UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For
the quarterly period ended September 30, 2010




OR




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





For
the transition period from __________ to __________





Commission
File Number 333-127703





LI3
ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Nevada
            20-3061907(State
      or other jurisdiction of
              incorporation
      or organization)
            (IRS
      Employer
              Identification
      No.)





Av.
Pardo y Aliaga 699 Of. 802


San
Isidro, Lima, Peru


(Address
of principal executive offices)





+
(51) 1-212-1880


(Registrant’s
telephone number, including area code)





N.A.


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





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


Yes x No o





Indicate
by check mark whether the registrant 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 o No o





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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer o
            
            Accelerated filer
         oNon-accelerated
      filer o
            
            Smaller
      reporting company  x(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o No x





As of
November 19, 2010, there were 90,872,191 shares of the registrant’s common stock
outstanding.










LI3
ENERGY, INC.





TABLE
OF CONTENTS




PageStatement
      Regarding Forward-Looking Information
                      3Part
      I – Financial InformationItem 1
                      Consolidated
      Financial Statements (unaudited)
                      4Item 2
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      26Item
      3
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      31Item 4
                      Controls
      and Procedures
                      31Part
      II – Other InformationItem
      1
                      Legal
      Proceedings
                      34Item
      1A
                      Risk
      Factors
                      34Item
      2
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      34Item
      3
                      Defaults
      Upon Senior Securities
                      34Item
      4
                      (Removed
      and Reserved)
                      34Item
      5
                      Other
      Information
                      35Item 6
                      Exhibits
                      35Signatures
                      37


2





Statement
Regarding Forward-Looking Information





This
Quarterly Report on Form 10-Q contains forward-looking statements. All
statements other than statements of historical facts included in this Report
including, without limitation, statements in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations section of this
Report, regarding our financial condition, estimated working capital, business
strategy, the plans and objectives of our management for future operations and
those statements preceded by, followed by or that otherwise include the words
“believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions or
variations on such expressions are forward-looking statements. We can give no
assurances that the assumptions upon which the forward-looking statements are
based will prove to be correct. Because forward-looking statements are subject
to risks and uncertainties, actual results may differ materially from those
expressed or implied by the forward-looking statements. There are a number of
risks, uncertainties and other important factors that could cause our actual
results to differ materially from the forward-looking statements including, but
not limited to, our ability to identify appropriate corporate acquisition and/or
joint venture opportunities in the lithium mining sector, our ability to
establish technical and managerial infrastructure, our ability to raise the
required capital to take advantage of and successfully participate in such
opportunities, and future economic conditions, political stability and lithium
prices. Descriptions of some of the risks and uncertainties that could cause our
actual results to differ materially from those described by the forward-looking
statements in this Quarterly Report on Form 10-Q appear in the section captioned
“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June
30, 2010, filed with the Securities and Exchange Commission (the
“SEC”).




Except as
otherwise required by the federal securities laws, we disclaim any obligations
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this Report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.


3





PART I – FINANCIAL INFORMATION





Item
1. Financial Statements





LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Balance Sheets


(Unaudited)


As
      of
                              
                              
                              As
      ofSeptember 30, 2010
                              
                              
                              June 30, 2010AssetsCurrent
      Assets:Cash
                              
                              $
                              3,851
                              
                              
                              $
                              302,821Prepaid
      expenses and advances
                              
                              
                              20,067
                              
                              
                              
                              56,476Total
      current assets
                              
                              
                              23,918
                              
                              
                              
                              359,297Mineral
      rights
                              
                              
                              4,420,000
                              
                              
                              
                              340,000Property
      and equipment, net of accumulated depreciation of $16,224 and $15,249,
      respectively
                              
                              
                              2,971
                              
                              
                              
                              3,946Total
      non- current assets
                              
                              
                              4,422,971
                              
                              
                              
                              343,946Total
      assets
                              
                              $
                              4,446,889
                              
                              
                              $
                              703,243Liabilities
      & Stockholders' DeficitCurrent
      Liabilities:Accounts
      payable
                              
                              
                              625,264
                              
                              
                              $
                              649,046Accrued
      expenses
                              
                              
                              1,109,093
                              
                              
                              
                              982,550Common
      stock payable to related party
                              
                              
                              90,000
                              
                              
                              
                              -Payable
      to related parties
                              
                              
                              158,392
                              
                              
                              
                              18,725Loans
      payable
                              
                              
                              95,000
                              
                              
                              
                              95,000Total
      current liabilities
                              
                              
                              2,077,749
                              
                              
                              
                              1,745,321Derivative
      liabilities-warrant instruments
                              
                              
                              5,493,939
                              
                              
                              
                              8,029,728Total
      Liabilities
                              
                              
                              7,571,688
                              
                              
                              
                              9,775,049Commitments
      and contingencies
                              
                              
                              -
                              
                              
                              
                              -Stockholders'
      Deficit:Preferred
      stock, ($0.001 par value, 10,000,000 shares  authorized; 0
      shares issued and outstanding) as of September 30, 2010 and June 30,
      2010
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, ($0.001 par value, 290,000,000 shares authorized; 86,872,191
      and 74,625,095 shares issued and outstanding) as ofSeptember
      30, 2010 and June 30, 2010, respectively
                              
                              
                              86,872
                              
                              
                              
                              74,625Additional
      paid-in capital
                              
                              
                              11,367,178
                              
                              
                              
                              7,095,961Deficit
      accumulated during exploration stage
                              
                              
                              (14,578,849
                              )
                              
                              
                              (16,242,392
                              )Total
      stockholders' deficit
                              
                              
                              (3,124,799
                              )
                              
                              
                              (9,071,806
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              4,446,889
                              
                              
                              $
                              703,243





See
accompanying notes to unaudited consolidated financial
statements


4





LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statements of Operations


(Unaudited)


June 24, 2005(inception)ThreeMonthsEndedSeptember30,
                    
                    
                    through
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2010Revenues
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,278Cost
      of goods sold
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,182Gross
      profit
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,096Operating
      expenses:Inventory
      impairment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,469Mineral
      rights impairment expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,718,785Exploration
      expenses
                    
                    
                    272,642
                    
                    
                    
                    -
                    
                    
                    
                    2,608,421General
      and administrative expenses
                    
                    
                    831,227
                    
                    
                    
                    14,765
                    
                    
                    
                    3,781,840Total
      operating expenses
                    
                    
                    1,103,869
                    
                    
                    
                    14,765
                    
                    
                    
                    11,110,515Other
      income (expense):Unrealized
      gain (loss) – change in fair value of warrant derivative liability
      instruments
                    
                    
                    2,772,726
                    
                    
                    
                    -
                    
                    
                    
                    (3,450,821
                    )Foreign
      currency – losses
                    
                    
                    (3,437
                    )
                    
                    
                    -
                    
                    
                    
                    (8,597
                    )Interest
      income
                    
                    
                    67
                    
                    
                    
                    1
                    
                    
                    
                    4,482Interest
      expense
                    
                    
                    (1,944
                    )
                    
                    
                    (1,958
                    )
                    
                    
                    (14,494
                    )Total
      other income (expense)
                    
                    
                    2,767,412
                    
                    
                    
                    (1,957
                    )
                    
                    
                    (3,469,430
                    )Net
      income (loss)
                    
                    $
                    1,663,543
                    
                    
                    $
                    (16,722
                    )
                    
                    $
                    (14,578,849
                    )Basic
      and diluted earnings (loss) per share
                    
                    $
                    0.02
                    
                    
                    $
                    0.00Weighted
      average number of  common shares outstanding -basic and
      diluted
                    
                    
                    82,708,587
                    
                    
                    
                    7,747,374





See
accompanying notes to unaudited consolidated financial statements




5




LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)


From
June 24, 2005 (Inception) through September 30, 2010


(Unaudited)


Deficit
                    AccumulatedCommon
                  
                  
                  Additional
                  
                  
                  DuringCommon
                  
                  
                  Stock
                  
                  
                  Paid-In
                  
                  
                  ExplorationStock
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Stage
                  
                  
                  TotalBalance
      at June 24, 2005 (Inception)
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Stock
      issued for cash on June 24, 2005 at $0.000105 per share
                  
                  
                  35,526,336
                  
                  
                  
                  35,526
                  
                  
                  
                  (31,776
                  )
                  
                  
                  -
                  
                  
                  
                  3,750Stock
      issued for cash on June 24, 2005 at $0.000105 per share
                  
                  
                  35,526,336
                  
                  
                  
                  35,526
                  
                  
                  
                  (31,776
                  )
                  
                  
                  -
                  
                  
                  
                  3,750Net
      loss, period ended June 30, 2005
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance,
      June 30, 2005
                  
                  
                  71,052,672
                  
                  
                  
                  71,052
                  
                  
                  
                  (63,552
                  )
                  
                  
                  -
                  
                  
                  
                  7,500Stock
      issued for cash on March 14,  2006 at $0.0019 per
      share
                  
                  
                  47,368,454
                  
                  
                  
                  47,368
                  
                  
                  
                  2,632
                  
                  
                  
                  -
                  
                  
                  
                  50,000Net
      loss, year ended June 30, 2006
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (14,068
                  )
                  
                  
                  (14,068
                  )Balance,
      June 30, 2006
                  
                  
                  118,421,126
                  
                  
                  
                  118,420
                  
                  
                  
                  (60,920
                  )
                  
                  
                  (14,068
                  )
                  
                  
                  43,432Net
      loss, year ended June 30, 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16,081
                  )
                  
                  
                  (16,081
                  )Balance,
      June 30, 2007
                  
                  
                  118,421,126
                  
                  
                  
                  118,420
                  
                  
                  
                  (60,920
                  )
                  
                  
                  (30,149
                  )
                  
                  
                  27,351Stock
      issued for cash on February 7, 2008 at $0.019 per share
                  
                  
                  2,631,595
                  
                  
                  
                  2,632
                  
                  
                  
                  47,368
                  
                  
                  
                  -
                  
                  
                  
                  50,000Net
      loss, year ended June 30, 2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (95,656
                  )
                  
                  
                  (95,656
                  )Balance,
      June 30, 2008
                  
                  
                  121,052,721
                  
                  
                  
                  121,052
                  
                  
                  
                  (13,552
                  )
                  
                  
                  (125,805
                  )
                  
                  
                  (18,305
                  )Net
      loss, year ended June 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (67,905
                  )
                  
                  
                  (67,905
                  )Balance,
      June 30, 2009
                  
                  
                  121,052,721
                  
                  
                  
                  121,052
                  
                  
                  
                  (13,552
                  )
                  
                  
                  (193,710
                  )
                  
                  
                  (86,210
                  )October
      2009, cancellation of former officer's shares
                  
                  
                  (71,052,626
                  )
                  
                  
                  (71,052
                  )
                  
                  
                  71,052
                  
                  
                  
                  -
                  
                  
                  
                  -October
      2009, stock issued to the chief executive officer for services at $0.0032
      per share
                  
                  
                  1,500,000
                  
                  
                  
                  1,500
                  
                  
                  
                  3,300
                  
                  
                  
                  -
                  
                  
                  
                  4,800November
      10, 2009, common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $42,392
                  
                  
                  6,400,000
                  
                  
                  
                  6,400
                  
                  
                  
                  1,018,222
                  
                  
                  
                  -
                  
                  
                  
                  1,024,622November
      12, 2009, common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $5,350
                  
                  
                  2,120,000
                  
                  
                  
                  2,120
                  
                  
                  
                  299,447
                  
                  
                  
                  -
                  
                  
                  
                  301,567November
      17, 2009, common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $31,243
                  
                  
                  1,820,000
                  
                  
                  
                  1,820
                  
                  
                  
