4 patented lode claims
totaling 95 acres known as the “Dayton.” These mineral claims are contiguous
with our Spring Valley mineral holdings and the property has known historic
mineral resources. The purchase price is $3,000,000 plus a 3% NSR. In addition,
the NSR will be reduced by 75% until the company receives credit through the
reduction of NSR for the $3,000,000 purchase price. The agreement calls for a
$500,000 upfront payment and the seller will finance $2,500,000 with a 0%
interest seller’s note. The note will be payable in 20 equal quarterly
installments of $125,000.




On July
20, 2010, we acquired  seven patented mining claims totaling 48 acres,
surface rights to two additional patented mining claims totaling 15 acres, 12
unpatented lode claims, and 15 acre-feet of water rights, all located in Storey
County, Nevada. The purchase price was $1,025,000, with an initial payment of
$300,000.  We financed the remaining $725,000 with an installment note
bearing 6% interest, requiring 60 monthly payments of $6,178 and a final payment
of then-unpaid principal and interest. The former owners of the parcel will
retain a 1.5% NSR on all future mineral production from these
claims.





On August
1, 2010 we purchased an exclusive 180 day option to acquire one patented lode
claim known as the Metropolitan and two unpatented lode claims.  These
claims adjoin the “Dayton” claims where we secured an option to acquire 4
patented lode claims on July 1, 2010.   The agreement allows us
to acquire theses mineral claims for $100,000 plus a 2% net smelter return at
any point during the option period.





On
October 14, 2010, we acquired 26 unpatented lode-mining claims along the
southern extension of the Occidental Lode structure in Storey County,
Nevada.  The historic Occidental Lode, also referred to as the
Brunswick Lode, is located 1.5 miles due east of and sub-parallel to the veins
of the main Comstock Lode.  These claims adjoin and extend the
Company’s previous holdings of six patented and six unpatented claims,
significantly expanding the Company’s position on the Occidental Lode. The Lease
has an initial term of 3 years and, in the event we determine that exploration
results warrant further development, then the term can be extended initially for
two additional six-year terms and then continuously thereafter as long as we are
producing on property adjacent to or in the vicinity of these new claims. The
agreement includes a 3% Net Smelter Return (NSR) royalty from production with
the gold price capped at $2,000 per ounce.





We will
continue our program to catalog and digitize our library of historic mining maps
and reports, so that our team can leverage the knowledge accumulated by over 150
years of mining experience in the Comstock Lode.


38


Comparative
Financial Information





Below we
set forth a summary of comparative financial information for the three and nine
months ended September 30, 2010 and 2009.





Comparative
Financial Information





Three
Months Ended September 30, 2010 and September 30, 2009:





Quarter
                      ended
                      Sept. 30, 2010
                    
                    
                    Quarter
                      ended
                      Sept. 30, 2009
                    
                    
                    DifferenceRevenue
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Depletion
      and amortization
                    
                    
                    31,828
                    
                    
                    
                    37,604
                    
                    
                    
                    (5,776
                    )Reclamation,
      Exploration and Test Mining Expense
                    
                    
                    570,616
                    
                    
                    
                    485,430
                    
                    
                    
                    85,186General
      and Administration
                    
                    
                    583,156
                    
                    
                    
                    330,453
                    
                    
                    
                    252,703Consulting
      and Professional Service
                    
                    
                    471,824
                    
                    
                    
                    32,204
                    
                    
                    
                    439,620Financing
      cost
                    
                    
                    —
                    
                    
                    
                    111,160
                    
                    
                    
                    (111,160
                    )Derivative
      change in fair value
                    
                    
                    5,953,651
                    
                    
                    
                    42,643
                    
                    
                    
                    5,911,008Other
      – Gain on sale
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Interest
      Expense
                    
                    
                    1,093,831
                    
                    
                    
                    1,693,994
                    
                    
                    
                    (600,163
                    )Net
      Loss
                    
                    $
                    (8,704,906
                    )
                    
                    
                    (2,733,488
                    )
                    
                    
                    5,971,418





We did
not produce or sell any gold or silver at our Comstock project in Nevada during
the three months ended September 30, 2010 and September 30, 2009.





