UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K


x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


FOR THE
FISCAL YEAR ENDED JULY 31, 2009


 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
File No. 0-13078





CAPITAL GOLD
CORPORATION


(Exact
name of registrant as specified in its charter)





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





76 Beaver Street, 14thFloor, New York, New York
                  
                  10005(Address
      of principal executive offices)
                  
                  (Zip
      Code)





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





Securities
registered under Section 12(b) of the Act:   none


Securities
registered under Section 12(g) of the Act: Common Stock, par value $.0001 per
share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈ 
 No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes
 ̈ 
No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x 
No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  ̈





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


 ̈
      Large accelerated filer
            x
      Accelerated filer ̈
      Non-accelerated filer
             ̈
      Smaller Reporting Company





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




Yes  ̈ 
No  ̈





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


Yes  ̈ No
x





The
aggregate market value of the voting and non-voting common equity on January 31,
2009 held by non-affiliates computed by reference to the closing price of the
issuer’s Common Stock on that date, was $87,275,682 based upon the closing price
($0.63) multiplied by the 138,532,828 shares of the issuer’s Common Stock held
by non-affiliates.





The
number of shares outstanding of each of the issuer’s classes of common equity as
of October 7, 2009: 193,850,593.





The Proxy
Statement of Capital Gold Corporation to be filed in connection with our 2010
Annual


Meeting
of Stockholders is incorporated in Part III hereof, as specified
herein.








CAPITAL
GOLD CORPORATION


Form
10-K


July 31,
2009




Table of Contents
                                        
                                        PageGlossary
      of Technical Terms
                                        
                                        (iii)Part IItem
      1.
                                        Business.
                                        
                                        1Item
      1A.
                                        Risk
      Factors.
                                        
                                        2Item
      1B.
                                        Unresolved
      Staff Comments.
                                        
                                        9Item
      2.
                                        Property.
                                        
                                        9Item
      3.
                                        Legal
      Proceedings.
                                        
                                        19Item
      4.
                                        Submission
      of Matters to a Vote of Security Holders.
                                        
                                        19Part IIItem
      5.
                                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                                        
                                        20Item
      6.
                                        Selected
      Financial Data.
                                        
                                        23Item
      7.
                                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                        
                                        23Item
      7A.
                                        Quantitative
      and Qualitative Disclosure  About Market Risk
                                        
                                        44Item
      8.
                                        Financial
      Statements and Supplementary Data.
                                        
                                        45Item
      9.
                                        Changes
      in and Disagreement with Accountants on Accounting and Financial
      Disclosure.
                                        
                                        45Item
      9A
                                        Controls
      and Procedures.
                                        
                                        45Item
      9B
                                        Other
      Information.
                                        
                                        46Part IIIItem
      10.
                                        Directors,
      Executive Officers and Corporate Governance.
                                        
                                        46Item
      11.
                                        Executive
      Compensation.
                                        
                                        48Item
      12.
                                        Security
      Ownership of Certain Beneficial Owners and Management and Related 
      Stockholder Matters.
                                        
                                        48Item
      13.
                                        Certain
      Relationships and Related Transactions and Director
      Independence.
                                        
                                        48Item
      14.
                                        Principal
      Accounting Fees and Services.
                                        
                                        49Part IVItem
      15.
                                        Exhibits,
      Financial Statement Schedules.
                                        
                                        49Signatures
                                        
                                        53Supplemental
      Information
                                        
                                        N/AFinancial
      Statements
                                        
                                        F-1


ii


GLOSSARY OF TECHNICAL
TERMS





Reserve:
              That
      part of a mineral deposit which could be economically and legally
      extracted or produced at the time of the reserve determination. Reserves
      must be supported by a feasibility study done to bankable standards that
      demonstrates the economic extraction  ("Bankable standards" implies
      that the confidence attached to the costs and achievements developed in
      the study is sufficient for the project to be eligible for external debt
      financing.) A reserve includes adjustments to the in-situ tonnes and grade
      to include diluting materials and allowances for losses that might occur
      when the material is mined.Proven
      Reserve:
              Reserves
      for which (a) quantity is computed from dimensions revealed in outcrops,
      trenches, workings or drill holes; grade and/or quality are computed from
      the results of detailed sampling and (b) the sites for inspection,
      sampling and measurement are spaced so closely and the geologic character
      is so well defined that size, shape depth and mineral content of reserves
      are well-established.Probable
      Reserve:
              Reserves
      for which quantity and grade and/or quality are computed from information
      similar to that used for proven (measured) reserves, but the sites for
      inspection, sampling, and measurement are farther apart or are otherwise
      less adequately spaced. The degree of assurance, although lower than that
      for proven reserves, is high enough to assume continuity between points of
      observation.Mineralized
      Material
              The
      term “mineralized material” refers to material that is not included in the
      reserve as it does not meet all of the criteria for adequate demonstration
      for economic or legal extraction.Non-reserves
              The
      term “non-reserves” refers to mineralized material that is not included in
      the reserve as it does not meet all of the criteria for adequate
      demonstration for economic or legal extraction.Exploration
      Stage
              An
      “exploration stage” prospect is one which is not in either the development
      or production stage.Development
      Stage
              A
      “development stage” project is one which is undergoing preparation of an
      established commercially mineable deposit for its extraction but which is
      not yet in production.  This stage occurs after completion of a
      feasibility study.Production
      Stage
              A
      “production stage” project is actively engaged in the process of
      extraction and beneficiation of mineral reserves to produce a marketable
      metal or mineral product.





iii





ADDITIONAL
DEFINITIONS





Caliche:
                Sediment
      cemented by calcium carbonate near surface.Diorite:
                Igneous
      Rock (Rock formed from magma or molten rock).Dore:
                Bars
      of low purity precious metal (Gold & Silver) which represents final
      product of a gold mine typically weighing 25 kg per
bar.Dikes:
                Tabular,
      vertical bodies of igneous rock.Fissility:
                Shattered,
      broken nature of rock.Fracture
      Foliations:
                Fracture
      pattern in rock, parallel orientation, resulting from
      pressure.Heap
      Leaching:
                Broken
      and crushed ore on a pile subjected to dissolution of metals by leach
      solution.HydrometallurgicalPlant:
                A
      metallurgical mineral processing plant that uses water to leach or
      separate and concentrate elements or minerals.Intercalated:
                Mixed
      in.Lithostatic
      Pressure:
                Pressure
      brought on by weight of overlaying rocks.MajorIntrusive
      Center:
                An
      area where large bodies of intrusive igneous rock exist and through which
      large amounts of mineralizing fluids rose.Mesothermal:
                A
      class of hydrothermal ore deposit formed at medium temperatures and a
      depth over one mile in the earth’s crust.MicroporphyriticLatite:
                Extremely
      fine grained siliceous igneous rock with a distribution of larger crystals
      within.Mudstone:
                Sedimentary
      bed composed primarily of fine grained material such as clay and
      silt.PPM:
                Part
      per million.Pyritized:
                Partly
      replaced by the mineral pyrite.Reverse
      CirculationDrilling
      (or R.C.Drilling):
                Type
      of drilling using air to recover cuttings for sampling through the middle
      of the drilling rods rather than the outside of the drill rods, resulting
      in less contamination of the sampled
interval.


iv





Sericitized:
              Rocks
      altered by heat, pressure and solutions resulting in formation of the
      mineral sericite, a very fine grained mica.Siltstone:
              A
      sedimentary rock composed of clay and silt sized
  particles.Silicified:
              Partly
      replaced by silica.Stockwork
      Breccia:
              Earth's
      crust broken by two or more sets of parallel faults converging from
      different directions.Stockwork:
              Ore,
      when not in strata or in veins but in large masses, so as to be worked in
      chambers or in large blocks.Surface
      Mine:
              Surface
      mining by way of an open pit without shafts or underground
      working.


v


PART I





Item
1.  Business





Capital Gold Corporation is engaged
in the mining, exploration and development of gold properties in Mexico. 
Our primary focus is on the operation and development of the El Chanate project,
and we also conduct gold exploration in other locations in Sonora, Mexico. (The
financial data in this discussion is in thousands, except where otherwise
specifically noted.)





Sonora,
Mexico Concessions





Through
wholly-owned subsidiaries, Capital Gold Corporation owns 100% of 16 mining
concessions located in the Municipality of Altar, State of Sonora, Republic of
Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square
miles).  We commenced mining operations on two of these concessions in late
March 2007 and achieved gold production and revenue from operations in early
August 2007. We sometimes refer to the operations on these two concessions as
the El Chanate Project.  Our results of operations differ from the fiscal
year ended July 31, 2007 because we now are realizing revenue from
operations.





In April
2008, we leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,304 additional
hectares adjacent to this property. The approximate 4,000 hectare area is
accessible by paved roads and has cellular phone service from hilltops. 
These concessions and this claim are about 60 miles northeast of the El Chanate
project. Mineralization is evident throughout the concession group and is hosted
by shear zones and stockwork quartz veins in volcanic and intrusive rocks. We
have completed exploration work consisting of geological mapping, systematic
geochemical sampling of rock and soils, geophysical surveys, trenching and 32
reverse circulation drill holes totaling 2,560 meters.  The results of this
early work has justified an expanded drill campaign which is currently underway
and consists of 23 reverse circulation drill holes between 100 to 150 meters
deep totaling 2,100 meters.  All of these holes will be focused on the
northern part of the concession group near the Sombreretillo Ranch.  These
holes will vary in depth from 40 to 50 meters.  SRK of Lakewood, Colorado
has made a site visit and will monitor the quality assurance and quality control
during the drilling campaign.  All of the drill hole samples have been and
will be assayed by ALS Chemex.  The ALS Chemex facility in Hermosillo does
the sample preparation, and the assays are performed at the ALS Chemex’s
Vancouver laboratory.  ALS Chemex laboratories provide the highest level of
quality and have ISO 9001:2000 certification at all locations.





For more
information on the El Chanate Project, please see  “Item 2. Property; El Chanate
Properties – Sonora, Mexico.”





Competition





The acquisition of gold properties and
their exploration and development are subject to intense competition. Companies
with greater financial resources, larger staffs and more equipment for
exploration and development may be in a better position than us to compete for
such mineral properties.  Our limited financial resources in relation to
companies with greater resources may hinder our ability to compete for and
acquire additional mineral properties.


1





Human
Resources





As of October 7, 2009, we had 162 full
time and 13 temporary employees working at our El Chanate mine in Sonora, Mexico
as well as 7 full time employees in the U.S.  We also utilize a mining
contractor at the El Chanate mine which had 55 personnel onsite.





Cautionary
Statement on Forward-Looking Statements





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





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





Available
Information




For more
information about us, visit our website at www.capitalgoldcorp.com.  The
contents of the website are not part of this Annual Report on Form 10-K. 
Our electronic filings with the U.S. Securities and Exchange Commission, or SEC
(including all Forms 10-K, 10-Q and 8-K, and any amendments to these reports)
are available free of charge through our website immediately after we
electronically file with or furnish them to the SEC.  These filings may
also be read and copied at the SEC’s Public Reference Room which is located at
100 F Street, N.E., Washington, D.C. 20549.  Information about the
operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.  The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers who
file electronically with the SEC at www.sec.gov.





Item
1A.  Risk
Factors





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


2


Risks related to our
business and operations





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





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





Our
Credit Facility with Standard Bank plc(“Standard Bank”) imposes restrictive
covenants on us.