                  234,944
                  
                  
                  
                  -
                  
                  
                  
                  236,764December
      15, 2009, common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $4,859
                  
                  
                  1,900,000
                  
                  
                  
                  1,900
                  
                  
                  
                  260,222
                  
                  
                  
                  -
                  
                  
                  
                  262,122December
      23, 2009, common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $76,632
                  
                  
                  1,760,000
                  
                  
                  
                  1,760
                  
                  
                  
                  167,361
                  
                  
                  
                  -
                  
                  
                  
                  169,121December
      2009, stock issued to a consultant for services at $0.61 per
      share
                  
                  
                  750,000
                  
                  
                  
                  750
                  
                  
                  
                  456,750
                  
                  
                  
                  -
                  
                  
                  
                  457,500February
      2010, stock issued to a consultant for services at $0.93 per
      share
                  
                  
                  375,000
                  
                  
                  
                  375
                  
                  
                  
                  348,375
                  
                  
                  
                  -
                  
                  
                  
                  348,750March
      12, 2010, stock issued for acquisition of mineral rights at $0.91 per
      share
                  
                  
                  4,000,000
                  
                  
                  
                  4,000
                  
                  
                  
                  3,636,000
                  
                  
                  
                  -
                  
                  
                  
                  3,640,000June
      9, 2010 common stock sold in private placement offering at $0.25 per
      share, less offering cost totaling $250,204
                  
                  
                  4,000,000
                  
                  
                  
                  4,000
                  
                  
                  
                  284,943
                  
                  
                  
                  -
                  
                  
                  
                  288,943Stock
      options issued to consultant for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  114,783
                  
                  
                  
                  -
                  
                  
                  
                  114,783Amortization
      of stock-based compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  84,614
                  
                  
                  
                  -
                  
                  
                  
                  84,614Stock
      issued by CEO to employees and director for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  129,500
                  
                  
                  
                  -
                  
                  
                  
                  129,500Net
      loss, year ended June 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (16,048,682
                  )
                  
                  
                  (16,048,682
                  )Balance,
      June 30, 2010
                  
                  
                  74,625,095
                  
                  
                  
                  74,625
                  
                  
                  
                  7,095,961
                  
                  
                  
                  (16,242,392
                  )
                  
                  
                  (9,071,806
                  )


6





LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statement of Changes in Stockholders’ Equity (Deficit) (continued)


From
June 24, 2005 (Inception) through September 30, 2010


(Unaudited)


Balance,
      June 30, 2010
                          
                          
                          74,625,095
                          
                          
                          
                          74,625
                          
                          
                          
                          7,095,961
                          
                          
                          
                          (16,242,392
                          )
                          
                          
                          (9,071,806
                          )July
      13, 2010, common stock sold in private placement offering at $0.25 per
      share, less offering costs totaling $47,245
                          
                          
                          2,000,000
                          
                          
                          
                          2,000
                          
                          
                          
                          230,884
                          
                          
                          
                          -
                          
                          
                          
                          232,884August
      3, 2010, stock issued for acquisition of mineral rights at $0.39 per
      share
                          
                          
                          10,000,000
                          
                          
                          
                          10,000
                          
                          
                          
                          3,890,000
                          
                          
                          
                          -
                          
                          
                          
                          3,900,000August
      27, 2010 stock issued for services at $0.30 per share
                          
                          
                          87,096
                          
                          
                          
                          87
                          
                          
                          
                          26,042
                          
                          
                          
                          
                          
                          
                          
                          26,129September
      13, 2010, common stock sold in   private placement offering
      at $0.25 per share, less offering costs totaling $4,757
                          
                          
                          160,000
                          
                          
                          
                          160
                          
                          
                          
                          18,017
                          
                          
                          
                          -
                          
                          
                          
                          18,177Amortization
      of stock-based compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          106,274
                          
                          
                          
                          -
                          
                          
                          
                          106,274Net
      income, period ended September 30, 2010
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,663,543
                          
                          
                          
                          1,663,543Balance,
      September 30, 2010
                          
                          
                          86,872,191
                          
                          
                          
                          86,872
                          
                          
                          $
                          11,367,178
                          
                          
                          $
                          (14,578,849
                          )
                          
                          $
                          (3,124,799
                          )





See
accompanying notes to unaudited consolidated financial
statements


7


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statements of Cash Flow


(Unaudited)


June 24, 2005Three Months
                      
                      
                      Three Months
                      
                      
                      (inception)Ended
                      
                      
                      Ended
                      
                      
                      ThroughSeptember 30,
                      
                      
                      September 30,
                      
                      
                      September 30,2010
                      
                      
                      2009
                      
                      
                      2010Cash
      Flows from Operating ActivitiesNet
      income (loss)
                      
                      $
                      1,663,543
                      
                      
                      $
                      (16,722
                      )
                      
                      $
                      (14,578,849
                      )Adjustments
      to reconcile net income (loss) to net cashused in operating
      activities:Depreciation
                      
                      
                      975
                      
                      
                      
                      975
                      
                      
                      
                      16,529Stock-based
      compensation
                      
                      
                      132,403
                      
                      
                      
                      -
                      
                      
                      
                      1,272,350Mineral
      rights impairment expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,718,785Unrealized
      (gain) loss on change in fair value of warrant derivative
      liabilities
                      
                      
                      (2,772,726
                      )
                      
                      
                      -
                      
                      
                      
                      3,450,821Inventory
      impairment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,469Changes
      in operating assets and liabilities:Increase
      in inventory
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,469
                      )Decrease
      (increase) in prepaid expenses and advances
                      
                      
                      36,409
                      
                      
                      
                      -
                      
                      
                      
                      (20,067
                      )Increase
      (decrease) in accounts payable
                      
                      
                      (23,782
                      )
                      
                      
                      6,151
                      
                      
                      
                      625,264Increase
      in accrued expenses
                      
                      
                      126,543
                      
                      
                      
                      1,958
                      
                      
                      
                      1,109,093Increase
      in common stock payable
                      
                      
                      90,000
                      
                      
                      
                      -
                      
                      
                      
                      90,000Increase
      in payable to related parties
                      
                      
                      139,667
                      
                      
                      
                      -
                      
                      
                      
                      158,392Net
      cash used in operating activities
                      
                      
                      (606,968
                      )
                      
                      
                      (7,638
                      )
                      
                      
                      (3,157,682
                      )Cash
      Flows from Investing ActivitiesAcquisition
      of mineral rights
                      
                      
                      (180,000
                      )
                      
                      
                      -
                      
                      
                      
                      (1,598,785
                      )Acquisition
      of equipment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (9,500
                      )Increase
      in leasehold improvement
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (10,000
                      )Net
      cash used in investing activities
                      
                      
                      (180,000
                      )
                      
                      
                      -
                      
                      
                      
                      (1,618,285
                      )Cash
      Flows from Financing ActivitiesIncrease
      in loans payable
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      95,000Proceeds
      from issuance of common stock, net of offering costs
                      
                      
                      487,998
                      
                      
                      
                      -
                      
                      
                      
                      4,684,818Net
      cash provided by financing activities
                      
                      
                      487,998
                      
                      
                      
                      -
                      
                      
                      
                      4,779,818Net
      increase (decrease) in cash
                      
                      
                      (298,970
                      )
                      
                      
                      (7,638
                      )
                      
                      
                      3,851Cash
      at beginning of period
                      
                      
                      302,821
                      
                      
                      
                      9,703
                      
                      
                      
                      -Cash
      at end of period
                      
                      $
                      3,851
                      
                      
                      $
                      2,065
                      
                      
                      
                      3,851Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Interest
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Non-cash
      investing and financing transactions:Common
      stock cancelled
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      71,052Issuance
      of common stock for acquisition of mineral rights
                      
                      $
                      3,900,000
                      
                      
                      $
                      -
                      
                      
                      $
                      7,540,000Fair
      value of derivative warrant instruments in private
    offerings
                      
                      $
                      236,937
                      
                      
                      $
                      -
                      
                      
                      $
                      2,043,118





See
accompanying notes to unaudited consolidated financial
statements


8


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


NOTE
1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION





Li3
Energy, Inc. (“Li3 Energy” or the “Company”) was incorporated under the laws of
the State of Nevada on June 24, 2005.  Initially, the Company’s principal
products were soy-blend wax candles (the “Legacy Business”). In 2009, the
Company decided to redirect its business focus and strategy toward identifying
and pursuing business opportunities in lithium and industrial
minerals mining in North and South America.




On
October 19, 2009, the Company filed an amendment to its articles of
incorporation with the Secretary of State of the State of Nevada, pursuant to
which it changed its name from NanoDynamics Holdings, Inc. to Li3 Energy, Inc.,
to reflect the Company’s plans to focus its business strategy on the energy
sector and related lithium mining opportunities in North and South
America.





The
Company has four subsidiaries; Li3 Energy Peru SRL, a wholly owned
subsidiary in Peru, to explore mining opportunities in Peru and in South
America; Alfredo Holdings, Ltd. (“Alfredo”), an exempted limited company
incorporated under the laws of the Cayman Islands; Pacific Road Mining Chile,
SA, a Chilean corporation (“PRMC”), which is a subsidiary of Alfredo; and Noto
Energy S.A. (“Noto”), an Argentinean corporation.





The
accompanying unaudited interim consolidated financial statements of Li3 Energy,
Inc. have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission (“SEC”), and should be read in conjunction with the audited
financial statements and notes thereto contained in the Company’s latest Annual
Report filed with the SEC on Form 10-K. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of financial position and the results of operations for the
interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. Notes to the financial statements which
would substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ending June 30, 2010, as reported in
Form 10-K, have been omitted.





NOTE
2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





a. Principles
of Consolidation





The
consolidated financial statements include the accounts of Li3 Energy Peru SRL,
Alfredo, PRMC and Noto.





b.Exploration Stage
Company





The
Company is in the exploration stage in accordance with SEC guidance and
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic No. 915 (formerly Statement of Financial Accounting Standards
(“SFAS”) No.7, “Accounting and
Reporting by Development Stage Enterprises”).  Its activities
to date have been limited to capital formation, organization, and development of
its business, including acquisition of mineral assets.





c.  Cash
Equivalents




The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.   The Company
had $0 cash equivalents at September 30, 2010 and June 30,
2010.


9


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


d.  Mineral
Exploration and Development Costs





All
exploration expenditures are expensed as incurred. Costs of acquisition and
option costs of mineral rights are capitalized upon acquisition. Mine
development costs incurred to develop new ore deposits, to expand the
capacity of mines, or to develop mine areas substantially in advance of
current production are also capitalized once proven and probable
reserves exist and the property is determined to be a commercially mineable
property. Costs incurred to maintain current production or to maintain
assets on a standby basis are charged to operations. If the Company does
not continue with exploration after the completion of the feasibility
study, the mineral rights will be expensed at that time. Costs of
abandoned project including related property and
equipment costs are charged to mining costs.  To determine if
these costs are in excess of their recoverable amount, periodic evaluation
of carrying value of capitalized costs and any related property and
equipment costs are based upon expected future cash flows and/or estimated
salvage value in accordance with ASC 360-10-35-15, Impairment or Disposal of Long-Lived
Assets.As of September 30, 2010, management evaluated our
capitalized mineral rights for impairment and determined no impairment was
required.





e.   Earnings
(Loss) per Share




The
Company accounts for earnings (loss) per share in accordance with FASB ASC Topic
No. 260 – 10 (formerly SFAS No. 128,“Earnings per Share”), which
specifies the computation, presentation and disclosure requirements for earnings
(loss) per share for entities with publicly held common stock and requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share.