Reclamation,
Exploration and Test Mining Expenses were $ 85,186 greater for the three months
ended September 30, 2010 compared to the three months ended September 30, 2009.
The increase in expenses during the third quarter 2010 reflects additional cost
related to our 43-101 technical report that was published by Behre
Dolbear.





Our third
quarter 2010 General and Administrative expenses increased by $252,703 compared
to the third quarter 2009.  This increase reflects higher labor costs,
a land purchase option payment for our Comstock Project and related expenses
incurred in conjunction with our recapitalization, including raising new equity
capital. .





Consulting
and professional expenses for the three month period ended September 30, 2010
were $471,824 compared to $32,204 for the three month ended September 30, 2009,
amounting to $439,620 quarter over quarter increase.  This increase
reflects higher legal fees associated restructuring and recapitalization,
including raising new equity capital.





Derivative
change in Fair Value increased in the third calendar quarter 2010 when compared
to the same period in 2009 by $5,911,008. This negative variance reflects the
quarter over quarter fair value calculation change for beneficial features
(embedded derivatives) and detachable instrument (warrants) contained in various
notes at each of the reporting periods.


39


Interest
expense for the three month period ended September 30, 2010 decreased by
$600,163 when compared to the same fiscal quarter in 2009. This net decrease
reflects the issuance of additional interest bearing notes offset by a $712,603
reduction of debt discount amortization.





Nine
Months Ended September 30, 2010 and September 30, 2009:





Nine months
                      ended
                      Sept. 30, 2010
                    
                    
                    Nine months
                      ended
                      Sept. 30, 2009
                    
                    
                    DifferenceRevenue
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Depletion
      and amortization
                    
                    
                    178,884
                    
                    
                    
                    114,073
                    
                    
                    
                    64,811Reclamation,
      Exploration and Test Mining Expense
                    
                    
                    2,331,869
                    
                    
                    
                    2,577,821
                    
                    
                    
                    (245,952
                    )General
      and Administration
                    
                    
                    1,535,503
                    
                    
                    
                    1,022,670
                    
                    
                    
                    512,833Consulting
      and Professional Service
                    
                    
                    855,673
                    
                    
                    
                    177,610
                    
                    
                    
                    678,063Financing
      cost
                    
                    
                    169,247
                    
                    
                    
                    83,500
                    
                    
                    
                    85,747Derivative
      change in fair value
                    
                    
                    7,472,128
                    
                    
                    
                    1,898,838
                    
                    
                    
                    5,573,290Other
      – Gain on sale
                    
                    
                    (300,000
                    )
                    
                    
                    (25,000
                    )
                    
                    
                    (275,000
                    )Interest
      Expense
                    
                    
                    3,014,408
                    
                    
                    
                    3,296,145
                    
                    
                    
                    (281,737
                    )Net
      Loss
                    
                    $
                    (15,257,712
                    )
                    
                    
                    (9,145,657
                    )
                    
                    
                    6,112,055





We did
not produce or sell any gold or silver during the nine month period ended
September 30, 2010 and September 30, 2009.





Reclamation,
Exploration and Test Mining Expenses were $ 245,952 less for the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009.
This decrease reflects the change in drilling activity in 2010 versus
2009.





General
and administrative expenses increased by $512,833 in the third quarter of 2010
from the third quarter 2009.  This increase reflects the costs
associated with the reverse stock-split proxy process, the restructuring and
related expenses incurred in conjunction with our recapitalization, including
raising new equity capital and higher labor costs.





Consulting
and professional expenses for the nine month period ended September 30, 2010
were $855,673 compared to $177,610 for the nine month period ended September 30,
2009. The $678,063 increase in consulting and professional expenses
reflects higher legal fees associated with affecting the reverse stock-split
proxy process, the restructuring and recapitalization, including raising new
equity capital.





The
Financing costs in the nine-month period September 30, 2010 were $85,747 higher
compared to the nine-month period ended September 30, 2009. This increase
reflects financing fees associated with our 2010 financing
activities.





Derivative
change in Fair Value increased in the nine month period ended September 30, 2010
when compared to the same period in 2009 by $5,573,290. This variance reflects
the year over year fair value calculation change for beneficial features
(embedded derivatives) and detachable instrument (warrants) contained in various
notes at each of the reporting periods.


40


In
January 2010, we sold a 0.6% royalty interest in our Obester Property to
Precious Royalties for $550,000. After adjusting our mineral claim value for the
sale, a gain of $300,000 was realized.