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including, but not limited to, (i) a ratio of
current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S.$15,000,000, and (iii) a quarterly average minimum liquidity of
U.S.$500,000.  In addition, the Credit Facility restricts, among other
things, our ability to incur additional debt, create liens on our property,
dispose of any assets, merge with other companies, enter into hedge agreements,
organize or invest in subsidiaries or make any investments above a certain
dollar limit.  A failure to comply with the restrictions contained in the
Credit Facility could lead to an event of default thereunder which could result
in an acceleration of such indebtedness.





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





Sinergia
Obras Civiles Y Mineras, S.A. de C.V. (“Sinergia”), our mining contractor, is
using fully functioning, but older equipment.  Such equipment is subject to
the risk of more frequent breakdowns and need for repair than new
equipment.  If the equipment that we or Sinergia uses breaks down and
needs to be repaired or replaced, we will incur additional costs and operations
may be delayed, resulting in lower amounts of gold recovered.  In such
event, our capital and operating cost assumptions may be inaccurate and our
ability to economically and successfully mine the El Chanate project may be
hampered, resulting in decreased revenues and, possibly, a loss from
operations.


3


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





The gold
deposit we are mining at our El Chanate mine is relatively
low-grade.  If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if we experience problems related to the mining, processing,
or recovery of gold from ore at the mine, our results of operation and financial
condition could be materially adversely affected.  Moreover, it is
possible that actual costs and economic returns may differ materially from our
best estimates.  There can be no assurance that our operations at El
Chanate will continue to be profitable.





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





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the fiscal year ended July
31, 2009, the spot price for gold on the London Exchange has fluctuated between
$712.50 and $985.75 per ounce.  Gold prices are affected by numerous
factors beyond our control, including:





·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





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





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





We have
entered into interest rate swap agreements.  The terms of our Credit
Facility with Standard Bank required that we hedge at least 50% of our
outstanding loan balance.  There can be no assurance that we will be
able to successfully hedge against interest rate fluctuations.




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


4


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





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





·
            labor
      disputes,


·
            invalidity
      of governmental orders,


·
            uncertain
      or unpredictable political, legal and economic
    environments,


·
            war
      and civil disturbances,


·
            changes
      in laws or policies,


·
            taxation,


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


·
            governmental
      seizure of land or mining claims,


·
            limitations
      on ownership,


·
            limitations
      on the repatriation of earnings,


·
            increased
      financial costs,


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


·
            foreign
      exchange controls.





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





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





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





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





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





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


·
            repatriation
      of income and/or


·
            return
      of capital.





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


5





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





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





·
            stricter
      standards and enforcement,


·
            increased
      fines and penalties for
non-compliance,


·
            more
      stringent environmental assessments of proposed projects
    and


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





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





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





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





·
            environmental
      hazards,


·
            industrial
      accidents,


·
            metallurgical
      and other processing,


·
            acts
      of God, and/or


·
            mechanical
      equipment and facility performance
problems.





Such
risks could result in:





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


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses, and/or


·
            possible
      legal liability.





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


6





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





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





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





We are
dependent on a relatively small number of key personnel, including but not
limited to John Brownlie, President and Chief Operating Officer who, among other
duties, oversees the El Chanate Project, the loss of any one of whom could have
an adverse effect on us.  We are also dependent upon Sinergia to
provide mining services.  Sinergia commenced mining operations on March 25,
2007, and transitioned from the pre-production to production phase of the mining
contract in July 2007.  Sinergia’s mining fleet is not new.  If
we lose the services of our key personnel, or if Sinergia is unable to
effectively maintain its fleet, our operations at our El Chanate Project may be
disrupted and/or materially adversely affected.





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





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





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





Gold is a non-renewable resource and
gold mines continue to deplete their reserves while in
operation.  They eventually become deplete of ore or  become
uneconomical to sustain mining operations.  The acquisition of gold
properties and their exploration and development are subject to intense
competition. Companies with greater financial resources and larger staffsfor
exploration and development may be in a better position than us to compete for
such mineral properties.  If we are unable to find, develop and
economically mine new properties, we most likely will not be able to be
profitable on a long-term basis.


7





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





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





·
            the
      location of economic ore bodies,


·
            development
      of appropriate metallurgical
processes,


·
            receipt
      of necessary governmental approvals,
and


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





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





·
            the
      price of gold,


·
            the
      particular attributes of the deposit, such as
  its


o
            size,


o
            grade,
      and


o
            proximity
      to infrastructure,


·
            financing
      costs,


·
            taxation,


·
            royalties,


·
            land
      tenure,


·
            land
      use,


·
            water
      use,


·
            power
      use,


·
            importing
      and exporting gold, and


·
            environmental
      protection.





The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





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





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


8





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





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





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





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





Item
1B.  Unresolved Staff
Comments





None.





Item
2.  Property





El
Chanate Properties – Sonora, Mexico





Through
our wholly-owned subsidiary, Oro de Altar S. de R. L. de C.V. (“Oro”), we own
100% of the following 21 mining concessions, all of which are located in the
State of Sonora United States of Mexico.


9





The 21
mining concessions are as follows:





Lot
                          
                          Title
      #
                          
                          Hectars
                          
                          Owner1
                          
                          SAN
      JOSE
                          
                          200718
                          
                          96.00
                          
                          Oro2
                          
                          LAS
      DOS VIRGEN
                          
                          214874
                          
                          132.235
                          
                          Oro3
                          
                          RONO
      #1
                          
                          206408
                          
                          82.1902
                          
                          Oro4
                          
                          RONO
      #3
                          
                          214224
                          
                          197.218
                          
                          Oro5
                          
                          LA
      CUCHILLA
                          
                          211987
                          
                          143.3481
                          
                          Oro6
                          
                          ELSA
                          
                          212004
                          
                          2,035.3997
                          
                          Oro7
                          
                          ELISA
                          
                          214223
                          
                          78.4717
                          
                          Oro8
                          
                          ENA
                          
                          217495
                          
                          190.00
                          
                          Oro9
                          
                          EVA
                          
                          212395
                          
                          416.8963
                          
                          Oro10
                          
                          MIRSA
                          
                          212082
                          
                          20.5518
                          
                          Oro11
                          
                          OLGA
                          
                          212081
                          
                          60.589
                          
                          Oro12
                          
                          EDNA
                          
                          219624
                          
                          24.0431
                          
                          Oro13
                          
                          LA
      TIRA
                          
                          219324
                          
                          1.7975
                          
                          Oro14
                          
                          LA
      TIRA 1
                          
                          219623
                          
                          18.6087
                          
                          Oro15
                          
                          LOS
      TRES
                          
                          223634
                          
                          8.00
                          
                          Oro16
                          
                          EL
      CHARRO
                          
                          206404
                          
                          40.00
                          
                          Oro17
                          
                          SANTA
      RITA 4 FRACCION I
                          
                          233574
                          
                          5.0728
                          
                          Oro18
                          
                          SANTA
      RITA 4 FRACCION II
                          
                          233575
                          
                          4.7786
                          
                          Oro19
                          
                          SANTA
      RITA 4 FRACCION III
                          
                          233576
                          
                          110.2725
                          
                          Oro20
                          
                          SANTA
      RITA I
                          
                          231373
                          
                          3,765.9666
                          
                          Oro21
                          
                          SANTA
      RITA III
                          
                          232117
                          
                          2,233.3163
                          
                          OroTotal
                          
                          9,664.7559





At the El Chanate Project we are
mining on two concessions, San Jose and Las Dos Virgens.  We are
utilizing four other concessions for processing mined ores.  In the
future, we plan to explore some or all of these concessions to determine whether
or not further activity is warranted.


10










During
the fiscal years ended July 31, 2008 and 2009, we completed 39 core and reverse
circulation drill holes to delineate additional reservesat the El Chanate open
pit mine.   These holes totaled approximately 7,800 meters, and
were targeted to fill in gaps in the ore body and test the outer limits of the
currently known ore zones.   Inclusive of this drilling, the
total number of drill holes at the El Chanate mine is currently 367. This
combination of reverse circulation and core drilling totals  54,320
meters.  The knowledge obtained about the geology of the deposit
during mining, combined with the assays from the samples from this exploration
drilling, was used to expand the information in our mine database.  We
have used this data to re-estimate El Chanate’s mineral reserves. The new
mineral reserves are based on an updated block model and an updated mine plan
and production schedule developed by IMC (“2009 Report”). The updated pit design
for the revised plan is based on a plant recovery of gold that varies by rock
types, but is expected to average 64.2% over the mine life.  A gold
price of $750 per ounce (SEC three year average as of March 20, 2009) was used
to estimate the reserves compared to a gold price of $550 per ounce used in the
prior estimate.  The stated proven and probable mineral reserves have
been prepared in accordance with the Canadian Institute of Mining, Metallurgy
and Petroleum (CIM) Definitions..  A technical report supporting this
estimate was finalized that complies with Canada’s National Instrument 43-101
Standards of Disclosure for Mineral Projects. These reserves are equivalent to
proven and probable reserves as defined by the United States Securities and
Exchange Commission (SEC) Industry Guide 7.


11





According
to the 2009 Report, our proven and probable reserves have increased to 43.1
million metric tonnes with a gold grade of 0.66 grams per tonne (47.6 million
U.S. short tons at 0.019 ounces per ton) net of depletion of 5,662,000 tonnes
(through the end of December 2008). The open pit stripping ratio is 1.24:1 (1.24
tonnes of waste to one tonne of ore).  The following Summary is
extracted from the 2009 Report.   Please note that the reserves
as stated are an estimate of what can be economically and legally recovered from
the mine and, as such, incorporate losses for dilution and mining
recovery.  The 913,400 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process.  Total gold
produced is estimated to be 586,000 ounces, or approximately 64.2% of the
contained gold.   Individual portions of the ore body may
experience varying recovery rates ranging from about 73% to
48%.  Oxidized and sandstone ore types may have recoveries of about
73%; fault zone ore type recoveries may be about 64%; siltstone ore types
recoveries may be about 48% and latite intrusive ore type recoveries may be
about 50%.


12





El Chanate
Mine





Production
Summary





Metric
                      
                      U.S.MaterialsReservesProven
                      
                      20.9
      Million Tonnes @   0.772   g/t(1)
                      
                      23.0
      Million Tons @   0.0225 opt(1)Probable
                      
                      14.9
      Million Tonnes  @  0.702   g/t(1)
                      
                      16.5
      Million Tons @   0.0205 opt(1)Low
      Grade Stockpile (Probable)
                      
                      7.3
      Million
      Tonnes  @  0.246   g/t(1)
                      
                      8.1
      Million Tons  @  0.0007 opt(1)Total
      Reserves(2)
                      
                      43.1
      Million Tonnes  @  0.659   g/t(1)
                      
                      47.6
      Million Tons @   0.0192 opt(1)Waste
                      
                      53.6 Million Tonnes
                      
                      58.9 Million
    TonsTotal
                      
                      96.7
      Million Tonnes
                      
                      106.5
      Million tonsContained
      Gold
                      
                      28.41
      Million grams
                      
                      913,400  OzProductionOre
      Crushed
                      
                      5.0
      Million Tonnes /Year
                      
                      5.51
      Million Tons/Year13,699
      Mt/d(1)
                      
                      15,100
      t/d(1)Operating
      Days/Year
                      
                      365
      Days per year
                      
                      365
      Days per yearGold
      Plant Average Recovery
                      
                      64.20
      %
                      
                      64.20%Average
      Annual Production
                      
                      2.21  Million
      grams
                      
                      71,079  OzTotal
      Gold Produced
                      
                      18.24
      Million grams
                      
                      586,403  Oz







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


(2)
            The
      reserve estimates are based on a gold cutoff grade of 0.20 grams per
      metric tonne.