Basic net
earnings (loss) per share amounts are computed by dividing the net
earnings (loss) by the weighted average number of common shares outstanding
over the reporting period.  Diluted earnings (loss) per share is
computed based on the weighted average number of shares of common stock plus the
effect of dilutive potential common shares outstanding during the period using
the treasury stock method.  There were no dilutive potential common
shares as of September 30, 2010.





f. Use of Estimates and
Assumptions




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates. Management has made
significant estimates related to the fair value of the warrant derivative
liability, accrued expenses and contingencies.




g.
Subsequent Events





We
evaluated all subsequent events from September 30, 2010 through the date of the
issuance of these consolidated financial statements.





h.  Recent
Accounting Pronouncements




Recently
issued or adopted accounting pronouncements are not expected to, or did not
have, a material impact on our financial position, results of operations or cash
flows.





i.
Reclassifications





Certain
accounts  in the prior period were reclassified to conform with the
current period financial statements presentation.


10


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


NOTE
3.   GOING CONCERN





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  The Company currently
has no sources of recurring revenue and has generated net losses of $14,578,849
and negative cash flows from operations of $3,157,682 during the period from
June 24, 2005 (inception) through September 30, 2010.





In the
course of its development activities, the Company has sustained and continues to
sustain losses.  The Company does not anticipate positive cash flow
from operations before 2013 and cannot predict if and when the Company may
generate profits from operations.  In the event the Company identifies
commercial reserves of lithium and/or minerals, the Company will require
substantial additional capital to develop those reserves.  The Company
expects to finance its operations primarily through future financings. However,
there exists substantial doubt about the Company’s ability to continue as a
going concern because there is no assurance that it will be able to obtain such
capital, through equity or debt financing, or any combination thereof, on
satisfactory terms or at all. Additionally, no assurance can be given that any
such financing, if obtained, will be adequate to meet the Company’s ultimate
capital needs and to support its growth. If adequate capital cannot be obtained
on a timely basis and on satisfactory terms, then the Company’s operations would
be materially negatively impacted.





The
Company’s ability to complete additional offerings is dependent on the state of
the debt and/or equity markets at the time of any proposed offering, and such
market’s reception of the Company and the offering terms. In addition, the
Company’s ability to complete an offering may be dependent on the status of its
exploration activities, which cannot be predicted. There is no assurance that
capital in any form would be available to the Company, and if available, on
terms and conditions that are acceptable.





These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. The Company’s continuation as a going concern is dependent on its
ability to meet its obligations, to obtain additional financing as may be
required until such time as it can generate sources of recurring revenues and to
ultimately attain profitability.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





NOTE
4.  MINERAL RIGHTS





September
      30,
                  2010
                
                
                June
      30,
                  2010Alfredo
                
                $
                4,070,000
                
                
                $
                90,000Noto
                
                
                300,000
                
                
                
                200,000Peru
                
                
                50,000
                
                
                
                50,000Total
                
                $
                4,420,000
                
                
                $
                340,000





Alfredo





On April
20, 2010, the Company entered into a non-binding term sheet with Pacific Road
Capital A Pty. Limited, as trustee for Pacific Road Resources Fund A (“Fund A”),
Pacific Road Capital B Pty. Limited, as trustee for Pacific Road Resources Fund
B (“Fund B”), and Pacific Road Capital Management G.P. Limited, as General
Partner of Pacific Road Resources Fund, L.P. (“PR Partnership” and, together
with Fund A and Fund B, “Sellers”), pursuant to which the Company was granted
the exclusive option to acquire all of the outstanding share capital of Alfredo
Holdings, Ltd. (“Alfredo”) in exchange for a cash payment of $90,000, which the
Company paid during the year ended June 30, 2010.


11


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Alfredo
owns 100% of the share capital of Pacific Road Mining Chile, SA, a Chilean
Corporation (“PRMC”).  PRMC is a special purpose Chilean corporation
which entered into an Option to Purchase Agreement, dated June 6, 2008, that
gives PRMC the option to acquire 100% of six mining concessions with respect to
approximately 6,669 acres of mining tenements near Pozo Almonte, Chile (the
“Alfredo Property”).  Under the Option to Purchase Agreement, PRMC
must make additional periodic payments aggregating $360,000 between June 30,
2010 and December 30, 2010.  The Company paid $80,000 in August 2010
and was required to make payments of $100,000 by October 30, 2010 and $180,000
by December 30, 2010 in order to maintain the Company’s option
rights.  Then, in order to exercise the option and purchase the
Alfredo Property, PRMC must pay the option exercise price of $4,860,000 by March
30, 2011.  The Company did not have sufficient funds to make the
$100,000 payment on October 30, 2010 and is currently negotiating to extend the
payment due date.  In the event the Company is unable to extend
its payment terms, the Company may be unable to pursue development of the
Alfredo properties and could be required to impair the properties and the
Company’s
investment in PRMC.





On August
3, 2010, the Company entered into a Stock Purchase Agreement (“SPA”) with the
Sellers to acquire all of the outstanding shares of Alfredo. Pursuant to
the SPA, the Company issued an aggregate of 10,000,000 shares of common stock
(the “Purchase Price Shares”) valued at $3,900,000 ($0.39 per share) to Sellers
and their designees.  Of the Purchase Price Shares, 8,800,000 that the
Company issued directly to Sellers are subject to an 18 month lock-up period
pursuant to the SPA.  If and when the following milestones are
achieved with respect to a mine that the Company may develop on the Alfredo
Property to recover iodine or nitrate (the “Alfredo Mine”), the SPA requires the
Company to make the following additional payments to the Sellers:





a)
            $1,000,000 upon the Board of
      Directors’ resolution to commence final engineering and design of the
      Alfredo Mine;





b)
            A further $2,000,000 upon the
      Board of Directors’ resolution to commence construction of the Alfredo
      Mine; and





c)
            A further $2,500,000 upon
      commencement of commercial production from the Alfredo Mine (meaning
      production at a rate of 75% of design capacity for 3
      months).





The
Sellers have the right to take any or all of the above milestone payments in
shares of the Company’s common stock instead of cash, valued at the greater of
(i) $0.25 per share or (ii) the average of the closing price of the common stock
on the 30 trading days immediately preceding the relevant payment
date.  The Company is under no obligation to achieve or pursue any of
the milestones.





Noto





Pursuant
to an Assignment Agreement dated as of March 12, 2010 (the “Assignment
Agreement”), the Company purchased all of Puna Lithium Corporation’s (“Puna”)
interests in and rights for the acquisition of Noto Energy S.A. (”Noto”) under a
letter of intent dated November 23, 2009, as amended (the “Letter of Intent”),
entered into by and among Puna, Lacus Minerals S.A., and the shareholders of
Noto Energy S.A. (“Noto Shareholders”), an Argentinian corporation.





On March
12, 2010, the Company entered into a Share Purchase Agreement with the Noto
Shareholders (the “Share Purchase Agreement”) for the acquisition of one hundred
percent (100%) of the issued and outstanding shares of Noto, an Argentinean
corporation which beneficially owns a one hundred percent (100%) undeveloped
mineral interest in over 2,995 acres situated on brine salars in Argentina,
known as Cauchari (the “Noto Properties”).





Under the
Share Purchase Agreement, the Company acquired upon closing on July 30, 2010,
one hundred percent (100%) of the issued and outstanding shares of Noto, for
$300,000 in cash, of which $200,000 was paid during the year ending June 30,
2010, and $100,000 was paid on July 30, 2010 when the transaction closed. Noto’s
only asset was the mineral interest in the Noto
Properties.


12


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


NOTE
5.  PROPERTY AND EQUIPMENT




Property
and equipment consists of the following:





September 30,
                    2010
                  
                  
                  June 30, 2010Leasehold
      improvement and equipment
                  
                  $
                  19,195
                  
                  
                  $
                  19,195Less:
      Accumulated depreciation
                  
                  
                  (16,224
                  )
                  
                  
                  (15,249
                  )Net
      property and equipment
                  
                  $
                  2,971
                  
                  
                  $
                  3,946





Depreciation
expense for the three-month periods ending September 30, 2010 and 2009 was
$975.





NOTE
6.   RELATED PARTY TRANSACTIONS





Shared
Services





During
the year ended June 30, 2010, Li3 Energy utilized the administrative personnel
and office space of a related party entity, with an office located in Lima, Peru
in which Li3 Energy’s Chief Executive Officer and Interim Chief Financial
Officer functioned in the same capacities.  As such, costs (consisting
of administrative salaries, rent, utilities and maintenance) were allocated to
Li3 Energy from the related party entity.  This arrangement ceased on
July 1, 2010.  No costs were allocated to the Company under this
arrangement during the three months ended September 30, 2010 and
2009.  As of September 30, 2010 and June 30, 2010, the Company owed
this related party $10,818 and $10,671, respectively.





Legal
Services





Antonio
Ortúzar, who served as a director of the Company from February 18, 2010, to
October 25, 2010, is a Partner in a law firm that the Company has engaged to
perform certain legal services.  The Company pays for such legal
services at the standard rates that the firm charges its unrelated
clients.  For the three months ended September 30, 2010 and 2009, the
total legal fees that the Company incurred to such firm was approximately
$66,000 and $0, respectively.  As of September 30, 2010 and June 30,
2010, the Company owed this law firm $66,450 and $8,054,
respectively.





MIZ





At
September 30, 2010 and June 30, 2010, the Company has $171,124 and $0 owed to
MIZ.  Of the $171,124 owed to MIZ as of September 30, 2010, $90,000 is
recorded as common stock payable and $81,124 is included in related party
payables in the consolidated balance sheet.  The balances owed are for
services performed in connection with the Employment Services Agreement (See
Note 13) and for consulting services provided by MIZ to the Company prior to the
commencement of the Employment Services Agreement.





NOTE
7.  LOANS PAYABLE





The
Company issued a $50,000 unsecured Promissory Note dated June 5, 2008
(the”Note”) to Milestone Enhanced Fund Ltd. (“Milestone”) in connection with
Milestone’s $50,000 working capital loan to the Company, and the terms and
conditions of such Note allow for prepayment of the principal and accrued
interest any time without penalty. The interest rate is 8% per annum and the
maturity date was June 5, 2010. The total interest accrued at September 30, 2010
is $9,306.  This Note is in default as of September 30, 2010 and
remains payable to Milestone.


13


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


The
Company issued an unsecured Convertible Promissory Note (the “Convertible Note”)
dated April 30, 2009, bearing an interest rate of 8.25% per annum, in the amount
of $45,000, due on November 8, 2010 to Milestone.  The Convertible
Note provides that principal and interest balance due on the Convertible Note
are convertible at Milestone’s option pursuant to terms to be mutually agreed
upon by the Company and Milestone in writing at a later date.  The
Company and Milestone have not yet negotiated such conversion
terms.  The total interest accrued on the Convertible Note at
September 30, 2010 is $5,187.  The Company did not pay off this note
on its November 8, 2010 due date, and the Note is in default.





NOTE
8. DERIVATIVE LIABILITIES





The
Company determined that warrants, initially exercisable to purchase a total
of 14,203,000 shares of common stock, issued in the 2009 Unit Offering and
warrants, initially exercisable to purchase a total of 6,580,000 shares of
common stock, issued in 2010 Unit Offering contain provisions that protect
holders from declines in the Company’s stock price that could result in
modification of the exercise price under the warrant based on a variable that is
not an input to the fair value of a “fixed-for-fixed” option as defined
under FASB ASC Topic No. 815 – 40.  As a result, these warrants were
determined to be not indexed to the Company’s own
stock.