Interest
expense for the nine month period ended September 30, 2010 decreased by $281,737
when compared to the same nine month period in 2009. This debt decrease reflects
the issuance of additional interest bearing notes offset by a $597,131 reduction
of debt discount amortization.





Liquidity
and Capital Resources





On
October 20, 2010, the Company raised $35.75 million in gross proceeds ($32.6
million, net of commissions and transaction related expenses) by issuing shares
of a newly created Series B to fund the Company’s business plan to accelerate
mine development and production and enhance exploration and exchanged all $29.4
million of its defaulted senior secured convertible notes and related
obligations for shares of a newly created Series A. This transaction also cures
all defaults under the terms of the notes being converted.  This
funding meets our capital and working capital needs for production start up in
2011, exploration drilling under our three-year strategic plan and certain,
additional land purchases.  However, we did not generate revenues or
cash flows and we have yet to realize an operating profit at our Company.
Although we previously had substantial doubt about our ability to continue as a
going concern, as disclosed in the report of our independent registered public
accounting firm in our financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2009, and we believe this substantial
doubt may no longer be applicable, our recurring losses and negative cash flow
from operations require ongoing assessment about our ability to continue as a
going concern.





The net
proceeds the Company received from the sale of the Series B was approximately
$32.6 million after deducting commissions and the estimated expenses of the
offering payable by the Company.  The Company intends to use the net
proceeds to meet its initial capital and operating needs for the first three
years of its strategic plan to accelerate mine development and production and
continue exploration.   This includes approximately $8 million of
capital expenditures associated with its leach pad expansion, new crushing unit
and lab refurbishment and rolling stock, approximately $19 million for mine
development, exploration and production start up costs and approximately $4
million for land acquisitions.  The remaining $1.75 million is
reserved for general corporate purposes, including remaining feasibility
studies.




US$
                    (in
      millions)Capital
      Required for Production:Mobile
      Mine Equipment
                  
                  $
                  2.50Leach
      Pad Expansion
                  
                  
                  2.50Crushing
      Plant & Lab Refurbishment
                  
                  
                  3.00Exploration
      and Start Up:Exploration
      & Mine Development
                  
                  
                  15.00Production
      Start up
                  
                  
                  4.00General
      Corporate Purposes/Feasibility
                  
                  
                  1.75Land
      Acquisition
                  
                  
                  4.00Transaction
      Fees and Related Expenses
                  
                  
                  3.00Total:
                  
                  $
                  35.75




Pending
the use of the proceeds described above, the Company may invest all or a portion
of the proceeds of the offering in short-term deposits, including banker
acceptances and short-term, high quality, interest bearing corporate,
government-issued or government-guaranteed securities.


41


Item 3. Quantitative and Qualitative
Disclosures About Market Risks





An
investment in our common stock involves risk. You should carefully consider the
following risk factors.





Our exposure to market
risk for changes in interest rates relates primarily to the market-driven
increase or decrease in interest rates, and the impact of those changes on the
Company’s ability to realize a return on invested or available funds. We ensure
the safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We mitigate default risk by investing
in short term high-credit investment grade securities and/or commercial checking
and savings accounts.





ITEM
4. CONTROLS AND PROCEDURES





A. 
Disclosure





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this Quarterly Report on Form 10-Q, management
performed, with the participation of our Principal Executive Officer and
Principal Financial Officer and our Principal Accounting Officer, an evaluation
of the effectiveness of our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed in
the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s forms,
and that such information is accumulated and communicated to our management
including our Principal Executive Officer and Principal Financial Officer and
our Principal Accounting Officer, to allow timely decisions regarding required
disclosures. Based on the evaluation as described above, our Principal Executive
Officer and Principal Financial Officer and Principal Accounting Officer have
concluded that our internal control over disclosure controls and procedures as
of September 30, 2010 were effective.





B.
 Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes
those policies and procedures that:





(i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;





(ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements; and





(iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized transactions.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Frameworkand Internal Control over Financial
Reporting-Guidance for Smaller Public Companies.


42


There
have been no changes during the quarter ended September 30, 2010 in our
Company's internal control over financial reporting identified in connection
with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15(d) that
have material affected, or are reasonably likely to materially affect, our
internal controls over our financial reporting.