The 2009
reserve modeling has been modified from previous methodology to closely
reconcile with the production results through December 2008.  The 2009
model uses indicator kriging to define mineralized zones followed by block grade
estimation utilizing inverse distance estimation.




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




·
            Blocks
      with 2 or more drill holes within a search radius of 80m x 70m x 15m and
      with a relative kriging standard deviation less than or equal to 0.45 were
      classified as Measured (corresponding to
  Proven);




·
            Blocks
      with 1 hole within the search radius of 80m x 70m x 15m and with a
      relative kriging standard deviation of 0.60 or less, blocks with 2 holes
      and a kriging standard deviation of 0.70 or less, blocks with 3 holes and
      a kriging standard deviation of 0.80 or less, blocks with 4 holes and a
      relative kriging standard deviation of 0.90 or less and all blocks with 5
      or more holes within the search radius were classified as Indicated
      (corresponding to Probable), unless they met the above criterion for
      Proven;




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




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


13





The mine
plan used as the basis for the reserve is based on operating gold cutoff grades
of 0.25 to 0.30 grams/tonne, depending on the operating year.  The
variation is due to balancing the mine and plant production capacities on a year
by year basis for the plan.  The internal (in-pit) and break even
cutoff grade calculations are as follows:





Cutoff
      Grade Calculation
                      
                      Internal
      Cutoff Grade
                      
                      Break
      Even Cutoff GradeBasic
      ParametersGold
      Price
                      
                      US$750/oz
                      
                      US$750/ozShipping
      and Refining
                      
                      US$
      1.00/oz
                      
                      US$
      1.00/ozGold
      Recovery*
                      
                      64.2%
                      
                      64.2%Royalty
                      
                      4%
      of NSR
                      
                      4%
      of NSROperating
      Costs per Tonne of Ore
                      
                      $
      per Tonne of Ore
                      
                      $
      per Tonne of OreMining
                      
                      1.156
                      
                      1.156Processing/G&A
                      
                      2.683
                      
                      2.683Total
                      
                      3.839
                      
                      3.839Cutoff
      Grade
                      
                      Grams
      per Tonne
                      
                      Grams
      per TonneHead
      Grade Cutoff (64.2% average recov.)
                      
                      0.19
      g/t Au
                      
                      0.27
      g/t AuRecovered
      Gold Grade Cutoff
                      
                      0.12
                      
                      0.17





* Plant
recovery of gold varies by rock type but is expected to average 64.2% based on
work done to date.





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





Proven and probable mineral reserve (Ktonnes of
      ore)
                    
                    July
      31,
                      2009
                    
                    
                    July
      31,
                      2008
                    
                    
                    July
      31,
                      2007Ore
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Beginning
      balance (Ktonnes)
                    
                    
                    35,417
                    
                    
                    
                    38,916
                    
                    
                    
                    19,868Additions
                    
                    
                    9,342
                    
                    
                    
                    -
                    
                    
                    
                    19,593Reductions
                    
                    
                    (3,848
                    )
                    
                    
                    (3,499
                    )
                    
                    
                    (545
                    )Ending
      Balance
                    
                    
                    40,911
                    
                    
                    
                    35,417
                    
                    
                    
                    38,916Contained
      goldBeginning
      balance (thousand of ounces)
                    
                    
                    719
                    
                    
                    
                    814
                    
                    
                    
                    490Additions
                    
                    
                    239
                    
                    
                    
                    -
                    
                    
                    
                    342Reductions
                    
                    
                    (99
                    )
                    
                    
                    (95
                    )
                    
                    
                    (18
                    )Ending
      Balance
                    
                    
                    859
                    
                    
                    
                    719
                    
                    
                    
                    814





During 2009 and subsequent to the
fiscal year ended July 31, 2009, we conducted exploration activities in the El
Chanate pit area including, core drilling at depth to determine the potential of
increasing its reserves further. The data obtained from geological mapping of
the deposit’s mine pit areas, combined with assays from samples of the
exploration drilling therein, were used to expand information in our mine
database. SRK Consulting, Inc. U.S. (SRK) of Lakewood, Colorado, an independent
consulting firm, used this data to re-estimate El Chanate’s Mineral Reserves.
The table below shows the updated Proven and Probable reserves at El Chanate as
of October 2009:


14





Mineral Reserve Class
                
                Ore (tonnes)
                
                
                Grade (g/t)
                
                
                Contained Gold (oz.)Proven
      Mineral Reserve
                
                
                22,401,000
                
                
                
                0.70
                
                
                
                503,000Probable
      Mineral Reserve
                
                
                48,155,000
                
                
                
                0.65
                
                
                
                1,001,000Proven
      and Probable Mineral Reserve
                
                
                70,557,000
                
                
                
                0.66
                
                
                
                1,504,000





The new
mineral reserves are based on an updated resource block model and an updated
mine plan and mine production schedule both developed by SRK. The updated pit
design for the revised plan is based on a plant recovery of gold that varies by
rock type, but has a weighted average recovery of 58.25%. A gold price of US$800
per ounce (SEC three year average as of September 2009) was used to estimate the
reserves. The stated proven and probable mineral reserves have been prepared in
accordance with the Canadian Institute of Mining, Metallurgy and Petroleum (CIM)
Definitions. A technical report supporting this estimate is being finalized that
complies with National Instrument 43-101 Standards of Disclosure for Mineral
Projects and will be filed on SEDAR shortly. These reserves are equivalent to
proven and probable reserves as defined by the United States Securities and
Exchange Commission (SEC) Industry Guide 7.





El
Chanate is anopen pit
heap leach mining and processing operation.  Ore is hauled by truck
from the pits to the processing plant.  The recovery of gold from
certain gold ores is achieved through the heap leaching process. Under this
method, ore is placed on leach pads where it is treated with a cyanide bearing
solution, which dissolves gold and silver contained within the ore. The
resulting “pregnant” solution is further processed in a plant where the gold is
recovered. The mining and other mobile equipment is refurbished as is the
smaller of the two ADR processing plants.  All other equipment and
infrastructure at the El Chanate mine are new.  Management
continuously analyzes production results and considers improvements and
modernizations as deemed necessary.





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





During
fiscal 2008 and 2009, we identified certain restrictions related to our ADR
plant capacity which limited the amount of solution that can be
processed.  We addressed these issues by increasing the installed
pumping capacity to increase solution flow to the leach pad.  We also
purchased and installed an additional set of carbon columns and a strip vessel
to process an additional two tonnes of carbon per strip. The installation and
commissioning of this newADR plant was completed at the end of October
2008.  In May 2009, we completed the procurement and installation of
an additional secondary crusher and tunnel conveyor that allowed us to increase
production from 7,500 tonnes per day to 13,000 tonnes per day of crushed
ore.  In August 2009, we initiated the construction of an additional
leach pad .  Permitting and site clearing has been completed and the
construction contractor has begun with the site preparation and other
earthworks. Golder Engineering of Tucson, Arizona will oversee construction
activities and quality control and quality assurance for the project. The
construction schedule anticipates that stacking ore on the new pad will commence
in January 2010.  The total cost cost of the completed leach pad will
be approximately $3,300.  In October 2009,  we committed to
the purchase of an additional tertiary crusher and screen module for the El
Chanate mine.  The total cost for the module is approximately $1,000
with one-third due upon execution of the sales order, one-third due in 30 days
and one-third upon shipment.  Once this equipment is installed and
functioning, we expect production to increase to approximately 70,000 ounces of
gold per annum.


15





We
commenced gold production at the El Chanate mine on July 31,
2007.  During the fiscal years ended July 31, 2009 and 2008, we sold
48,418 and 39,102 ounces of gold, respectively.  Management has been
and anticipates that it will continue to fund expansion costs with its cash flow
from operations.





Surface Property
Ownership





Anglo
Gold purchased surface property ownership, consisting of 466 hectares in Altar,
Sonora, on January 27, 1998.  The ownership was conveyed to our
subsidiary, Oro de Altar S.A. de C.V., in 2002.  MSR, one of our
wholly-owned Mexican subsidiaries, has a lease on the property for the purpose
of mining the Chanate gold deposit.  The purchase transaction was
recorded as public deed 19,591 granted by Mr. Jose Maria Morera Gonzalez, Notary
Public 102 of the Federal District, registered at the Public Registry of
Property of Caborca, Sonora, under number 36026, book one, volume 169 of the
real estate registry section on May 7, 1998.





We
purchased surface property ownership, consisting of 220 hectares in Altar,
Sonora, in March 2009, adjacent to the El Chanate mine in order to accommodate
future leach pad expansion requirements.  The purchase transaction was
recorded as public deed number 18,174, dated March 26, 2009, issued by Mr. José
Antonio Dávila Payán, Notary Public number 3 in Caborca, Sonora.





General Information and
Location





The El
Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
northeast of the town of Caborca and nine kilometers from a paved
road.  It is accessible by an all weather dirt
road.  Driving time from Caborca is approximately 30
minutes.  Access from Caborca to the village of 16 de
September  (“Ejido”) is over well maintained National highways. We
acquired rights for service road access from the Ejido, and constructed this
road.





The
project is situated on the Sonora desert in a hot and windy climate, generally
devoid of vegetation with the exception of cactus.  The terrain is
generally flat with immense, shallow basins, scattered rock outcropping and low
rocky hills and ridges.  The desert floor is covered by shallow, fine
sediment, gravel and caliche.  The delineated ore zone and current
mine plan covers an area of approximately 5,576 feet long by 2,558 feet
wide.  There is evidence of potential additional mineralization within
the El Chanate concessions that warrant further exporation.





In 2005,
we acquired 15 year rights of way to access the El Chanate Project from the
Ejido and local ranchers. We subsequently purchased an extension of our
rights-of-way from 15 to 30 years.  We acquired a water allocation and
water well that draws from a large regional aquifer.   The 2005
feasibility study indicated our average life of mine water requirements, at that
time, for ore processing only, will be about 94.6 million gallons per year (11.4
liters per second).  The amount of water we were permitted to pump
from the well was approximately 71.3 million gallons per year (8.6 liters per
second).  During the fiscal years ended July 31, 2008 and 2009, on two
occasions  we acquired additional water right permits that allow us to
pump up to 149.5 million gallons per year.  Based on current water
consumption, we have sufficient water to meet our current
requirements.


16





In December 2005, MSR entered into a
Mining Contract with Sinergia.  The Mining Contract, as amended,
became effective November 1, 2006 and work commenced on March 25, 2007 (the
“Commencement Date”).  Pursuant to an amendment to the Mining
Contract, the mining rates set forth in that contract are subject to adjustment
for the rate of inflation between September 23, 2005 and the Commencement
Date.  Pursuant to the Mining Contract, Sinergia, using its mining
fleet, is obligated to perform all of the mining, blasting and mine maintenance
work at the El Chanate Project for the life of the mine at a predetermined
mining rate and fleet size.  Sinergia’s mining rates are subject to
escalation on an annual basis.  This escalation is tied to the
percentage escalation in Sinergia’s costs for equipment parts, interest rates
and labor.  One of the principals of Sinergia (“FG’s Successor”) is
one of the former principals of Grupo Minero FG S.A. de C.V.
(“FG”).  FG was our former joint venture partner.