The
warrants issued in connection with the 2009 Unit Offering and the 2010 Unit
Offering contain anti-dilution provisions that provide for a reduction in the
exercise price of such warrants in the event that future common stock (or
securities convertible into or exercisable for common stock) is issued at a
price per share (a “Lower Price”) that is less than the exercise price of such
warrant at the relevant time. The amount of any such adjustment is determined in
accordance with the provisions of the relevant warrant agreement and depends
upon the number of shares of common stock issued (or deemed issued) at the Lower
Price and the extent to which the Lower Price is less than the exercise price of
the warrant at the relevant time.  In addition, the number of shares
issuable upon exercise of the 2010 Unit Offering warrants and all warrants
issued to agents under both the 2009 Unit Offering and the 2010 Unit Offering
will be increased inversely proportionally to any decrease in the exercise
price, thus preserving the aggregate exercise price of the warrants both before
and after any such adjustment.





The fair
value of these 2009 Unit Offering warrants and 2010 Unit Offering warrants was
recognized as derivative warrant instruments at issuance and will be measured at
fair value at each reporting period.   The Company determined the fair
values of these securities using a modified lattice valuation
model.





Activity
for derivative warrant instruments during the three months ended September 30,
2010 was as follows:




Balance at
                    June 30,
                    2010
                  
                  
                  Initial
                    valuation
                    of derivative
                    liabilities upon
                    issuance of
                    new
                    warrants
                    during
                    the period
                  
                  
                  Decrease in
                    Fair Value of
                    Derivative
                    Liability
                  
                  
                  Balance at
                      September 30, 20102009
      Unit Offering - Derivative warrant instruments
                  
                  $
                  6,313,769
                  
                  
                  $
                  -
                  
                  
                  $
                  (2,403,438)
                  
                  
                  $
                  3,910,3312010
      Unit Offering – Derivative warrant instruments
                  
                  
                  1,715,959
                  
                  
                  
                  236,937
                  
                  
                  
                  (369,288)
                  
                  
                  
                  1,583,608$
                  8,029,728
                  
                  
                  $
                  236,937
                  
                  
                  $
                  (2,772,726)
                  
                  
                  $
                  5,493,939


14


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Following
is a summary of the assumptions used in the modified lattice valuation model as
of the initial valuation of the Second 2010 Unit Offering Closing (July 13,
2010) and the Final 2010 Unit Offering Closing (September 13, 2010), and as of
September 30, 2010:





2010 Unit
                    Offerings
                  
                  
                  September 30, 2010Common
      stock issuable upon exercise of warrants
                  
                  
                  2,300,000
                  
                  
                  
                  20,798,448Market
      value of common stock on measurement date (1)
                  
                  $
                  0.30-$0.39
                  
                  
                  $
                  0.25Adjusted
      Exercise price
                  
                  $
                  0.25-$0.50
                  
                  
                  $
                  0.25
      - $0.90Risk
      free interest rate (2)
                  
                  
                  1.51%-1.90
                  %
                  
                  
                  1.27
                  %Warrant
      lives in years
                  
                  
                  5
                  
                  
                  
                  4.11 – 4.9 5Expected
      volatility (3)
                  
                  
                  151
                  %
                  
                  
                  15 1
                  %Expected
      dividend yield (4)
                  
                  
                  0
                  %
                  
                  
                  0
                  %Assumed
      stock offerings per year over next five years (5)
                  
                  
                  1
                  
                  
                  
                  1Probability
      of stock offering in any year over five years (6)
                  
                  
                  100
                  %
                  
                  
                  100
                  %Range
      of percentage of existing shares offered (7)
                  
                  
                  10% - 30
                  %
                  
                  
                  10% - 30
                  %Offering
      price range (8)
                  
                  $
                  0.25
      - $1.50
                  
                  
                  $
                  0.25
      - $1.50





(1)
            The market value of common stock
      is the stock price at the close of trading on the date of issuance or
      September 30, 2010, as
applicable.


(2)
            The risk-free interest rate was
      determined by management using the 5 year Treasury Bill as of the 2010
      Unit Offering and as of September 30,
  2010.


(3)
            Because the Company does not have
      adequate trading history to determine its historical trading volatility,
      the volatility factor was estimated by management using the historical
      volatilities of comparable companies in the same industry and
      region.


(4)
            Management determined the
      dividend yield to be 0% based upon its expectation that it will not pay
      dividends for the foreseeable
future.


(5)
            Management estimates the Company
      will have one stock offering in each of the next 5
      years.


(6)
            Management has determined that
      the probability of a stock offering is 100% in each of the next five
      years.


(7)
            Management estimates that the
      range of percentage of existing shares offered in each stock offering will
      be between 10% and 30% of the shares
  outstanding.


(8)
            Management estimates that the
      offering price range in the future offerings will be between $0.25 and
      $1.50 per share.





Subsequent
to the end of the period, the exercise price of the 2009 Unit Offering warrants
and the 2010 Unit Offering warrants and the number of shares issuable upon
exercise of the 2010 Unit Offering warrants and all warrants issued to agents
under both the 2009 and 2010 Unit Offerings were further adjusted as a result of
the Company’s issuance of New Units (as defined below) in the New Offering (as
defined below). See Note 14.





NOTE
9.  STOCKHOLDERS’ EQUITY





Common
Stock issued for services





The
Company issued 87,096 shares of common stock for services on August 27, 2010 and
recorded compensation expense of $26,129 based on the $0.30 per share price of
the Company’s common
stock on the OTC Bulletin Board on that date.


15




LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Common
Stock issued for acquisition of mineral rights





On August
3, 2010, the Company’ Board of Directors authorized the issuance of 10,000,000
shares of its common stock valued at $3,900,000  as part of its
acquisition of mineral rights in connection with the Alfredo acquisition (See
Note 4). Management determined the fair value of the stock issued to be $0.39
per share based on the last sale price of the Company’s common
stock on the OTC Bulletin Board on that date.





Common
Stock issued with performance based vesting





Pursuant
to the Chief Operating Officer’s Employment Services Agreement (See Note 13),
the Company has granted to MIZ an award under the 2009 Plan pursuant to which
the Company shall issue 2,500,000 restricted shares of its common stock (the
“Restricted Stock”).  The shares of Restricted Stock vest in
installments of between 300,000 and 1,000,000 shares upon the achievement of
certain milestones set forth in the Employment Services Agreement, subject to
acceleration upon a change of control or a termination of Mr. Currin’s
employment by MIZ for Good Reason (as defined in the Employment Services
Agreement) or by the Company for any reason other than for Cause (as defined in
the Employment Services Agreement).  If his employment is terminated
by the Company for Cause, or by Mr. Currin for any reason other than Good
Reason, then all unvested Restricted Stock will immediately expire.





The
Company determined the grant date of the 2,500,000 shares was August 11,
2010.  The stock price on the grant date was $0.38 per share. Total
compensation expense which may be recognized in connection with these restricted
shares is $950,000 if all of the shares vest.  As of September 30,
2010, the Company has determined that the achievement of one of the milestones
which will result in 500,000 shares vesting is probable and as a result has
recorded $53,242 of expense based on a six month vesting service period
beginning on the grant date.  The Company has not recorded any
compensation expense for the remaining 2,000,000 shares as the Company has not
yet determined that vesting of these shares is probable of
occurring.





Common
Stock sales





On
October 19, 2009, the Board of Directors authorized the Company to offer up to a
maximum of 16,000,000 units (the “2009 Unit Offering”) at an offering price of
$0.25 per 2009 Unit. Each 2009 Unit consisted of (i) one share of the Company’s
common stock, (ii) warrants representing the right to purchase one-half of one
(0.5) share of common stock, exercisable for a period of five years at an
exercise price of $0.50 per whole share (the “A Warrants”), and (iii) warrants
representing the right to purchase one-half of one (0.5) share of common stock,
exercisable for a period of five years at an exercise price of $1.00 per whole
share (the “B Warrants,” and together with the A Warrants, the “2009
Warrants”).





In the
aggregate, the Company sold 14,000,000 2009 Units for gross proceeds of
$3,500,000 ($3,339,524 net after offering expenses) during the 2009 Unit
Offering.  In connection with the 2009 Unit Offering, the Company
issued an aggregate of 101,500 additional A Warrants and 101,500 additional B
Warrants (together the “2009 Agent Warrants”) as compensation to finders and
placement agents.





On June
16, 2010, Board of Directors authorized the Company to offer up to a maximum of
20,000,000 units (the “2010 Unit Offering”), plus up to an additional 8,000,000
units to cover over-allotments, at a purchase price of $0.25 per 2010 Unit.
 Each 2010 Unit consisted of (i) one share of the Company’s common stock,
and (ii) a warrant (a “2010 Warrant”) representing the right to purchase one
share of common stock, exercisable for a period of two years at an exercise
price of $0.70 per share.





On June
9, 2010, the Company sold 4,000,000 2010 Units (the “Initial 2010 Unit Offering
Closing”) for total proceeds to the Company of $1,000,000 ($749,796, net after
offering expenses).  In connection with the Initial 2010 Unit Offering
Closing, the Company also became obligated to issue to a placement agent
five-year warrants (“Agent Warrants”) to purchase an aggregate of 280,000 shares
of common stock at an exercise price of $0.25 per share, and incurred placement
agent fees of $175,000.    A total of $460,853 of the
proceeds were allocated to the value of the warrant instruments.  On
June 23, 2010, the Company revised the terms of the 2010 Warrants to decrease
the warrant exercise price to $0.50 per share (from $0.70 per share) and
increase the term to five years, from two years.


16


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


On July
13, 2010, the Company completed the second closing (the “Second 2010 Unit
Offering Closing”) of the 2010 Unit Offering. In the Second 2010 Unit Offering
Closing, the Company sold 2,000,000 2010 Units for an aggregate of $500,000
($452,755 net after offering expenses). A total of $219,871 of the proceeds
were allocated to the value of the warrant instruments. In connection with the
Second 2010 Unit Offering Closing, the Company also became obligated to issue to
a placement agent five-year warrants to purchase an aggregate of 140,000 shares
of common stock at an exercise price of $0.25 per share, and incurred placement
agent fees of $35,000.





On
September 13, 2010, the Company completed the third and final closing (the
“Final 2010 Unit Offering Closing”) of the 2010 Unit Offering.  In the
Final 2010 Unit Offering Closing, the Company sold 160,000 2010 Units for an
aggregate of $40,000 ($35,243 net after offering expenses). A total of
$17,066 of the proceeds were allocated to the value of the warrant
instruments.





In the
aggregate, the Company sold 6,160,000 2010 Units for gross proceeds of
$1,540,000 ($1,237,794 net after offering expenses) during the 2010 Unit
Offering.  In connection with the 2010 Unit Offering, the Company
issued 420,000 Agent Warrants as compensation to the finders and placement
agents.





The 2009
Warrants and the 2010 Warrants each contain anti-dilution provisions that
provide for a reduction in the exercise price of such warrant in the event that
future common stock (or securities convertible into or exercisable for common
stock) is issued at a price per share (a “Lower Price”) that is less than the
exercise price of such warrant at the relevant time.  See Note
8.




The
Company’s issuance of securities in connection with the 2010 Unit Offering
triggered the adjustments to the exercise prices and number of shares issuable
upon exercise of the 2009 Warrants pursuant to the anti-dilution provisions
thereof.  Following the Final 2010 Unit Offering Closing (and the revision
to the exercise price of the 2010 Warrants):  (i) the A Warrants
(initially exercisable to purchase an aggregate of 7,101,500 shares of common
stock at $0.50 per share) were exercisable, in the aggregate, to purchase
7,105,994 shares of common stock for approximately $0.4788 per share; and (ii)
the B Warrants (initially exercisable to purchase an aggregate of 7,101,500
shares of common stock at $1.00 per share) were exercisable, in the aggregate,
to purchase 7,112,454 shares of common stock for approximately $0.9026 per
share.