PART
II - OTHER INFORMATION





Item 1. Legal Proceedings





From time
to time, we are involved in lawsuits, claims, investigations and proceedings
that arise in the ordinary course of business. There are no matters pending or
threatened that we expect to have a material adverse impact on our business,
results of operations, financial condition or cash flows.





Item
1A.  Risk
Factors





Set forth
below is an update to our risk factors as set forth in our Annual Report on Form
10-K for the year ended December 31, 2009.  For full comprehension of
the risks affecting our Company, you are encouraged to review the risk factors
set forth in our 2009 Annual Report on Form 10-K, which are hereby incorporated
herein in their entirety.





Investing
in our common stock is very speculative and involves a high degree of risk. You
should carefully consider all of the information in this report before making an
investment decision. The following are among the risks we face related to our
business, assets and operations. They are not the only risks we face. Additional
risks and uncertainties not presently known to us or that we currently believe
to be immaterial may also arise. Any of these risks could materially and
adversely affect our business, results of operations and financial condition,
which in turn could materially and adversely affect the trading price of our
common stock. You should not purchase our shares unless you can afford to lose
your entire investment.





Relative
to our cash flows we have substantial indebtedness.





As of
September 30, 2010, we had current indebtedness of $24,804,004 million in
addition to $7,027,569 million of current accrued interest payable. For the nine
months ended September 30, 2010, we had a deficit of cash flows from operating
activities of $4,529,475 million. Our substantial indebtedness, and our ability
to incur additional indebtedness, may further negatively affect our cash flow
and our ability to operate our business and react to changes in the economy or
our industry.





Outstanding
convertible securities and warrants may result in substantial
dilution.





At
September 30, 2010, we had outstanding 19,406,382 shares of common stock. In
addition, we had outstanding convertible notes and related interest plus various
common stock purchase warrants. At September 30, 2010, these notes, related
interest and warrants were convertible into or exercisable for a total of
approximately 27.4 million additional shares of our common stock, subject to
further anti-dilution provisions.




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





Employees and
directors




During
the three month period ended September 30, 2010, the following shares were
issued to employees and Company directors:




·
            In August 2010, pursuant to his
      employment agreement, Mr. Larry Martin, our Chief Geologist, was issued a
      total of two thousand five hundred (2,500) of our unregistered common
      shares.  The value of the common shares at the time of issuance
      was $3,375, averaging $1.35 per share.  Shares are valued at the
      closing market price on date of
issue.


43





Item 3. Defaults Upon Senior
Securities





As of
September 30, 2010, the Company is in default of the terms on several
outstanding notes payable with the Winfield Group with principal balance due of
$15,119,986 and accrued interest of $6,037,061. Because we are in default, the
entire note balances of the defaulted notes have been recorded as current
liabilities.





Item 5. Other Information





None.





Item 6. Exhibits and Reports on Form
8-K





(a)     The
following documents are filed as part of this Report:





(1) Financial
statements filed as part of this Report:




Consolidated
      Balance Sheet as of  September 30, 2010
    (Unaudited)Consolidated
      Statement of Operations for the three-month periods ended September 30,
      2010 and 2009 (Unaudited)Consolidated
      Statement of Operations for the nine-month periods ended September 30,
      2010 and 2009 (Unaudited)Consolidated
      Statement of Cash Flows for the nine-month periods ended September 30,
      2010 and 2009 (Unaudited)Consolidated
      Statement of Changes in Stockholders’ Deficit for the nine-month periods
      ended September 30, 2010 (Unaudited)Notes
      to Financial Statements





(2) Exhibits
filed as part of this Report:





Exhibit
                    Number
                  
                  Exhibit31
                  
                  Certifications
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities
      Exchange Act of 1934, as amended.32
                  
                  Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002


44


SIGNATURES





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





COMSTOCK
      MINING INC.(Registrant)Date:
      November 12, 2010
                  By:
                  /s/
      Corrado De GasperisName:
      Corrado De GasperisTitle:  
      Chief Executive Officer (Principal
                    Executive
      Officer and Principal Financial
                    Officer)Date:  November
      12, 2010
                  By:
                  /s/
      Robert T. FaberName:
      Robert T. FaberTitle:  
      Chief Accounting
Officer





45