Historical
workings suggest that the area has been mined for gold since the early 19th
century.  A number of old underground workings exist characterized by
narrow shafts, to a depth of several tens of feet and connecting drifts and
cross cuts.  The current open pit mine has been developed below the
existence of historical small scale mining.





Geology





The project area is underlain by
sedimentary rocks of the Late Jurassic – Early Cretaceous Bisbee Group, and the
Late Cretaceous Chanate Group, which locally are overlain by andesites of the
Cretaceous El Charro volcanic complex.  The sedimentary strata are
locally intruded by andesitic sills and dikes, a microporphyritic latite and by
a diorite stock.  The sedimentary strata are comprised of mudstone,
siltstone, sandstone, conglomerate, shale and limestone.  Within the
drilled resource area, a predecessor exploration company differentiated two
units on the basis of their position relative to the Chanate
fault.  The upper member is an undifferentiated sequence of sandstone,
conglomerate and lesser mudstone that lies above the Chanate fault and it is
assigned to the Escalante Formation of the Middle Cretaceous Chanate
Group.  The lower member is comprised of mudstone with mixed in
sandstone lenses and thin limestone interbeds; it lies below the Chanate fault
and is assigned to the Arroyo Sasabe Formation of the Lower Cretaceous Bisbee
Group.  The Arroyo Sasabe formation overlies the Morita Formation of
the Bisbee Group.  Both the Escalante and Arroyo Sasabe formations are
significantly mineralized proximal to the Chanate fault, while the Morita
Formation is barren.





The main
structural feature of the project area is the Chanate fault, a 7 km long
(minimum) northwest-striking, variably southwest-dipping structure that has been
interpreted to be a thrust fault.  The Chanate fault is overturned
(north-dipping) at surface, and is marked by brittle deformation and shearing
which has created a pronounced fracture foliation and fissility in the host
rocks.  In drill holes the fault is often marked the presence of an
andesite dike.  Reports prepared by a predecessor exploration company
describe the fault as consisting of a series of thrust ramps and flats; however,
geologic cross sections which we have reviewed but did not prepare may negate
this interpretation.





Alteration/Mineralization





A
predecessor exploration company defined a 600 meter long, 300 meter wide, 120
meter thick zone of alteration that is centered about the Chanate
fault.  The strata within this zone are silicified and pyritized to
varying degrees.  In surface outcrop the mineralized zone is
distinguished by its bleached appearance relative to unmineralized
rock.  The mineralized zone contains only single digit ppm (parts per
million) levels of gold.  Dense swarms of veinlets form thick,
mineralized lenses, within a larger area of sub-economic but anomalous gold
concentrations.  Drill hole data indicates the mineralized lenses are
sub-horizontal to gently southwest-dipping and are generally parallel to the
Chanate fault.  The fault zone itself is generally weakly mineralized,
while strata in the adjacent hanging and footwalls are well
mineralized.


17





Our Acquisition and
Ownership of the El Chanate Project





In June
2001, we purchased 100% of the issued and outstanding stock of Minera Chanate,
S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt Canyon)
Corp.  Minera Chanate’s assets at the time of the closing of the
purchase consisted of 106 exploitation and exploration concessions in the States
of Sonora, Chihuahua and Guerrero, Mexico. By June 2002, after property reviews
and to minimize tax payments, the 106 concessions had been reduced to 12
concessions.  To cover certain non-critical gaps between concessions,
four new concessions were acquired, and the number of concessions is now
16.  These concessions are contiguous, totaling approximately 3,543
hectares (8,756 acres or 13.7 square miles).   Although there are
16 concessions, we are only mining two of these concessions at the present
time.  We also own outright 466 hectares (1,151 acres or 1.8 square
miles) of surface rights at El Chanate and no third party ownership or leases
exist on this fee land or the El Chanate concessions.  In the future,
assuming adequate funding is available, we plan on conducting exploration
activities on some of the other concessions.





Pursuant
to the terms of the agreement with AngloGold, in December 2001, we made a $50
payment to AngloGold.  AngloGold will be entitled to receive the
remainder of the purchase price by way of an ongoing percentage of net smelter
returns of between 2% and 4% plus a 10% net profits interest (until the total
net profits interest payment received by AngloGold equals
$1,000).  AngloGold's right to a payment of a percentage of net
smelter returns and the net profits interest will terminate when they aggregate
$18,018.  In accordance with the agreement, the foregoing payments are
not to be construed as royalty payments. Should the Mexican government or other
jurisdiction determine that such payments are royalties, we could be subjected
to and would be responsible for any withholding taxes assessed on such
payments.   During thefirst
part of calendar 2008, Royal Gold, Inc. acquired from Anglo Gold the right to
receive both the net smelter returns of between 2% and 4% plus and the 10% net
profits interest which terminates at such point as they aggregate
$18,018.  As of July 31, 2009, we have incurred approximately
$3,082  with regard to the net smelter return.  In addition,
in March 2009, we paid  the total $1,000 net profit interest to Royal
Gold.  As of July 31, 2009, we have approximately $13,936 remaining to
be incurred on the net smelter return.





Under the
terms of the agreement, we had granted AngloGold the right to designate one of
its wholly-owned Mexican subsidiaries to receive a one-time option to purchase
51% of Minera Chanate (or such entity that owns the El Chanate concessions at
the time of option exercise).  That option was exercisable over a 180
day period commencing at such time as we notified AngloGold that we had made a
good faith determination that we had gold-bearing ore deposits on any one of the
identified groups of El Chanate concessions, when aggregated with any ore that
we have mined, produced and sold from such concessions, in excess of 2,000,000
troy ounces of contained gold.  The exercise price would equal twice
our project costs on the properties during the period commencing on December 15,
2000 and ending on the date of such notice.  In January 2008, we made
a good faith determination and notified AngloGold that the drill indicated
resources at the El Chanate gold mine exceeded two million ounces of contained
gold. The term "drill indicated resources" is defined in the
agreement.  A drill indicated resource number does not rise to the
level of, and should not be considered proven and probable reserves as those
terms are defined under guidelines of the Securities Exchange Commission
(“SEC”).   On July 1, 2008, AngloGold notified us that it would
not be exercising its option.


18





El
Oso Project - Saric Properties – Sonora, Mexico





In April
2008, we leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,304 additional
hectares adjacent to this property. The approximate 4,000 hectare area is
accessible by paved roads and has cellular phone service from
hilltops.  These concessions and this claim are about 60 miles
northeast of the El Chanate project. Mineralization is evident throughout the
concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. We have completed exploration work consisting of
geological mapping, systematic geochemical sampling of rock and soils,
geophysical surveys, trenching and 32 reverse circulation drill holes totaling
2,560 meters.  The results of this work has justified an expanded
drill campaign which is currently underway and consists of 23 reverse
circulation drill holes totaling 2,100 meters.  All of these holes
will be focused on the northern part of the concession group near the
Sombreretillo Ranch.  These holes will vary in depth from 100 to 150
meters.  SRK of Lakewood, Colorado has made a site visit and will
monitor the quality assurance and quality control during the drilling
campaign.  All of the drill hole samples have been and will be assayed
by ALS Chemex.  The ALS Chemex facility in Hermosillo does the sample
preparation, and the assays are performed at the ALS Chemex’s Vancouver
laboratory.  ALS Chemex laboratories provide the highest level of
quality and have ISO 9001:2000 certification at all locations.





The lease agreement, which allows us to
explore the property,  required an initial payment of $45 upon
execution of the lease.  In addition, we are required to make ten
payments of $25 every four months initiating six months after execution of the
lease agreement. The agreement also contains an option  to acquire the
mining concessions for a cash payment of $1,500 at the end of the term (December
2010).  If we elect not to exercise this option, we would have the
ability to mine the concessions by paying a 1% net smelter return to the owners
of the leased concessions capped at $3,000.  Prior payments made under
this lease agreement would be deductible from the $3,000 cap.





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





Other
Properties





We
currently lease our headquarters located in New York, New York consisting of a
suite of offices of approximately 3,800 square feet.  We also lease a
administrative office in Caborca, Sonora, Mexico located near our El Chanate
mine.





Item
3.  Legal
Proceedings





We, as
well as our subsidiaries, are not presently a party to any material legal
proceedings.





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





No matter
was submitted to a vote of our stockholders during the fourth quarter of the
fiscal year ended July 31, 2009 through the solicitation of proxies or
otherwise.


19


PART II





Item 5.
            Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities.





(a) Marketing Information — The
principal U.S. market in which our common shares (all of which are of one class,
$.0001 par value common stock) are traded or will trade is in the
over-the-counter market (Bulletin Board Symbol: "CGLD").  Our stock is
not traded or quoted on any Automated Quotation System.





The following table sets forth the
range of high and low closing bid quotes of our common stock per quarter for the
past two fiscal years as reported by the OTC Bulletin Board  (which
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessary represent actual transactions).





MARKET
PRICE OF COMMON STOCK





Quarter Ending
                    
                    High and LowJuly
      31, 2009
                    
                    
                    0.72
                    
                    
                    
                    0.53April
      30, 2009
                    
                    
                    0.71
                    
                    
                    
                    0.52January
      31, 2009
                    
                    
                    0.63
                    
                    
                    
                    0.30October
      31, 2008
                    
                    
                    0.65
                    
                    
                    
                    0.27July
      31, 2008
                    
                    
                    0.70
                    
                    
                    
                    0.60April
      30, 2008
                    
                    
                    0.78
                    
                    
                    
                    0.62January
      31, 2008
                    
                    
                    0.81
                    
                    
                    
                    0.60October
      31, 2007
                    
                    
                    0.63
                    
                    
                    
                    0.38





Our common stock also trades on the
Toronto Stock Exchange under the symbol "CGC."  The high and low
closing prices for our common stock for the periods indicated below are as
follows:





Quarter Ending
                    
                    High and LowUS$/CDN$
                    
                    
                    US$/CDN$Quarter
      ended July 31, 2009
                    
                    
                    0.71/0.79
                    
                    
                    
                    0.53/0.62Quarter
      ended April 30, 2009
                    
                    
                    0.71/0.90
                    
                    
                    
                    0.52/0.63Quarter
      ended January 31, 2009
                    
                    
                    0.62/0.76
                    
                    
                    
                    0.29/0.35Quarter
      ended October 31, 2008
                    
                    
                    0.65/0.68
                    
                    
                    
                    0.25/0.32Quarter
      ended July 31, 2008
                    
                    
                    0.70/0.71
                    
                    
                    
                    0.61/0.60Quarter
      ended April 30, 2008
                    
                    
                    0.83/0.83
                    
                    
                    
                    0.62/0.62Quarter
      ended January 31, 2008
                    
                    
                    077/0.76
                    
                    
                    
                    0.58/0.57Quarter
      ended October 31, 2007
                    
                    
                    0.60/0.61
                    
                    
                    
                    0.39/0.40





(b)  Holders — The
approximate number of record holders of our Common Stock, as of October 7, 2009
amounts to 2,336, inclusive of those brokerage firms and/or clearing houses
holding our common shares for their clientele (with each such brokerage house
and/or clearing house being considered as one holder).The aggregate number of
shares of Common Stock outstanding is 193,850,593 as of October 7, 2009.