The table
below reflects the allocation of the gross proceeds from the 2010 Unit Offering
during the three months ended September 30, 2010:





Par
      value of common stock issued
                    
                    $
                    2,160Paid-in
      capital
                    
                    
                    248,901Derivative
      warrant liabilities
                    
                    
                    236,937Offering
      expenses
                    
                    
                    52,002Total
      gross proceeds
                    
                    $
                    540,000





Stock
Option Awards





On August
26, 2010 the Company granted 1,000,000 shares of its common stock to its newly
appointed Chief Operating Officer.  These were granted with an
exercise price of $0.38 per share, which was also the stock price on the grant
date.  As a result, the intrinsic value and fair value for these
options on the grant date was $0 and $343,310, respectively. These options vest
in three equal installments on each of the first, second and third anniversaries
of the date of grant and expire after ten years.


17


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to the Consolidated Financial statements
 For
the quarterly period ended September 30
 (Unaudited)


Stock
option activity summary covering options is presented in the table
below:





Numberof
                    Shares
                  
                  
                  Weighted-
                    average
                    Exercise
                    Price
                  
                  
                  Weighted-
                    average
                    Remaining
                    Contractual
                    Term(years)
                  
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      at June 30, 2010
                  
                  
                  800,000
                  
                  
                  
                  0.31
                  
                  
                  
                  7.73
                  
                  
                  
                  91,000Granted
                  
                  
                  1,000,000
                  
                  
                  
                  0.38
                  
                  
                  
                  10.00
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Expired /
      Forfeited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at September 30, 2010
                  
                  
                  1,800,000
                  
                  
                  $
                  0.35
                  
                  
                  
                  8.81
                  
                  
                  $
                  —Exercisable
      at September 30, 2010
                  
                  
                  250,000
                  
                  
                  $
                  0.46
                  
                  
                  
                  3.71
                  
                  
                  $
                  —





During
the three months ended September 30, 2010, the 1,000,000 options that were
granted had a weighted average grant-date fair value of $0.34 per
share.  During the three months ended September 30, 2010, the Company
recognized stock-based compensation expense of $53,032 related to stock
options.  As of September 30, 2010, there was approximately $440,960
of total unrecognized compensation cost related to non-vested stock options
which is expected to be recognized ratably over a weighted-average period of
approximately 2.63 years.





The fair
value of the options granted during the three months ended September 30, 2010
was estimated at the date of grant using the Black-Scholes option-pricing model
with the following assumptions:





Market
      value of stock on grant date
                  
                  $
                  0.38Risk-free
      interest rate (1)
                  
                  
                  2.08
                  %(1)Dividend
      yield
                  
                  
                  0.00
                  %Volatility
      factor
                  
                  
                  150
                  %Weighted
      average expected life (2)
                  
                  6.5
      years
                  (2)Expected
      forfeiture rate
                  
                  
                  5
                  %





(1)
            The risk-free interest rate was
      determined by management using the U.S. Treasury zero-coupon yield over
      the contractual term of the option on date of
  grant.





(2)
            Due to a lack of stock option
      exercise history, the Company uses the simplified method under SAB 107 to
      estimate expected
term.


18


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Warrants





Summary
information regarding common stock warrants issued and outstanding as of
September 30, 2010 is as follows:





Warrants
                    
                    
                    Weighted Average
                      Exercise PriceOutstanding
      at year-ended June 30, 2010
                    
                    
                    18,493,150
                    
                    
                    $
                    0.66Issued
                    
                    
                    2,300,000
                    
                    
                    
                    0.48Warrants
      issued pursuant to anti-dilution provisions
                    
                    
                    5,298
                    
                    
                    
                    0.78Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at September 30, 2010
                    
                    
                    20,798,448
                    
                    
                    $
                    0.63




Warrants
outstanding and exercisable as of September 30, 2010





Date
                            
                            Exercise
                              Price
                            
                            
                            Outstanding Number
                              of Shares
                            
                            Remaining
                              Life
                            
                            Exercisable
                              Number of SharesNovember
      10, 2009
                            
                            $
                            0.4788
                            
                            
                            
                            3,200,000
                            
                            4.11
      years
                            
                            
                            3,200,000November
      10, 2009
                            
                            $
                            0.9026
                            
                            
                            
                            3,200,000
                            
                            4.11
      years
                            
                            
                            3,200,000November
      12, 2009
                            
                            $
                            0.4788
                            
                            
                            
                            1,060,000
                            
                            4.12
      years
                            
                            
                            1,060,000November
      12, 2009
                            
                            $
                            0.9026
                            
                            
                            
                            1,060,000
                            
                            4.12
      years
                            
                            
                            1,060,000November
      17, 2009
                            
                            $
                            0.4788
                            
                            
                            
                            910,000
                            
                            4.13
      years
                            
                            
                            910,000November
      17, 2009
                            
                            $
                            0.9026
                            
                            
                            
                            910,000
                            
                            4.13
      years
                            
                            
                            910,000December
      15, 2009
                            
                            $
                            0.4788
                            
                            
                            
                            1,008,480
                            
                            4.21
      years
                            
                            
                            1,008,480December
      15, 2009
                            
                            $
                            0.9026
                            
                            
                            
                            1,012,043
                            
                            4.21
      years
                            
                            
                            1,012,043December
      23, 2009
                            
                            $
                            0.4788
                            
                            
                            
                            927,515
                            
                            4.23
      years
                            
                            
                            927,515December
      23, 2009
                            
                            $
                            0.9026
                            
                            
                            
                            930,410
                            
                            4.23
      years
                            
                            
                            930,410June
      9, 2010
                            
                            $
                            0.50
                            
                            
                            
                            4,000,000
                            
                            4.69
      years
                            
                            
                            4,000,000June
      9, 2010
                            
                            $
                            0.25
                            
                            
                            
                            280,000
                            
                            4.69
      years
                            
                            
                            280,000July
      13, 2010
                            
                            $
                            0.25
                            
                            
                            
                            140,000
                            
                            4.78
      years
                            
                            
                            140,000July
      13, 2010
                            
                            $
                            0.50
                            
                            
                            
                            2,000,000
                            
                            4.78
      years
                            
                            
                            2,000,000September
      13, 2010
                            
                            $
                            0.50
                            
                            
                            
                            160,000
                            
                            4.95
      years
                            
                            
                            160,00020,798,448
                            
                            
                            
                            
                            20,798,448





The
intrinsic value of warrants outstanding at September 30, 2010 was
$0.


19


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Subsequent
to the end of the period, the Company issued New Units in the New Offering,
which triggered the anti-dilution provisions of the Company’s outstanding
warrants, resulting in reductions in the exercise prices, and, in some cases,
increases in the numbers of shares issuable upon exercise, of the warrants in
the above table.  See Note 14.





NOTE
10.   FAIR VALUE MEASUREMENTS




As
defined in FASB ASC Topic No. 820 – 10, fair value is the price that would be
received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. FASB ASC Topic
No. 820 – 10 requires disclosure that establishes a framework for measuring fair
value and expands disclosure about fair value measurements. The statement
requires fair value measurements be classified and disclosed in one of the
following categories:




Level 1:
            
            Unadjusted quoted prices in
      active markets that are accessible at the measurement date for identical,
      unrestricted assets or liabilities. The Company considers active markets
      as those in which transactions for the assets or liabilities occur in
      sufficient frequency and volume to provide pricing information on an
      ongoing basis.





Level 2:
            
            Quoted prices in markets that are
      not active, or inputs which are observable, either directly or indirectly,
      for substantially the full term of the asset or liability. This category
      includes those derivative instruments that the Company values using
      observable market data. Substantially all of these inputs are observable
      in the marketplace throughout the term of the derivative instruments, can
      be derived from observable data, or supported by observable levels at
      which transactions are executed in the
  marketplace.





Level
      3:
            
            Measured
      based on prices or valuation models that require inputs that are both
      significant to the fair value measurement and less observable from
      objective sources (i.e. supported by little or no market activity). The
      Company’s valuation models are primarily industry standard
      models.  Level 3 instruments include derivative warrant
      instruments.  The Company does not have sufficient corroborating
      evidence to support classifying these assets and liabilities as Level 1 or
      Level 2.





As
required by FASB ASC Topic No. 820 – 10, financial assets and liabilities are
classified based on the lowest level of input that is significant to the fair
value measurement. The Company’s assessment of the significance of a particular
input to the fair value measurement requires judgment, and may affect the
valuation of the fair value of assets and liabilities and their placement within
the fair value hierarchy levels. The estimated fair value of the derivative
warrant instruments was calculated using a modified lattice valuation
model.





Fair
Value on a Recurring Basis




The
following table sets forth, by level within the fair value hierarchy, the
Company’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of September 30, 2010:


20




LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to the Consolidated Financial statements
 For
the quarterly period ended September 30
 (Unaudited)


Quoted
                        PricesIn Active
                      
                      
                      SignificantMarkets for
                      
                      
                      Other
                      
                      
                      SignificantIdentical
                      
                      
                      Observable
                      
                      
                      Unobservable
                      
                      
                      TotalAssets
                      
                      
                      Inputs
                      
                      
                      Inputs
                      
                      
                      CarryingDescription
                      
                      Level 1
                      
                      
                      (Level 2)
                      
                      
                      (Level 3)
                      
                      
                      ValueDerivative
      liabilities - warrant instruments
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      5,493,939
                      
                      
                      $
                      5,493,939





The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy:





Significant Unobservable Inputs (Level 3)Three Months endedSeptember 30,
                      
                      
                      September 30,2010
                      
                      
                      2009Beginning
      balance,
                      
                      $
                      (8,029,728
                      )
                      
                      $
                      -Unrealized
      Gain
                      
                      
                      2,772,726
                      
                      
                      
                      -Additions
                      
                      
                      (236,937
                      )
                      
                      
                      -Ending
      balance
                      
                      $
                      (5,493,939
                      )
                      
                      $
                      -Change
      in unrealized gains included in earnings relating to derivatives still
      held as of September 30, 2010 and 2009
                      
                      $
                      2,772,726
                      
                      
                      $
                      -





NOTE
12. INCOME TAXES





The
Company files a U.S. federal income tax return.  The Company’s foreign
subsidiaries file income tax returns in their respective jurisdictions. The
components of the consolidated taxable net loss (which for the three months
ended September 30, 2010, exclude the unrealized gain related to the change in
the fair value of derivative warrant instruments ($2,772,726) and stock based
compensation ($132,403)) are as follows as of the three months ended September
30:





2010
                      
                      
                      2009U.S.
                      
                      $
                      872,583
                      
                      
                      $
                      16,722Foreign
                      
                      
                      104,197
                      
                      
                      
                      -Total
                      
                      $
                      976,780
                      
                      
                      $
                      16,722





The
components of the Company’s deferred tax assets at September 30, 2010 and June
30, 2010 are as follows:





September
                    30, 2010
                  
                  
                  June 30,
                    2010Deferred
      tax assets:Net
      operating loss carry-forwards
                  
                  $
                  2,076,528
                  
                  
                  $
                  1,744,423Valuation
      allowance
                  
                  
                  (2,076,528
                  )
                  
                  
                  (1,744,423
                  )Net
      deferred tax asset
                  
                  $
                  -
                  
                  
                  $
                  -





These net
operating loss carry-forwards expire twenty years from the date the loss was
incurred and are available to reduce future taxable income.  Federal
tax laws limit the time during which the net operating loss carry-forwards may
be applied against future taxes, and if the Company fails to generate taxable
income prior to the expiration dates it may not be able to fully utilize the net
operating loss carry-forwards to reduce future income taxes. As the Company has
had cumulative losses and there is no assurance of future taxable income,
valuation allowances have been recorded to fully offset the deferred tax asset
at September 30, 2010 and June 30, 2010.


21


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


NOTE
13.  COMMITMENTS AND CONTINGENCIES





Nevada





On March
12, 2010, pursuant to an Asset Purchase Agreement (the “Nevada APA”) between the
Company, Next Lithium Corp., an Ontario corporation, and Next Lithium (Nevada)
Corp., a Nevada corporation (together, “Next Lithium”), the Company acquired all
of Next Lithium’s interests in and rights under (a) an agreement dated October
30, 2009 and a subsequent amendment (the “CSV, LM and MW Option Agreement, as
amended”), pursuant to which GeoXplor Corp., a Nevada corporation (“GeoXplor”),
granted to Next Lithium the sole right and option (the “CSV, LM and MW Option”),
to acquire a 100% interest in the associated placer mining claims known as the
CSV Placer Mineral Claims, LM Placer Mineral Claims and MW Placer Mineral
Claims; and (b) an agreement dated October 30, 2009 (the “BSV Option Agreement,”
and, together with the CSV, LM and MW Option Agreement, the “Option
Agreements”), pursuant to which GeoXplor granted to Next Lithium the sole right
and option (the “BSV Option,” and, together with the CSV, LM and MW Option, the
“Nevada Options”), to acquire a 100% interest in the association placer mining
claims known as the BSV Placer Mineral Claims.





Under the
terms of the Nevada APA, the Company acquired the Nevada Options in exchange for
4,000,000 shares of its common stock with a fair value of $3,640,000 on the date
of acquisition based on our stock price.  As of September 30, 2010,
the 4,000,000 shares are issued, and 2,500,000 of these shares are held in
escrow for one year against any indemnifiable liabilities that may
arise.





Under the
CSV, LM and MW Option Agreement, as amended, the Company paid GeoXplor
$236,607. The Company also is obligated to pay amounts totaling $75,000
contingent upon future events which had not occurred as of September 30,
2010.





Under the
BSV Option Agreement, as amended, the Company was required to pay to GeoXplor
$100,000 on June 30, 2010, which the Company has not paid.  The
$100,000 owed to GeoXplor is recorded in accrued expenses as of September 30,
2010, and such amount remains unpaid as of November 22, 2010.





Upon
further analysis of the mineral composition of the Nevada Claims, the Company
determined that the Nevada Claims did not meet the Company’s requirements for
mining operations planned by the Company, thus the Company terminated the Nevada
Options and recorded impairment expense of $3,976,607 for all amounts previously
capitalized as mineral rights in the consolidated balance sheet during the year
ended June 30, 2010.  These amounts consisted of cash of $236,607 paid
to GeoXplor on the closing of the acquisition under the Nevada APA, and common
stock issued in connection with the acquisition valued at $3,640,000, and
$100,000 owed in connection with the BSV Option Agreement.





During
the three months ended September 30, 2010, the Company became obligated to pay
approximately $57,000 of claim maintenance fees on the Nevada Claims and
approximately $32,600 of Nevada state taxes, which the Company has recorded in
accrued expenses as of September 30, 2010, and such amount remains unpaid as of
November 22, 2010.





Puna
Lithium





On March
12, 2010, the Company entered into an assignment agreement (the “Assignment
Agreement”) whereby the Company would purchase all of the Puna Lithium
Corporation’s (“Puna”) interests in and rights under a letter of intent dated
November 23, 2009, as amended (the “Letter of Intent”) entered into by Puna,
Lacus Minerals S.A. (“Lacus”), and the shareholders of Noto Energy S.A., and the
Company entered into a certain Master Option Agreement with Lacus (the “Master
Option Agreement”), for the acquisition of three options (collectively, the
“Options”), to acquire up to an 85% interest in: (a) approximately 70,000 acres
situated on prospective brine salars in Argentina, known as Rincón, Centenario
and Pocitos (the “Master Lacus Properties”); and (b) salt-mining claims on
approximately 9,000 additional acres in certain other areas of mutual interest
on some of those same salars (the “Third Parties Properties” and, together with
the Master Lacus Properties, the “Lacus Properties”) that may be acquired upon
exercise of the two options (collectively, the “Third Parties
Options”).


22


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


As
consideration to Lacus for entering into the Master Option Agreement (“MOA”),
the Company paid Lacus aggregate payments of $942,178, which included $242,178
for acquisition costs and $700,000 for exploration related
expenses.  The Company is also required to pay Lacus $500,000 on March
12, 2011 as consideration for the agreement.  As further consideration
for entering the MOA and as a condition to maintain the first option under the
MOA in good standing until exercised, the Company was to pay $3,000,000 for work
commitments on dates to be determined at closing.  The MOA did not
close.  On July 30, 2010, the Company and Lacus amended the MOA
(“Amended MOA”) to clarify that the work commitment payments were due as
follows:  $237,000 due on or before July 30, 2010; $1,079,000 due on
or before August 15, 2010; $372,000 due on or before August 31, 2010 and
$1,312,000 due over the one year period subsequent to closing of the MOA on a
schedule to be determined by the MOA executive committee.





In August
2010, the Company determined that the Rincon, Pocitos and Centerario
salars did not meet the Company’s criteria for economic brine reserves,
that the work plan recommended by Lacus was not acceptable and that funding of a
drilling program should be suspended. Lacus subsequently terminated the
Master Option Agreement on August 24 2010.  The Company expensed
$742,178 of capitalized acquisition costs as impairment expense in the
consolidated statement of operations during the year ended June 30, 2010. In
accordance with the Assignment Agreement, the Company was also required to issue
8,000,000 shares of common stock to Puna upon the date of the closing
(“Closing”) as defined in the MOA.  As the Closing did not occur, the
Company did not issue the 8,000,000 shares of common stock.  As of
September 30, 2010, the Company has $765,000 in accrued expenses related to
acquisition costs and exploration expenses under the
agreements.





Contingent
Obligations Related to Terminated Agreements





In
connection with our obligations under the Nevada APA and the MOA, the Company
may be directly or contingently obligated to fulfill certain commitments for
payments under the agreements related to option payments, permitting costs,
maintenance costs, and funding requirements under work
commitments.  Total unpaid commitments under the Nevada APA and the
MOA including development costs related to these projects were $264,600 and
$3,500,000, respectively.  To date, claims amounting to $275,000 have
been made by Lacus.  Although the Company believes it will not be
required to pay the majority of these commitments under the termination
provisions of the respective agreements, it could be obligated for substantial
payments.





Employment
Agreement





The
Company retained Mr. Currin’s services as its Chief Operating Officer under an
Employment Services Agreement with MIZ Comercializadora, S. de R.L. (“MIZ”), a
corporation owned in part by Mr. Currin.  The employment agreement has
a three year term which began on August 11, 2010. The employment agreement
requires Mr. Currin  to devote at least 90 percent of his working time
and effort to our business and affairs during the term of the agreement. The
employment agreement provides for a signing bonus of $100,000 (of which $90,000
is payable in common stock and $10,000 is payable in cash), and a minimum annual
base salary of $200,000 per year with bonuses payable in the first year based on
certain milestones and at the discretion of the Board of Directors as set forth
in the agreement and thereafter as determined by the Board of
Directors.





Pursuant
to such Employment Services Agreement, the Company has granted to MIZ an award
under the 2009 Plan pursuant to which the Company shall issue 2,500,000 shares
of Restricted Stock.  The shares of Restricted Stock vest in
installments of between 300,000 and 1,000,000 shares upon the achievement of
certain milestones set forth in the Employment Services Agreement, subject to
acceleration upon a change of control or a termination of Mr. Currin’s
employment by MIZ for Good Reason or by the Company for any reason other than
for Cause.  If his employment is terminated by the Company for Cause,
or by Mr. Currin for any reason other than Good Reason, then all unvested
Restricted Stock will immediately expire.


23


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)


Pursuant
to the Employment Services Agreement, the Company has granted to MIZ an option
to purchase an aggregate of 1,000,000 shares of Common Stock under the 2009
Plan, exercisable at a price of $0.38 per share, the fair market value per share
of common stock on August 11, 2010, with a term of ten years.  One
third of such options vest on each of August 11, 2011, 2012 and
2013.  If the Company terminates Mr. Currin’s employment for Cause,
then all such options, whether or not vested, will immediately
expire.  If his employment is terminated voluntarily by MIZ without
Good Reason, then all unvested options will immediately
expire.  Vested options, to the extent unexercised, will expire one
month after the termination of employment (or nine months in the case of his
death or permanent disability).  If his employment is terminated (a)
in connection with a Change of Control (as defined in the Employment Services
Agreement), (b) by the Company without Cause or (c) by MIZ for Good Reason, then
all unvested options will immediately vest and will expire nine months after
such event.





Mr.
Currin’s employment with the Company is “at-will” and terminable at any time for
any reason or for no reason.  If Mr. Currin’s employment is terminated
by the Company without Cause, then the Company must continue to pay MIZ the base
fee at the rate then in effect for a period of 18 months and, with respect to
the first annual bonus, to the extent the milestones therefor are achieved, pay
MIZ a pro rata portion of the annual bonus.  If MIZ terminates the
Employment Services Agreement for Good Reason, or in the event of a termination
of employment due to a permanent disability, the Company will continue to pay
MIZ the base fee at the rate then in effect for a period of 18
months.





For the
duration of the employment period and, unless the Company terminates Mr.
Currin’s employment without Cause, for a period of 18 months thereafter, both
MIZ and Mr. Currin have agreed not to directly or indirectly compete with the
Company anywhere within the countries in which the Company is at that time
operating, with certain exceptions.





The
foregoing is a summary of the principal terms of the Employment Services
Agreement and the Restricted Stock and the options granted pursuant thereto, and
is qualified in its entirety by the detailed provisions of the relevant
documents, which are filed as exhibits to this Report and are incorporated
herein by reference.





NOTE
14. SUBSEQUENT EVENTS





Alfredo





The
Company did not make the $100,000 October 30, 2010 option payment as required
under the Alfredo Option to Purchase Agreement (See Note 4).  The
Company is in negotiations to extend the due date of this option
payment.





Loans
Payable





The
Company did not pay off the $45,000 Convertible Note, dated April 30, 2009, by
its November 8, 2010, due date (See Note 7).  As a result, this Note
is in default.





Private
Placement Offering





On
November 8, 2010,  the Company held an initial closing of a private
placement offering (the “New Offering”) of 2,000,000 units of its securities
(the “New Units”) to institutional and accredited investors and non-U.S. persons
for gross proceeds of $100,000, at an offering price of $0.05 per New Unit. Each
New Unit consists of (i) one share of the Company’s common stock, and (ii) a
warrant to purchase one share of common stock at an exercise price of $0.05 per
share (the “New Warrants”). The New Warrants will be exercisable from issuance
until five years after the final closing of the New Offering.  On
November 15, 2010, the Company held a second and final closing of the New
Offering in which an additional 2,000,000 New Units were sold for gross proceeds
of $100,000.  In the aggregate, the Company sold 4,000,000 New Units
in the New Offering for aggregate gross proceeds of $200,000.  The
Company plans to apply the net proceeds of this closing towards certain
outstanding accounts payable.


24


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to the Consolidated Financial statements


For
the quarterly period ended September 30


(Unaudited)




The
Company has determined that the New Warrants contain anti-dilution provisions
and will be classified as derivative liabilities.