(c)  Dividends
– We have not paid or declared any cash dividends upon our Common Stock since
inception and, by reason of our present financial status and our contemplated
financial requirements, do not contemplate or anticipate paying any cash
dividends upon our Common Stock in the foreseeable future.


20





We did
not repurchase any of our securities during the fiscal year ended July 31,
2009.





The
following table gives information about our Common Stock that may be issued upon
the exercise of options, warrants and rights under all of our equity
compensation plans as of July 31, 2009.





Number of Securities to
                      be issued upon exercise
                      of outstanding options,
                      warrants and rights*
                    
                    Weighted-average
                      Exercise price of
                      Outstanding options,
                      warrants and rights
                    
                    
                    Number of securities
                      Remaining available for
                      future issuance under
                      equity compensation plans
                      (excluding securities
                      reflected in column (a))Plan Category(a)
                    
                    (b)
                    
                    
                    (c)Equity
      compensation plans approved by security holders:
                    
                    
                    6,015,000
                    
                    
                    $
                    0.56
                    
                    
                    
                    602,500Equity
      compensation plans not approved by security holders:
                    
                    
                    600,000
                    
                    
                    $
                    0.85
                    
                    
                    
                    N/ATotal
                    
                    
                    6,615,000
                    
                    
                    $
                    0.59
                    
                    
                    
                    602,500





*Does not
include the issuance of 2,332,500 shares of restricted stock during the fiscal
year ended July 31, 2009





Performance
Graph





Total
Return To Shareholders


(Includes
reinvestment of dividends)





QUARTERLY
      RETURN PERCENTAGEQuarter
      EndingCompany
      / Index
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              10/31/07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4/30/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              7/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              10/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1/31/09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4/30/09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              7/31/09Capital
      Gold Corporation
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              36.07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              10.48
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -6.61
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -0.77
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -55.04
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              115.52
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -13.60
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              12.04S&P
      SmallCap 600 Index
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              5.12
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -12.65
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1.20
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -1.48
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -22.43
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -18.20
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              11.89
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              13.71New
      Peer Group
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              5.64
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -18.49
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1.12
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              14.03
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -63.09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              62.24
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              5.86
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              22.80Old
      Peer Group
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              9.32
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -20.42
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -4.41
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              17.42
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -56.28
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              88.11
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              -0.63
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              19.89INDEXED
      RETURNSBase
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              Quarter
      EndingPeriodCompany
      / Index
                                                                                                                                              
                                                                                                                                              8/1/07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              10/31/07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4/30/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              7/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              10/31/08
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              1/31/09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              4/30/09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              7/31/09Capital
      Gold Corporation
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              100
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              136.07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              150.32
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              140.39
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              139.31
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              62.63
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              134.99
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              116.63
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              130.67S&P
      SmallCap 600 Index
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              100
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              105.12
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              91.82
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              92.92
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              91.55
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              71.01
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              58.09
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              65.00
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              73.91New
      Peer Group
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              100
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              105.64
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              86.10
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              87.07
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              99.28
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              36.64
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              59.45
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              62.93
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              77.28Old
      Peer Group
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              100
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              109.32
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              87.00
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              83.16
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              97.64
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              42.69
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              80.30
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              79.79
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              
                                                                                                                                              95.67


21





New
      Peer Group
                                          
                                          Old
      Peer GroupALAMOS
      GOLD INC
                                          
                                          ALAMOS
      GOLD INCGAMMON
      GOLD INC
                                          
                                          GAMMON
      GOLD INCMINEFINDERS
      CORP LTD
                                          
                                          WESTERN
      GOLDFIELDS INCNEW
      GOLD INC








22


ITEM
6. Selected Financial
Data.





The selected consolidated financial
data set forth below should be read in conjunction with our consolidated
financial statements, and the related notes thereto, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
included in this Annual Report.  The statement of operations and
balance sheet data presented below for, and as of the end of, each of the years
in the five year period ended July 31, 2009 are derived from our audited
consolidated financial statements.  Historical results are not
necessarily indicative of the results to be expected in the
future.  The Selected Financial Data is in thousands except for share
and per share data.





Fiscal Year Ended July 312009
                                    
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005Statement of Operations
    data:Revenues
                                    
                                    $
                                    42,757
                                    
                                    
                                    $
                                    33,104
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Net Income (loss)
                                    
                                    $
                                    10,407
                                    
                                    
                                    $
                                    6,364
                                    
                                    
                                    $
                                    (7,472
                                    )
                                    
                                    $
                                    (4,805
                                    )
                                    
                                    $
                                    (2,006
                                    )Income (loss) per share –
    Basic
                                    
                                    $
                                    0.05
                                    
                                    
                                    $
                                    0.04
                                    
                                    
                                    $
                                    (0.05
                                    )
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.03
                                    )Balance Sheet data:Total Assets
                                    
                                    $
                                    54,601
                                    
                                    
                                    $
                                    48,879
                                    
                                    
                                    $
                                    27,551
                                    
                                    
                                    $
                                    9,546
                                    
                                    
                                    $
                                    5,552Long-term Debt
                                    
                                    $
                                    4,400
                                    
                                    
                                    $
                                    8,375
                                    
                                    
                                    $
                                    12,500
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -Reclamation and Remediation
      Liability
                                    
                                    $
                                    1,594
                                    
                                    
                                    $
                                    1,666
                                    
                                    
                                    $
                                    1,249
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -





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





The following discussion relates to
the three fiscal years ended July 31, 2009, 2008 and 2007.  As
disclosed in greater detail elsewhere in this report, we commenced mining
operations and began to receive operating revenues in August 2007, shortly after
the end of the fiscal year ended July 31, 2007. (the financial data in this
discussion is in thousands, except where otherwise specifically
noted).





We
utilize certain non-GAAP performance measures and ratios in managing the
business.  We believe these measures may provide users with additional
meaningful comparisons between current results and results in prior operating
periods. Non-GAAP financial measures should be viewed in addition to, and not as
an alternative to, the reported operating results or cash flow from operations
or any other measure of performance prepared in accordance with accounting
principles generally accepted in the United States. In addition, the
presentation of these measures may not be comparable to similarly titled
measures other companies use  "Cash costs per ounce sold" is a
non-GAAP measure which includes all direct mining costs, refining and
transportation costs and by-product credits as well as royalties as reported in
the Company's financial statements.  “Total cost per ounce sold” is a
non-GAAP measure which includes “cash costs per ounce sold” as well as
depreciation and amortization as reported in the Company's financial
statements.





Overview





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




23





Our financial position was
as follows:





For the year
                                
                                
                                For the yearended
                                
                                
                                endedJuly 31,
                                  2009
                                
                                
                                July 31,
                                  2008Total debt
                                
                                $
                                8,000
                                
                                
                                $
                                12,500Total stockholders’ equity
                                
                                $
                                37,882
                                
                                
                                $
                                28,197Cash and cash equivalents
                                
                                $
                                6,448
                                
                                
                                $
                                10,992Working capital
                                
                                $
                                20,646
                                
                                
                                $
                                15,825




During
our fiscal year ended July 31, 2009 our debt and liquidity positions were
affected by the following:




·
            Net
      cash provided from operations of
$7,536;




·
            Capital
      expenditures of $5,174;




·
            Repayments
      on Credit Facility of $4,500;




·
            Proceeds
      from the issuance of common stock upon the exercising of warrants of
      $319;




Looking
Forward




Certain
key factors will affect our future financial and operating results. These
include, but are not limited to, the following (the financial data in this
discussion is in thousands except for ounces and cash cost data):




·
            Fluctuations
      in gold prices;




·
            We
      expect fiscal 2010 gold sales of approximately 60,000 ounces and
      90,000 ounces of silver;




·
            Cash
      costs per ounce sold for fiscal 2010 are expected to be approximately $330
      per ounce;




·
            We
      anticipate capital expenditures of approximately $5,000 in fiscal 2010
      with approximately $3,300 being allocated to leach pad expansion and
      approximately $1,000 for the addition of a new tertiary crusher and
      screening module;




·
            Repayments
      on Credit Facility of $3,600 during fiscal
2010.




·
            Our
      fiscal year 2010 expectations, particularly with respect to sales volumes
      and cash costs per ounce sold, may differ significantly from actual
      quarter and full fiscal year results due to variations in: ore grades and
      hardness, metal recoveries, waste removed, commodity input prices, foreign
      currencies and gold sale prices.




Result
of Operations





Fiscal year ended July 31,
2009 compared to fiscal year ended July 31, 2008





Net income for the years ended July 31,
2009 and 2008 was approximately $10,407 and $6,364, respectively, representing
an increase of approximately 64% over the prior period.  Net income
before income taxes was $15,949 and $9,871 for the years ended July 31, 2009 and
2008, respectively, which represented an increase of 62%.  Net income
and net income before taxes increased primarily as a result of higher revenues
from more ounces of gold being sold during the year ended July 31, 2009, as
compared to the same period a year ago. Income tax expense increased in
conjunction with the increase in net income before tax, which was
anticipated.


24





Revenues & Costs
Applicable to Sales





Gold
sales for the fiscal year ended July 31, 2009 totaled approximately $42,757 as
compared to $33,104 in the prior period representing an increase of
approximately $9,653 or 29%.  We sold 48,418 ounces at an average
realizable price per ounce of approximately $883 in the current
period.  We sold 39,102 ounces at an average realizable price per
ounce of $847 during the same period last year.





Costs
applicable to sales were approximately $13,883 and $10,690, respectively, for
the year ended July 31, 2009 and 2008, an increase of approximately $3,193 or
30%, which increased in conjunction with our increase in
revenues.  Cash costs of $271 per ounce of gold sold for the year
ended July 31, 2009 was 2% lower than the $276 for the year ended July 31,
2008.   The primary reason for this decrease in cash costs in the
current year can be attributed to the 10% net profit interest paid to Royal Gold
which was primarily incurred in the prior fiscal year.  This was
offset by a higher waste-to-ore strip ratio of 1.12 to 1 experienced during the
fiscal year ended July 31, 2009 as compared to the prior fiscal year of 0.75 to
1.  Our increased production profile in the current fiscal year
advanced the removal of more waste tonnes than in the prior
year.   Total costs of $314 per ounce of gold sold for the year
ended July 31, 2009, was 6% lower than the $335 total cost in the prior
period.  The primary reason for this decrease in total costs was
attributed to higher amortization charges recorded in the prior period related
to the repurchase of the 5% net profit interest acquired from FG in 2006 for
$500.





Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $1,076 and $707 for
the year ended July 31, 2009 and 2008, on silver ounces sold of 86,523 and
40,461, respectively.





Depreciation and
Amortization





Depreciation and amortization expense
during the year ended July 31, 2009 and 2008 was approximately $3,019 and
$3,438, respectively.  The primary reason for the decrease of
approximately $419, or 12%, was due to amortization charges recorded in the
prior period related to the repurchase of the 5% net profit interest acquired
from FG in 2006 for $500.  The $500 was fully amortized during the
quarterly period ended April 30, 2008.  This was slightly offset by an
increase in Units-of-Production depreciation and amortization mainly
attributable to additional ounces being produced in the current period versus
the same period in the prior year.  Depreciation and amortization also
includes deferred financing costs resulting from the credit arrangements entered
into with Standard Bank.  This accounted for approximately $934 and
$1,088 of depreciation and amortization expense during the year ended July 31,
2009 and 2008, respectively, and also slightly contributed to the decrease in
depreciation and amortization noted above.