The
subscription agreements (the “Subscription Agreements”) between the Company and
each investor (each “Subscriber”) in the New Offering provide each Subscriber
with the right, subject to certain conditions, to purchase, at any time prior to
November 8, 2011, a number of additional New Units (“Double Units”) up to the
number of New Units purchased at the closing of the New Offering by such
Subscriber.  The Subscription Agreements provide the Subscribers with
certain “piggyback” registration rights covering the shares of Common Stock
included in the Units (including any Double Units) and the shares of Common
Stock issuable upon exercise of the New Warrants (including New Warrants
included in any Double Units).





As a
result of the New Units issued in the New Offering, the exercise prices and
number of shares issuable upon exercise of the 2009 Warrants, 2010 Warrants and
Agent Warrants was further adjusted.  After November 15,
2010:  (i) the A Warrants were exercisable, in the aggregate, to
purchase 7,123,593 shares of common stock for approximately $0.4106 per share;
(ii) the B Warrants were exercisable, in the aggregate, to purchase 7,132,318
shares of common stock for approximately $0.7671 per share; (iii) the 2010
Warrants were exercisable to purchase 7,188,035 shares of common stock for
approximately $0.4285 per share; and (iv) the Agent Warrants were exercisable to
purchase 481,171 shares of common stock for approximately $0.2182 per
share.


25


Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operation





Li3
Energy, Inc. (“Li3 Energy,” the “Company,” “we,” “us” or “our”) is an emerging
exploration company, focused on the discovery and development of lithium and
potassium brine and nitrate and iodine deposits in Chile, Argentina and
Peru.





We have
acquired mineral claims prospective for lithium and potassium that cover a total
area of 19,500 acres in Peru. We have also acquired an option to purchase mining
concessions with respect to approximately 6,670 acres of mining tenements near
Pozo Almonte, Chile, from which we expect to produce (aided by the potassium we
expect to generate from our prospective lithium carbonate brine properties)
saleable iodine nitrate products.  We are currently evaluating
additional exploration and production opportunities.





We were
incorporated on June 24, 2005, as Mystica Candle Corp. and were originally in
the business of manufacturing, marketing and distributing soy-blend scented
candles and oils. We determined that we could not continue with our business
operations as outlined in our original business plan because of a lack of
financial results and resources; therefore, we redirected our focus towards
identifying and pursuing options regarding the development of a new business
plan and direction. In July 2008 we changed our name from Mystica Candle Corp.
to NanoDynamics Holdings, Inc., to facilitate discussions with NanoDynamics,
Inc., a Delaware corporation, regarding a possible business combination.
However, we determined not to proceed with that business
combination.  In October 2009, we changed our name from NanoDynamics
Holdings, Inc., to Li3 Energy, Inc., as we refocused our business strategy on
the energy sector and lithium mining opportunities.





The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described. This discussion contains
forward-looking statements. Please see “Forward-Looking Statements” above
and “Risk Factors” included in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2010, filed with the Securities and Exchange Commission
(“SEC”) (the “Form 10-K”), for a discussion of the uncertainties, risks and
assumptions associated with these forward-looking statements.





The
following discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements as of September 30,
2010, and for the three months ended September 30, 2010 and 2009, which are
unaudited. In the opinion of management, such consolidated financial
statements include the adjustments and accruals necessary for a fair
presentation of the results for the interim periods. These interim results are
not necessarily indicative of results for a full year. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with United States Generally Accepted Accounting Principles (“GAAP”)
have been condensed or omitted in these financial statements as of September 30,
2010, and for the three months ended September 30, 2010 and 2009.





You
should read this discussion and analysis together with such financial statements
and the notes thereto.





Going
Concern





The
Company currently has no sources of recurring revenue and has generated net
losses of $14,578,849 and negative cash flows from operations of $3,157,682
during the period from June 24, 2005 (inception) through September 30,
2010.


26





In the
course of its development activities, the Company has sustained and continues to
sustain losses.  The Company does not anticipate positive cash flow
from operations before 2013 and cannot predict if and when the Company may
generate profits.  In the event the Company identifies commercial
reserves of lithium and/or minerals, the Company will require substantial
additional capital to develop those reserves.  The Company expects to
finance its operations primarily through future financings. However, there
exists substantial doubt about the Company’s ability to continue as a going
concern because there is no assurance that it will be able to obtain such
capital, through equity or debt financing, or any combination thereof, on
satisfactory terms or at all. Additionally, no assurance can be given that any
such financing, if obtained, will be adequate to meet the Company’s ultimate
capital needs and to support its growth. If adequate capital cannot be obtained
on a timely basis and on satisfactory terms, then the Company’s operations would
be materially negatively impacted.





Our
ability to complete additional equity or debt offerings is dependent on the
state of the debt and/or equity markets at the time of any proposed offering,
and such market’s reception of us and the offering terms. In addition, our
ability to complete an offering may be dependent on the status of our
exploration activities, which cannot be predicted. There is no assurance that
capital in any form would be available to us, and if available, on terms and
conditions that are acceptable.





These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. The Company’s continuation as a going concern is dependent on its
ability to meet its obligations, to obtain additional financing as may be
required until such time as it can generate sources of recurring revenues and to
ultimately attain profitability.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





Operational
Update





Chile





In August
2010, we acquired all of the outstanding share capital of Alfredo Holdings, Ltd.
(“Alfredo”), which, through its Chilean subsidiary Pacific Road Mining Chile
S.A. (“PRMC”), has an option to purchase mining concessions with respect to
approximately 6,670 acres of mining tenements near Pozo Almonte, Chile. Details
of the terms of the acquisition and option (including future payments we may be
obligated to make to the Sellers) are contained in the Form 10-K under Part I,
Item 1, “Business—Our Projects—Chile—Alfredo” and are incorporated by reference
herein.





Under the
terms of the option agreement, we were required to make a payment of $100,000 to
the optionor by October 30, 2010, and we will be required to pay $180,000 by
December 30, 2010, in order to maintain our option rights.  Then, in
order to exercise the option and purchase the Alfredo Property, we must pay the
option exercise price of $4,860,000 by March 30, 2011.  We were unable
to make the payment of $100,000 due on October 30, 2010.  We are in
discussions with the optionor to extend the payments for October and December;
however, there can be no assurance at this point that we will be successful. In
the event we are unable to extend our payment terms, we may be unable to pursue
development of the Alfredo properties and could be required to impair the
properties.





We
estimate that we would require an additional $8.5 million in order to develop
the Alfredo Property to the stage of a completed feasibility study.





We are in
the process of obtaining a Canadian National Instrument 43-101 report (“NI
43-101”) on the Alfredo Property.  The NI 43-101 is a
codified set of rules and guidelines for reporting and displaying information
related to mineral properties owned or explored by companies which generally
report these results on stock exchanges within Canada.   We are
not listed on any stock exchanges within Canada.


27




Peru




On
February 23, 2010, we acquired 100% of the assets of the Loriscota, Suches and
Vizcachas Projects for an aggregate purchase price of $50,000.  Given
our limited resources, we continue to develop plans to pursue exploration and/or
development of the Peru properties. Any such plans include development beyond a
year and are subject to the availability of financing.  We continue to
evaluate other nearby properties in Peru to potentially expand our land package
in this region.





Argentina





In July
2010, we acquired 100% of the issued and outstanding shares of Noto Energy S.A.,
an Argentinean corporation (“Noto”), which beneficially owns a 100% interest
over 2,995 acres situated on brine salars in Argentina, known as
Cauchari.  We are in the process of evaluating the Noto
property.  Given our limited resources, we continue to develop plans
to pursue exploration and/or development of the Noto property.  Any
such plans include development beyond a year and are subject to the availability
of financing.  We continue to evaluate other nearby properties in
Argentina to potentially expand our land package in this region.





Recent
Development





On
November 8, 2010, we held an initial closing of a private placement offering
(the “New Offering”) of 2,000,000 units of our securities (the “New Units”) to
institutional and accredited investors and non-U.S. persons for gross proceeds
of $100,000, at an offering price of $0.05 per New Unit. Each New Unit consists
of (i) one share of common stock, par value $0.001 per share, of the Company
(“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an
exercise price of $0.05 per share (the “New Warrants”). The New Warrants will be
exercisable from issuance until five years after the final closing of the
Offering.  On November 15, 2010, we held a second and final closing of
the New Offering in which an additional 2,000,000 Units were sold for gross
proceeds of $100,000.  In the aggregate, we sold 4,000,000 New Units
in the New Offering for aggregate gross proceeds of $200,000.  We plan
to apply the net proceeds of these closings towards certain outstanding accounts
payable.





The
subscription agreements (the “Subscription Agreements”) between us and each
investor (each “Subscriber”) in the New Offering provide each Subscriber with
the right, subject to certain conditions, to purchase, at any time prior to
November 8, 2011, a number of additional New Units (“Double Units”) up to the
number of New Units purchased at the closing of the New Offering by such
Subscriber.  The Subscription Agreements provide the Subscribers with
certain “piggyback” registration rights covering the shares of Common Stock
included in the New Units (including any Double Units) and the shares of Common
Stock issuable upon exercise of the New Warrants (including New Warrants
included in any Double Units).





The sale
of the New Units and the securities contained therein were exempt from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) thereof and Regulation D and/or Regulation S promulgated thereunder, as
transactions by an issuer not involving a public offering.  The
purchasers of the securities represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the
certificates issued in such transactions.  All purchasers of the
securities represented and warranted, among other things, that they were
accredited investors within the meaning of Regulation D and/or non-U.S. persons
within the meaning of Regulation S, that they had the knowledge and experience
in financial and business matters necessary to evaluate the merits and risks of
an investment in the Company and had the ability to bear the economic risks of
the investment, and that they had adequate access to information about the
Company.


28




Strategic
Plan





Our
strategic plan is to explore and develop our existing projects and to identify
additional opportunities and generate new projects with near-term production
potential, with the goal of becoming a significant player in the lithium and
industrial minerals industry.  Our primary objective is to become a
low cost lithium producer as well as a significant producer of potassium
nitrate. The key to achieving this objective is to become an integrated chemical
company through the strategic acquisition and development of lithium assets as
well as other assets that have by-product synergies.





We
continue to pursue an advanced lithium and potassium chloride project in Chile,
although there can be no assurance that this project will meet our technical and
other due diligence requirements or that we will successfully negotiate an
acquisition, and we continue to explore other lithium and industrial minerals
prospects in the region, located to complement the Alfredo project, in order to
achieve integration of operations to produce metallurgical grade lithium,
commercial grade fertilizer and pharmaceutical grade iodine.





Results
of Operations





Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009





Revenues





We had no
revenues during the three months ended September 30, 2010 and 2009,
respectively.





Exploration
expenses





During
the three months ended September 30, 2010 and 2009, we incurred exploration
expenses of $272,642 and $0, respectively.  The expenses incurred
during the three months ended September 30, 2010 related principally to our
efforts to secure strategic mineral rights in South America and include direct
expenses, consulting expenses in connection with prospective mining operation
investment opportunities, and travel.





General and administrative
Expenses




During
the three months ended September 30, 2010 and 2009, we incurred general and
administrative expenses of $831,227 and $14,765, respectively.  The
increase in expenses incurred related primarily to legal fees, consultancy fees,
travel expenses and professional fees incurred in connection with the day-to-day
operation of our business.


29




Other Income
(Expense)





Other
income for the three months ended September 30, 2010, was $2,767,412 compared to
other expense of $1,957 for the three months ended September 30, 2009, and
increased primarily due to our recognition, during the three months ended
September 30, 2010, of an unrealized gain from the decrease in the fair value of
the derivative liability related to our outstanding warrant instruments of
$2,772,726.  Interest expense amounted to $1,944 and $1,958 during the
three months ended September 30, 2010 and 2009, respectively and related to our
loans payable.   During the three months ended September 30, 2010
and 2009, we incurred losses on foreign currency translation of $3,437 and $0,
respectively, and such losses related to our operations in Peru.