General and Administration
Expense





General
and administrative expenses during the year ended July 31, 2009 were
approximately $5,464, a decrease of approximately $122, or 2%, from the year
ended July 31, 2008. The decrease in general and administrative expenses
resulted primarily from: 1) lower salaries and wages primarily due to a decrease
in cash bonuses of approximately $345 during the current fiscal year compared to
the prior year, 2)  lower equity based compensation of approximately
$93 as compared to the prior year, 3) lower investor relations and travel
expenses of approximately $87.  Offsetting these decreases were higher
legal and financial advisor fees incurred as a result of merger and acquisition
activity during the current year  as well as higher
audit  fees associated with the  attestation report issued
on the effectiveness of our internal controls during the current
period.


25





Exploration
Expense





Exploration
expense during the year ended July 31, 2009 and 2008 was approximately $1,600
and $938, respectively, or an increase of $662, or 71%.  The primary
reason for the increase can be attributed to increased activity during the
current period associated with on-going exploration, drilling and geochemical
work being conducted on our leased and owned concessions located northwest of
Saric, Sonora.  Exploration expense for the current period also
included costs incurred from a 10 hole, deep core drilling campaign at our El
Chanate mine totaling 2,500 meters.  Exploration expense in the prior
period included a drilling campaign initiated in December 2007 at El Chanate
which consisted of 26 reverse circulation holes amounting to 4,912
meters.  These drill holes were mainly positioned to test the outer
limits of the currently known ore zones within the pit.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the year ended July
31, 2009 and 2008, was approximately $1,975 and $1,356, respectively, and was
reflected as Other
Expense.The
primary reason for the increase can be attributed to the settlement, on February
24, 2009, with Standard Bank, Plc., the remaining 58,233 ounces of gold under
the original Gold Price Protection arrangements entered into in March 2006. The
purpose of these arrangements at the time was to protect us in the event the
gold price dropped below $500 per ounce. Total remuneration to unwind these
arrangements was approximately $1,906. In conjunction with the settlement of the
gold price protection agreements, we incurred an Other Expense of
approximately $1,391 during the current period.  These contracts were
not designated as hedging derivatives; and therefore, special hedge accounting
does not apply.





Interest expense was approximately
$597 for the year ended July 31, 2009 compared to approximately $1,207 for the
same period a year earlier.  This decrease was mainly due to lower
interest charges incurred during the current period related to our credit
arrangements with Standard Bank.  As of July 31, 2009, there was
$8,000 outstanding on our term note.





Income Tax
Expense




Income
tax expense was $5,542 during the fiscal year ended July 31, 2009, compared to
$3,507 in 2008 with an effective tax rate of 35% and 35%,
respectively.  The factors that most significantly impact our
effective tax rate are valuation allowances related to deferred tax assets
offset partially by lower statutory tax rates in Mexico. Current year income tax
expense and deferred income tax expense amounted to $3,909 and $1,633 as of July
31, 2009, respectively.  Prior year income tax expense and deferred
income tax expense amounted to $2,111 and $1,396 as of July 31, 2008,
respectively.




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


26




Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that we will not be liable for any excess
flat tax for calendar year 2009 and, accordingly, have recorded a Mexican income
tax provision as of July 31, 2009.





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




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




During
the fiscal years ended July 31, 2009 and 2008, we completed a reconciliation of
our U.S. book and tax basis assets and liabilities as well as a detailed
analysis of our income taxes payable.




Based on
the uncertainty and inherent unpredictability of the factors influencing our
effective tax rate and the sensitivity of such factors to gold and other metals
prices as discussed above, the effective tax rate is expected to be volatile in
future periods.




For more
information concerning income taxes, please see Note 21 within the consolidated
financial statements contained herein.




Changes in Foreign Exchange
Rates





During the years ended July 31, 2009
and 2008, we recorded equity adjustments from foreign currency translations of
approximately $2,731 and $622, respectively.  These translation
adjustments are related to changes in the rates of exchange between the Mexican
Peso and the U.S. dollar and are included as a component of other comprehensive
income.  The Mexican Peso and the U.S. dollar exchange rate as of July
31, 2009 was 12.9933.  As of July 31, 2008, such exchange rate was
10.0483.





Summary of Annual
Results


(000’s except per share Data
and ounces sold)





For
      the year
                
                
                For
      the year
                
                
                For
      the yearended
                
                
                ended
                
                
                EndedJuly
      31,
                  2009
                
                
                July
      31,
                  2008
                
                
                July
      31,
                  2007Revenues
                
                
                42,757
                
                
                
                33,104
                
                
                
                -Net
      Income (loss)
                
                
                10,407
                
                
                
                6,364
                
                
                
                (7,472
                )Basic
      net income (loss) per share
                
                
                0.05
                
                
                
                0.04
                
                
                
                (0.05
                )Diluted
      net income (loss) per share
                
                
                0.05
                
                
                
                0.03
                
                
                
                -Gold
      ounces sold
                
                
                48,418
                
                
                
                39,102
                
                
                
                -Average
      price received
                
                $
                883
                
                
                $
                847
                
                
                
                -Cash
      cost per ounce sold
                
                $
                271
                
                
                $
                276
                
                
                
                -Total
      cost per ounce sold
                
                $
                314
                
                
                $
                335
                
                
                
                -




27




Summary of Results of
Operations




For
      the year
                    ended
                    July
      31,
                    2009
                  
                  
                  For
      the year
                    ended
                    July
      31,
                    2008
                  
                  
                  For
      the year
                    ended
                    July
      31,
                    2007(1)Tonnes
      of ore mined
                  
                  
                  3,847,883
                  
                  
                  
                  3,498,612
                  
                  
                  
                  545,089Tonnes
      of waste removed
                  
                  
                  4,319,949
                  
                  
                  
                  2,627,318
                  
                  
                  
                  209,567Ratio
      of waste to ore
                  
                  
                  1.12
                  
                  
                  
                  0.75
                  
                  
                  
                  0.38Tonnes
      of ore processed
                  
                  
                  3,999,346
                  
                  
                  
                  3,529,699
                  
                  
                  
                  631,530Grade
      (grams/tonne)
                  
                  
                  0.78
                  
                  
                  
                  0.85
                  
                  
                  
                  0.88Gold
      (ounces)-Produced(2)
                  
                  
                  49,921
                  
                  
                  
                  39,242
                  
                  
                  
                  578-Sold
                  
                  
                  48,418
                  
                  
                  
                  39,102
                  
                  
                  
                  -


(1) Commercial
production at El Chanate commenced on July 31, 2007 and the operation was still
in its ramp up phase and production results are not
comparable.


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




Fiscal year ended July 31,
2008 compared to fiscal year ended July 31, 2007





Net income for the year ended July 31,
2008 was approximately $6,364 compared to a net loss of approximately $7,472 for
the year ended July 31, 2007. Theprincipal reason for this increase was
our transition to an operating  company during the year ended July 31,
2008.  Our first gold sale occurred in August 2007.  Net
income per common share was $0.04 for the year ended July 31, 2008, on a basic
basis and $0.03 on a diluted basis.  The net loss per share for the
same period in 2007 was $0.05 on a basic basis. Basic and diluted net loss per
share is computed using the weighted average number of shares of common stock
outstanding during the period. Equivalent common shares, consisting of stock
options and warrants, were excluded from the calculation of diluted net loss per
share for the fiscal year ended July 31, 2007 since their effect was
anti-dilutive.





Revenues & Costs
Applicable to Sales





Gold revenue for the year ended July
31, 2008 totaled approximately $33,104.  We sold 39,102 ounces at
an average realizable price per ounce of approximately $847.  Costs
applicable to sales were approximately
$10,690 for the current period.  There were no metal sales for the
same period in the prior year as we had not yet realized revenue from our
operations.  Our cash cost and total cost per ounce sold, excluding
Royal Gold’s 10% net profit interest, formally owned by AngloGold, was $257 and
$316, respectively, for the year ended July 31, 2008.  If we factor in
this net profit interest cost for the same period, our cash cost and total cost
per ounce sold would be $276 and $335, respectively.  These costs were
slightly higher than previous quarter results primarily due to the accrual of
this net profit interest which is capped at $1,000.  As of July 31,
2008, we had approximately $753 accrued towards this net profits
interest.  We anticipate accruing the remaining portion of the net
profit interest within this calendar year.


28





Revenues from by-product sales (silver)
are credited to Costs
applicable to sales as a by-product credit.  Silver sales
totaled 40,461 ounces at an average price of $17.48 amounting to approximately
$707 for the
year ended July 31, 2008.





Depreciation and
Amortization





Depreciation and amortization expense
during the year ended July 31, 2008 and 2007 was approximately $3,438 and $891,
respectively.  The increase of approximately $2,547 was primarily due
to a full year of depreciation and amortization charges related to the El
Chanate capital costs being incurred during the year ended July 31,
2008.  The charges during the same period in the prior year were
significantly lower as most of these assets were placed in service in April
2007.  Depreciation and amortization also represents deferred
financing costs resulting from the Credit Facility we entered into with Standard
Bank.  This accounted for approximately $1,088 and $876 of the
amortization expense during the years ended July 31, 2008 and 2007,
respectively.





General and Administration
Expense





General
and administrative expenses during the year ended July 31, 2008 were
approximately $5,586, an increase of approximately $2,693 or 93% from the year
ended July 31, 2007.  The increase in general and administrative
expenses resulted primarily from: 1) higher salaries and wages for officers and
employees including the hiring of a controller and the awarding of cash bonuses
of approximately $1,708,  2) the granting of stock options and
restricted stock to our officers and employees under our 2006 Equity Incentive
Plan amounting to approximately $467,  3) higher investor relations
fees and travel fees of approximately $221,  4) higher accounting and
consulting fees of approximately $419 versus the same period a year earlier,
primarily due to the awarding of a cash bonus to one of our officers as well as
higher consulting fees related to compliance with internal control over
financial reporting, and 5) an increase in insurance costs of approximately $116
versus the same period a year earlier as we were not yet in full production in
the prior period.  The above mentioned increases in compensation, cash
bonus awards as well as the stock option and restricted stock awards were
granted based upon recommendations from an independent report on executive
compensation.  This independent report, requested by our Compensation
Committee, was obtained in order to assist us in attracting and retaining
individuals of experience and ability, to provide incentive to our employees and
directors, to encourage employee and director proprietary interests in our
company, and to encourage employees to remain in our employ.





Exploration
Expense





Exploration
expense during the years ended July 31, 2008 and 2007 was approximately $938 and
$1,816, respectively, or a decrease of $878 or 48%.  The primary
reason for the decrease in exploration expense was the result of higher
engineering and planning costs related to our El Chanate Project being expensed
in the prior period as well as the costs incurred from our 72-hole reverse
circulation drilling campaign targeted to identify additional reserves at the El
Chanate Project which was completed in May 2007.  Exploration expense
for the year ended July 31, 2008 includes: 1) costs from our completed 26 hole
reverse circulation drilling program in December 2007 consisting of 4,912 meters
at the El Chanate mine.  The drill holes were targeted to test the
outer limits of the existing ore zones, and 2) costs associated with our leased
12 mining concessions totaling 1,790 hectares located northwest of Saric,
Sonora. We initiated a drill program as well as geochemical work related to
these claims during fiscal 2008.  Also, a claim was filed for
approximately 2,200 additional hectares adjacent to this property. These
concessions and this claim are approximately sixty miles northeast of the El
Chanate project and can be accessed by a paved road.  Surface
mineralization is evident throughout the property and is hosted by shear
zones and veins in a granite intrusive; follow up exploration is
underway.


29





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the year ended July
31, 2008 and 2007, was approximately $1,356 and $1,226, respectively, and was
reflected as an other expense.This was primarily due
to the change in fair value of our two identically structured derivative
contracts with Standard Bank which correlates to fluctuations in the gold
price.  These contracts were not designated as hedging derivatives;
and therefore, special hedge accounting does not apply.





Interest
expense was approximately $1,207 for the year ended July 31, 2008 compared to
approximately $792 for the same period a year earlier.  This increase
was mainly due to higher interest charges incurred during fiscal 2008 related to
our outstanding credit facility with Standard Bank.  As of July 31,
2008 and 2007, there was $12,500 outstanding on this credit
facility.





Income Tax
Expense




Income
tax expense was $3,507 during the fiscal year ended July 31, 2008, compared to
$0 in 2007 with an effective tax rate of 35% and 0%,
respectively.  The factors that most significantly impact our
effective tax rate are valuation allowances related to deferred tax assets
offset partially by lower statutory tax rates in Mexico. Current income tax
expense and deferred income tax expense amounted to $2,111 and $1,396 as of July
31, 2008, respectively.




Mining
operations are conducted in Mexico. Mexico has tax laws, tax incentives and tax
rates that are significantly different than those of the United
States.  On October 1, 2007, the Mexican government enacted
legislation which introduced certain tax reforms as well as a new minimum flat
tax system.  This new flat tax system integrates with the regular income
tax system and is based on cash-basis net income that includes only certain
receipts and expenditures.  The flat tax is set at 17.5% of cash-basis net
income as determined, with transitional rates of 16.5% and 17.0% in 2008 and
2009, respectively.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.  Companies are required to
prepay income taxes on a monthly basis based on the greater of the flat tax or
regular income tax as calculated for each monthly period.  Annualized
income projections indicated that we were not be liable for any excess flat tax
for calendar year 2008 and, accordingly, recorded a Mexican income tax provision
as of July 31, 2008.




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




During
the fiscal year ended 2008, we completed a reconciliation of our U.S. book and
tax basis assets and liabilities as well as a detailed analysis of our income
taxes payable.




Based on
the uncertainty and inherent unpredictability of the factors influencing our
effective tax rate and the sensitivity of such factors to gold and other metals
prices as discussed above, the effective tax rate is expected to be volatile in
future periods.


30




For more
information concerning income taxes, please see Note 21 within the consolidated
financial statements contained herein.




Changes in Foreign Exchange
Rates





During the year ended July 31, 2008 and
2007, we recorded equity adjustments from foreign currency translations of
approximately $622 and $205, respectively.  These translation
adjustments are related to changes in the rates of exchange between the Mexican
Peso and the US dollar and are included as a component of other comprehensive
income.





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the year ended July 31, 2009 was approximately $7,536,
which primarily represents cash flows resulting from our realization of revenue
from operations during the year ended July 31, 2009.  The increase
period-to-period was mainly due to higher net income during the year ended July
31, 2009.  In addition,  we utilized cash flows from
operations to pay the following one time items:  1)  10% net
profits interest of $1,000 to Royal Gold, and  2)  $1,906 to
close out the remaining 58,233 ounces of gold under the original Gold Price
Protection arrangements that we entered into in March 2006 to Standard
Bank.    Cash used in operating
activities for the same period a year ago was $6,318, as this was our
first year realizing revenue from operations.




Investing
Activities




Cash used in investing
activities during the year ended July 31, 2009, amounted to approximately
$5,174, primarily from the acquisition of an additional secondary crusher and
tunnel conveyor, mobile equipment, conveyors, ADR plant equipment, and a carbon
regeneration kiln.  Cash used in investing activitiesfor the same period a year ago was approximately $5,479 which was due to
costs incurred for leach pad expansion, conveyors, additional water rights, and
original ADR plant equipment for the El Chanate mine.





In August
2009, we initiated the construction of an additional leach pad
area.  Permitting and site clearing has been completed and the
construction has commenced. Golder Engineering of Tucson, Arizona will oversee
construction activities and quality control and quality assurance for the
project. The construction schedule anticipates that stacking ore on the new pad
will commence in January 2010 and will cost approximately $3,300.  In
October 2009,  we committed to the procurement of a new tertiary
crusher and screen module for the El Chanate mine.  The cost for this
equipment is approximately $1,000 with one-third due upon execution of the sales
order, one-third due in 30 days and one-third upon shipment.  This is
part of our ongoing production expansion plan.




Financing
Activities




Cash used in financing
activities during the year ended July 31, 2009 amounted to approximately
$4,175, primarily from the repayment of the Credit Facility in the amount of
$4,500.  We also received proceeds of approximately $319 in the
current period from the issuance of common stock upon the exercising of 855,729
options.  Cash
provided by financing activities during the year ended July 31, 2008
amounted to approximately $7,306, primarily from the exercising of 22,994,178
warrants for gross proceeds of approximately $7,474.


31




Term
loan and Revolving Credit Facility




On July
17, 2008, we closed in escrow, pending execution of Mexican collateral documents
and certain other ministerial matters, an Amended And Restated Credit Agreement
(the “Credit Agreement”) involving our wholly-owned Mexican subsidiaries MSR and
Oro, as borrowers (“Borrowers”), us, as guarantor, and Standard Bank PLC
(“Standard Bank”), as the lender.  The Mexican collateral documents
were executed on September 18, 2008, effectively closing the
loan.  The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006 (the “Original Agreement”).
Under the Original Agreement, MSR and Oro could borrow, and did borrow, money in
an aggregate principal amount of up to $12,500 (the “Term Loan”) for the purpose
of constructing, developing and operating the El Chanate gold mining project in
Sonora State, Mexico. We guaranteed the repayment of the Term Loan and the
performance of the obligations under the Original Agreement.





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





On
September 17, 2009, our ability to borrow under the Revolving Loan
expired.  The Company had not drawn on this facility during the term
period and determined that it was not cost beneficial to maintain the Revolving
Loan on a going forward basis.





Debt
Covenants





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including, but not limited to, (i) a ratio of
current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S.$15,000,000, and (iii) a quarterly average minimum liquidity of
U.S.$500,000. In addition, the Credit Facility restricts, among other things,
our ability to incur additional debt, create liens on our property, dispose of
any assets, merge with other companies, enter into hedge agreements, organize or
invest in subsidiaries or make any investments above a certain dollar
limit.


32




As of
July 31, 2009, we and our related entities were in compliance with all debt
covenants and default provisions.  For the purposes of meeting these
financial covenants, the accounts of Caborca Industrial are not required to be
included in the calculation of these covenants.





Environmental
and Permitting Issues





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





We
received the annual extension to the explosive use permit from the relevant
authorities.  The permit is valid through December 2009.





We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the
future..  As of July 31, 2009, we have estimated the reclamation costs
for the El Chanate site to be approximately $2,950.  Reclamation costs
are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and closure costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation at each mine
site.  We reviewed the estimated present value of the El Chanate mine
reclamation and closure costs as of July 31, 2009.  This resulted in
an accrual for reclamation obligations as of July 31, 2009 of $1,594 relating to
mineral properties in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations.”





We own
properties in Leadville, Colorado for which we have previously recorded an
impairment loss.  Part of the Leadville Mining District has been
declared a federal Superfund site under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, and the Superfund Amendments
and Reauthorization Act of 1986.  Several mining companies and one
individual were declared defendants in a possible lawsuit.  We were
not named a defendant or Principal Responsible Party.  We did respond
in full detail to a lengthy questionnaire prepared by the Environmental
Protection Agency ("EPA") regarding our proposed procedures and past activities
in November 1990.  To our knowledge, the EPA has initiated no further
comments or questions.  The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of our Leadville Mining properties in August 2007.  The Division
concluded that based upon 2007 equipment prices and labor costs, an additional
$46 was necessary to be bonded with the Division to reclaim the site to achieve
the approved post-mining land use.  The total amount of the bond
sufficient to perform reclamation as of April 30, 2009, was approximately
$82.  We met this bonding requirement.  During our fiscal
year ended July 31, 2008, we sold two of the Leadville Mining claims and the
mill for gross proceeds of $100.  In May 2009, we received our bond
back from the Division.


33


Contractual
Obligations





Our
contractual obligations as of July 31, 2009 are summarized as
follows:





Payments Due by PeriodContractual Obligations(5)
                    
                    Total
                    
                    
                    Less than
                      1 Year
                    
                    
                    1 – 3
                      Years
                    
                    
                    3 – 5
                      Years
                    
                    
                    More than
                      5 YearsDebt
      (1)
                    
                    $
                    8,650
                    
                    
                    $
                    3,860
                    
                    
                    $
                    4,790
                    
                    
                    $
                    -
                    
                    
                    $
                    -Remediation
      and reclamation   obligations(2)
                    
                    
                    3,741
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,741Operating
      leases(3)
                    
                    
                    760
                    
                    
                    
                    247
                    
                    
                    
                    513
                    
                    
                    
                    -
                    
                    
                    
                    -Derivative
      instruments(4)
                    
                    
                    184
                    
                    
                    
                    154
                    
                    
                    
                    30
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    13,335
                    
                    
                    $
                    4,261
                    
                    
                    $
                    5,333
                    
                    
                    $
                    -
                    
                    
                    $
                    3,741





(1)
            Amounts
      represent principal ($8,000) and estimated interest payments ($650)
      assuming no early extinguishment.


(2)
            Mining
      operations are subject to extensive environmental regulations in the
      jurisdictions in which they operate. Pursuant to environmental
      regulations, we are required to close our operations and reclaim and
      remediate the lands that operations have disturbed. The estimated
      undiscounted cash outflows of these remediation and reclamation
      obligations are reflected here. For more information regarding remediation
      and reclamation liabilities, see Note 12 to the Consolidated Financial
      Statements.


(3)
            Amounts
      represent a non-cancelable operating lease for office space in New York
      that commenced on September 1, 2007 and terminates on August 31, 2012. In
      addition to base rent, the lease calls for payment of utilities and other
      occupancy costs. Also, includes an operating lease for office space in
      Caborca, Sonora, as well as leased concessions in Saric, Sonora for
      exploration.


(4)
            Amounts
      represent the net cash settlement of  interest rate swap
      agreement with Standard Bank.


(5)
            Contractual
      obligations do not include the net smelter return payments as this payment
      is linked to the gold price and cannot be reasonably estimated given
      variable market conditions.  As of July 31, 2009, the amount
      remaining in net smelter return payments due to Royal Gold was
      approximately $13,936.





To date,
we have not been adversely affected by the recent volatility in the global
credit and foreign exchange markets.  To a minor degree we have
benefited from the devaluation of the Mexican peso compared to the U.S.
dollar.