Liquidity
and Capital Resources





Liquidity and Capital
Resources





Due to
our brief history and historical operating losses, our operations have not been
a source of liquidity, and our sources of liquidity primarily have been
debt and proceeds from the sale of our equity securities in several private
placements.




Although
we have begun the acquisition of certain mining properties, any of such
properties that we may acquire will require exploration and development that
could take years to complete before it begins to generate
revenues.  There can be no assurances that we will be successful in
acquiring such properties or that if we do complete acquisitions, properties
acquired will be successfully developed to the revenue producing
stage.  If we are not successful in our proposed mining operations,
our business, results of operations, liquidity and financial condition will
suffer materially.





Various
factors outside of our control, including the price of lithium and other
minerals, overall market and economic conditions, the downturn and volatility in
the US equity markets and the trading price of our common stock may limit our
ability to raise the capital needed to execute our plan of
operations.  We recognize that the US economy is currently
experiencing a period of uncertainty and that the capital markets have been
depressed from recent levels.  These or other factors could adversely
affect our ability to raise additional capital.  As a result of an
inability to raise additional capital, our short-term or long-term liquidity and
our ability to execute our plan of operations could be significantly
impaired.





In July
and September 2010, we raised gross proceeds of $540,000 ($487,998 after
offering expenses) from the sale of units of our equity securities in our
2010 Private Placement.  We sold an aggregate of 2,160,000 units, each
consisting of (i) one share of our common stock and (ii) a warrant to purchase
one share of common stock at an exercise price of $0.50 per share. The warrants
are exercisable for a period of five years from the issuance date.





On
November 8, 2010,  the Company held an initial closing of a private
placement offering (the “New Offering”) of 2,000,000 units of its securities
(the “New Units”) to institutional and accredited investors and non-U.S. persons
for gross proceeds of $100,000, at an offering price of $0.05 per New Unit. Each
New Unit consists of (i) one share of the Company’s common stock, and (ii) a
warrant to purchase one share of common stock at an exercise price of $0.05 per
share (the “New Warrants”). The New Warrants will be exercisable from issuance
until five years after the final closing of the New Offering.  On
November 15, 2010, the Company held a second and final closing of the New
Offering in which an additional 2,000,000 New Units were sold for gross proceeds
of $100,000.  In the aggregate, the Company sold 4,000,000 New Units
in the New Offering for aggregate gross proceeds of $200,000.  The
Company plans to apply the net proceeds of this closing towards certain
outstanding accounts payable.


30




As a
result of the New Units issued in the New Offering, the exercise prices and
number of shares issuable upon exercise of the 2009 Warrants, 2010 Warrants and
Agent Warrants was further adjusted.  After November 15,
2010:  (i) the A Warrants were exercisable, in the aggregate, to
purchase 7,123,593 shares of common stock for approximately $0.4106 per share;
(ii) the B Warrants were exercisable, in the aggregate, to purchase 7,132,318
shares of common stock for approximately $0.7671 per share; (iii) the 2010
Warrants were exercisable to purchase 7,188,035 shares of common stock for
approximately $0.4285 per share; and (iv) the Agent Warrants were exercisable to
purchase 481,171 shares of common stock for approximately $0.2182 per
share.





In
addition to utilizing our capital to acquire properties and pay other corporate
costs, we periodically issue shares of our common stock as consideration in lieu
of cash to conserve our cash and meet our obligations.  We likely will
continue to issue common stock for these purposes where feasible, if we
determine that it is in our economic best interests.





We have
been using the net proceeds from the 2010 private placements towards the
implementation of our business development plan and for general working capital
purposes.  We will require additional capital to pay our obligations
and to execute our exploration and development plans for our existing lithium
mining properties and any others that we may be successful in
acquiring.  We plan to seek to raise such capital through additional
sales of our equity or debt securities.  There can be no assurance,
however, that such financing will be available to us or, if it is available,
that it will be available on terms acceptable to us and that it will be
sufficient to fund our expected needs.  If we are unable to obtain
sufficient financing, we may not be able to proceed with our exploration and
development plans or meet our ongoing operational working capital
needs.




At
September 30, 2010, we had cash and cash equivalents of $3,851, as compared to
$302,821 at June 30, 2010.  The decrease in cash and cash equivalents
from June 30, 2010 to September 30, 2010 was due to cash used in operating
activities ($606,968) and the acquisition of mineral rights ($180,000),
partially offset by net proceeds from 2010 private placements of
$487,998.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.






Item
3. Quantitative and Qualitative Disclosures About Market Risk





As a
smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are
not required to provide disclosure under this Item 3.





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange
Act of 1934 as a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers and effected by the
company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”) and includes those policies and procedures that:


31




●
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





●
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with US GAAP and that
      receipts and expenditures of the company are being made only in accordance
      with authorizations of management and directors of the company;
      and





●
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over
financial reporting. However, these inherent limitations are known features of
the financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.




As of
September 30, 2010, management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and SEC guidance on conducting such assessments. Based on
that evaluation, they concluded that, during the period covered by this report,
such internal controls and procedures were not effective in detecting the
inappropriate application of U.S. GAAP rules as more fully described below. This
was due to deficiencies that existed in the design or operation of our internal
controls over financial reporting that adversely affected our internal controls
and that may be considered to be material weaknesses.





The
matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were: (1) inadequate segregation of duties consistent
with control objectives; and (2) ineffective controls over period end financial
disclosure and reporting processes primarily due to limited financial accounting
staff resources. The aforementioned material weaknesses were identified by our
Chief Executive Officer in connection with the review of our financial
statements as of September 30, 2010.





Management
believes that the material weaknesses set forth above did not have an effect on
our financial results.


32


Management’s
Remediation Initiatives





In an
effort to remediate the identified material weaknesses and other deficiencies
and enhance our internal controls, we intend to hire additional qualified staff
once we have the available resources.





Changes
in Internal Controls over Financial Reporting




There were
no changes in the Company’s internal controls over financial reporting, known to
executive management that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.


33


PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business.





We are
currently not aware of any pending legal proceedings to which we are a party or
of which any of our property is the subject, nor are we aware of any such
proceedings that are contemplated by any governmental authority.





Item
1A. Risk Factors





There
have been no material changes from the risk factors disclosed in the Form
10-K under Part I, Item 1A, “Risk Factors,” therein.





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





Except as
previously disclosed in Current Reports on Form 8-K that we have filed, or as
set forth below, we have not sold any of our equity securities during the period
covered by this Report that were not registered under the Securities
Act.




Pursuant
to our Employment Services Agreement with MIZ Comercializadora, S. de R.L.
(“MIZ”) relating to Mr. Currin’s serving as our Chief Operating Officer, we
agreed to issue MIZ 236,842 shares of our common stock as a signing bonus,
granted to MIZ an award under the 2009 Plan pursuant to which we shall issue
2,500,000 shares of Restricted Stock and granted to MIZ an option to purchase an
aggregate of 1,000,000 shares of our common stock under the 2009 Plan,
exercisable at a price of $0.38 per share.  To the extent such
issuances may be deemed sales of our equity securities, they were effected
without registration in reliance upon the exemption from the registration
requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof and
Regulation D and/or Regulation S promulgated thereunder, as transactions by an
issuer not involving a public offering.  MIZ represented its intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends will be
affixed to any certificates issued in connection with such awards.





Item
3. Defaults upon Senior Securities





None.





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





None.


34





Item
5. Other Information





None.





Item
6. Exhibits





The
following exhibits are filed as part of (or are furnished with, as indicated
below) this Quarterly Report or, where indicated, were heretofore filed and are
hereby incorporated by reference.





In
reviewing the agreements included (or incorporated by reference) as exhibits to
this Form 10-Q, please remember that they are included to provide you with
information regarding their terms and are not intended to provide any other
factual or disclosure information about the Company or the other parties to the
agreements. The agreements may contain representations and warranties by each of
the parties to the applicable agreement. These representations and warranties
have been made solely for the benefit of the parties to the applicable agreement
and:





Ÿ
            should not in all instances be
      treated as categorical statements of fact, but rather as a way of
      allocating the risk to one of the parties if those statements prove to be
      inaccurate;





Ÿ
            have been qualified by
      disclosures that were made to the other party in connection with the
      negotiation of the applicable agreement, which disclosures are not
      necessarily reflected in the
agreement;





Ÿ
            may apply standards of
      materiality in a way that is different from what may be viewed as material
      to you or other investors;
and





Ÿ
            were made only as of the date
      of the applicable agreement or such other date or dates as may be
      specified in the agreement and are subject to more recent
      developments.





Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time. Additional
information about the Company may be found elsewhere in this Form 10-K and the
Company’s other public filings, which are available without charge through the
SEC’s website at http://www.sec.gov.




Exhibit
                    Number
                  
                  
                  Description10.1
                  
                  
                  Addendum
      to Master Option Agreement between Lacus Minerals S.A. and the Registrant,
      dated as of July 29, 2010. (2)10.2
                  
                  
                  Stock
      Purchase Agreement, dated as of August 3, 2010, among Li3 Energy, Inc. and
      Pacific Road Capital A Pty. Limited, as trustee for Pacific Road Resources
      Fund A, Pacific Road Capital B Pty. Limited, as trustee for Pacific Road
      Resources Fund B, and Pacific Road Capital Management G.P. Limited, as
      General Partner of Pacific Road Resources Fund L.P.
  (1)




35




10.3
      †
              
              
              Employment
      Services Agreement, dated as of August 11, 2010, between the Registrant
      and MIZ Comercializadora, S. de R.L. (2)10.4
      †
              
              
              Form
      of Restricted Stock Agreement, dated as of August 11, 2010, between the
      Registrant and MIZ Comercializadora, S. de R.L. (2)31.1
              
              
              Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              
              
              Certification
      of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1¶
              
              
              Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2¶
              
              
              Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





†
            Management
      contract or compensatory plan or
arrangement





¶
            This
      certification is being furnished and shall not be deemed “filed” with the
      SEC for purposes of Section 18 of the Exchange Act, or otherwise subject
      to the liability of that section, and shall not be deemed to be
      incorporated by reference into any filing under the Securities Act or the
      Exchange Act, except to the extent that the Registrant specifically
      incorporates it by reference.





(1)
            Filed
      with the Securities and Exchange Commission on August 9, 2010, as an
      exhibit to the Registrant’s current report on Form 8-K, which exhibit is
      incorporated herein by reference.





(2)
            Filed
      with the Securities and Exchange Commission on November 4, 2010, as an
      exhibit to the Registrant’s current report on Form 8-K, which exhibit is
      incorporated herein by
reference.


36




SIGNATURES





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





Date:
      November 22,  2010
                LI3
      ENERGY, INC.By:
                /s/
      Luis F. SaenzName: Luis
      F. SaenzTitle:  
      Chief Executive Officer
                  (Principal
      Executive Officer)By:
                /s/
      Eric E. MarinName: Eric
      E. MarinTitle:  
      Interim Chief Financial Officer
                  (Principal
      Financial
Officer)


37




EXHIBIT INDEX





Exhibit
                    Number
                  
                  
                  Description31.1
                  
                  
                  Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                  
                  
                  Certification
      of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1¶
                  
                  
                  Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2¶
                  
                  
                  Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




¶
            This
      certification is being furnished and shall not be deemed “filed” with the
      SEC for purposes of Section 18 of the Exchange Act, or otherwise subject
      to the liability of that section, and shall not be deemed to be
      incorporated by reference into any filing under the Securities Act or the
      Exchange Act, except to the extent that the Registrant specifically
      incorporates it by reference.


38