While we
believe that our available funds in conjunction with anticipated revenues from
metail sales will be adequate to cover our cash requirements for the fiscal year
ending July 31, 2010, if we encounter unexpected problems we may need to raise
additional capital.  We also may need to raise additional capital for
significant property acquisitions and/or exploration activities. To the extent
that we need to obtain additional capital, management may raise such funds
through the sale of our securities, obtain debt financing, and/or joint
venturing with one or more strategic partners.  We cannot assure that
adequate additional funding, if needed, will be available or on terms acceptable
to us.  If we need additional capital and we are unable to obtain it
from outside sources, we may be forced to reduce or curtail our operations or
our anticipated exploration activities.





Recently Issued Accounting
Pronouncements





Fair
Value Accounting





In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of
FAS 157 were adopted on January 1, 2009. In February 2008, the FASB
staff issued FSP No. 157-2 “Effective Date of FASB Statement No. 157”
(“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of
FAS 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). The provisions of FSP FAS 157-2
are effective for companies beginning January 1, 2009, and are not expected
to have a significant impact on us.


34


In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”), which clarifies the application of FAS 157 in an inactive
market. The intent of this FSP is to provide guidance on how the fair value of a
financial asset is to be determined when the market for that financial asset is
inactive. FSP FAS 157-3 states that determining fair value in an
inactive market depends on the facts and circumstances, requires the use of
significant judgment and, in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. FSP FAS 157-3 was effective
upon issuance. We have incorporated the principles of FSP FAS 157-3 in
determining the fair value of financial assets when the market for those assets
is not active.





FAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:




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




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




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





The
following table sets forth our financial assets and liabilities measured at fair
value by level within the fair value hierarchy. As required by FAS 157,
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement.





Fair Value at July 31, 2009
                    (in thousands)Total
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3Assets:Cash
      equivalents
                  
                  $
                  3,334
                  
                  
                  $
                  3,334
                  
                  
                  $
                  -
                  
                  
                  $
                  -Marketable
      securities
                  
                  
                  35
                  
                  
                  
                  35
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  3,369
                  
                  
                  $
                  3,369
                  
                  
                  $
                  -
                  
                  
                  $
                  -Liabilities:Interest
      rate swap
                  
                  
                  193
                  
                  
                  
                  -
                  
                  
                  
                  193
                  
                  
                  
                  -$
                  193
                  
                  
                  $
                  -
                  
                  
                  $
                  193
                  
                  
                  $
                  -





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





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


35


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





In
April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which provides additional guidance on determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. In April 2009, the FASB issued Staff Position
No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which: 1)
clarifies the interaction of the factors that should be considered when
determining whether a debt security is other than temporarily impaired, 2)
provides guidance on the amount of an other-than-temporary impairment recognized
in earnings and other comprehensive income and 3) expands the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the FASB issued Staff Position No. 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), which requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Adoption of these Staff Positions is
required for the Company’s interim reporting period beginning April 1, 2009
with early adoption permitted. We adopted the provisions of FSP FAS 157-4, FSP
FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 for the interim period
ended April 30, 2009. The adoption of this standard did not have a material
impact on the financial condition or the results of our operations.





Fair
Value Option





In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“FAS 159”).
FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value, with the objective of improving financial
reporting by mitigating volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of FAS 159 were adopted
January 1, 2009. We did not elect the Fair Value Option for any of its
financial assets or liabilities, and therefore, the adoption of FAS 159 had
no impact on our consolidated financial position, results of operations or cash
flows.





Derivative
Instruments





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


36


Accounting
for the Useful Life of Intangibles




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




Business
Combinations





In
April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (“FSP FAS 141(R)-1”), which amends and clarifies FAS 141(R).
The intent of FSP FAS 141(R)-1 is to address application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. This FSP is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after January 1, 2009. We will apply the provisions of FSP FAS 141(R)-1 to
all future business combinations.





Equity
Method Investment




In
November 2008, the Emerging Issues Task Force (“EITF”) reached consensus on
Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF
08-6”), which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. The intent of EITF 08-6 is
to provide guidance on (i) determining the initial measurement of an equity
method investment, (ii) recognizing other-than-temporary impairments of an
equity method investment and (iii) accounting for an equity method
investee’s issuance of shares. EITF 08-6 was effective for the Company’s fiscal
year beginning August 1, 2009 and has been applied prospectively. The
adoption of EITF 08-6 had no impact on our consolidated financial position or
results of operations.




Equity-linked
Financial Instruments




In
June 2008, the EITF reached consensus on Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 clarifies the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which would
qualify as a scope exception under FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“FAS 133”). EITF 07-5 was
effective for our fiscal year beginning August 1, 2009. The adoption of EITF
07-5 had no impact on our consolidated financial position or results of
operations.


37


Subsequent
Events





In
May 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 165 “Subsequent Events” (“FAS 165”) which establishes
accounting and reporting standards for events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The statement sets forth (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet in its financial
statements, and (iii) the disclosures that an entity should make about
events or transactions occurring after the balance sheet date in its financial
statements. We adopted the provisions of FAS 165 for the interim period ended
June 30, 2009. The adoption of FAS 165 had no impact on our consolidated
financial position, results of operations or cash flows.





Variable
Interest Entities





In
June 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“FAS 167”), which requires an entity to perform a
qualitative analysis to determine whether the enterprise’s variable interest
gives it a controlling financial interest in a variable interest entity (“VIE”).
This analysis identifies a primary beneficiary of a VIE as the entity that has
both of the following characteristics: i) the power to direct the activities of
a VIE that most significantly impact the entity’s economic performance and ii)
the obligation to absorb losses or receive benefits from the entity that could
potentially be significant to the VIE. FAS 167 also amends FIN 46(R) to require
ongoing reassessments of the primary beneficiary of a VIE. The provisions of FAS
167 are effective for fiscal years beginning January 1, 2010. We currently
account for Caborca Industrial (“CI”) as a VIE and are evaluating the potential
impact of adopting this statement on our consolidated financial position,
results of operations and cash flows.





The
Accounting Standards Codification





In
June 2009, the FASB issued FASB Statement No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162” (“FAS 168”
or “the Codification”).  FAS 168 will become the source of
authoritative U.S. GAAP to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification will
supersede all non-SEC accounting and reporting standards.  All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative.  FAS 168 is effective for our interim
quarterly period beginning after September 15, 2009. We do not expect the
adoption of FAS 168 to have an impact on our consolidated financial position,
results of operations or cash flows.





Disclosure
About Off-Balance Sheet Arrangements





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





Critical
Accounting Policies





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


38




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




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




Ore
on Leach Pads




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




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




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




In-process
Inventory




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




Precious
Metals Inventory




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


39




Materials
and Supplies




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




Property, Plant and Mine
Development




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




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




Impairment of Long-Lived
Assets




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




Reclamation and Remediation
Costs (Asset Retirement Obligations)




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


40


Deferred Financing
Costs





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





Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements, net profit interests, etc. are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with SFAS 144. There was no impairment at
July 31, 2009.





Fair Value of Financial
Instruments





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





Revenue
Recognition





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




Revenues
from by-product sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $1,076, $707 and $0
for the fiscal years ended July 31, 2009, 2008 and 2007,
respectively.




Foreign Currency
Translation





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


41


Comprehensive Income
(Loss)





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





Income
Taxes





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




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




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





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




Equity Based
Compensation





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


42


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





Accounting for Derivatives
and Hedging Activities





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





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





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





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





Use of
Estimates





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


43


Item
      7A.
            Quantitative and
      Qualitative Disclosures About Market
Risk




Metal
Price




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




Foreign
Currency




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





Gold
Price Protection Agreement





On
February 24, 2009, we settled with Standard Bank, the remaining 58,233 ounces of
gold under the original Gold Price Protection arrangements entered into in March
2006. The purpose of these arrangements at the time was to protect the Company
in the event the gold price dropped below $500 per ounce. Total remuneration to
unwind these arrangements was approximately $1,906.





Interest
Rate Swap Contracts





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





Market
Risk Disclosures


July
31, 2009


(in
thousands)





Instruments
entered into for hedging purposes -





Type of Derivative
                            
                            Notional Size
                            
                            
                            Fixed Price or
                              Strike Price
                            
                            
                            Underlying Price
                            
                            Termination or
                              Expiration
                            
                            Fair ValueInterest
      Rate Swaps
                            
                            $
                            4,594
                            (1)
                            
                            
                            5.30
                            %
                            
                            3 Mo. USD LIBOR
                            
                            12/31/2010
                            
                            $
                            (193
                            )


(1)The value shown reflects
the notional as of July 31, 2009. Over the term of the swap, the notional
amortizes, dropping to approximately $656.


44





As of July 31, 2009, the dollar value
of a basis point for this interest rate swap was approximately $463, suggesting
that a one-basis point rise (fall) of the yield curve would likely foster an
increase (decrease) in the interest rate swaps value by approximately
$342.  Because hedge accounting is applied, the contract serves to
lock in a fixed rate of interest for the portion of the variable rate debt equal
to the swap's notional size.  The swap covers only 75% of our variable
rate exposure.





Item
      8.
            Financial Statements
      and Supplementary Data.





For the
Financial Statements required by Item 8 see the Financial Statements included at
the end of this Annual Report on Form 10-K starting on page F-1.





Item
      9.
            Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosures.





There have been no changes in
accountants or disagreements with accountants or reportable events with respect
to accounting principles or practices, financial statement disclosures or
auditing scope or procedure.





Item
      9A.
            Controls and
      Procedures.





The term "disclosure controls and
procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). This term refers to the
controls and procedures of a company that are designed not only to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized, and reported within
the required time periods but also to ensure that information required to be
disclosed is accumulated and communicated to the Chief Executive Officer and
Chief Financial Officer to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. They have concluded that, as of that date, our
disclosure controls and procedures were effective.





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





Management’s Annual Report
on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Rules 13a-15(f) or
15d-15(f), under the Exchange Act. Internal control over financial reporting is
a process designed by, or under the supervision of, our Chief Executive Officer
and Chief Financial Officer  and affected by our 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 generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) 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 its financial statements.


45


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





Management
has assessed the effectiveness of our internal control over financial reporting
as of July 31, 2009.  In making this assessment, management used the
criteria set forth in the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission Internal Control—Integrated
Framework, (COSO).  Based on this assessment, management has
not identified any material weaknesses as of July 31, 2009.  A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.





Management
has concluded that we did maintain effective internal control over financial
reporting as of July 31, 2009, based on the criteria set forth in “Internal Control—Integrated
Framework” issued by the COSO.





The effectiveness of our internal
controls over financial reporting as of July 31, 2009, has been audited by
Wolinetz, Lafazan & Company, P.C., an independent registered public
accounting firm, as stated in their report which is included on page F-1 of the
Financial Statements of this Annual Report on Form 10-K.





Item
      9B.
            Other
      Information.





None.





PART III





Item
      10.
            Executive Officers and
      Corporate Governance.





Information
concerning Capital Gold’s directors, Audit Committee, Compliance with
Section 16(a) of the Exchange Act; Code of Ethics and any material changes
to the procedures by which stockholders may recommend nominees to the Company’s
board of directors is contained in Capital Gold’s definitive Proxy Statement,
filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 for the 2010 Annual Meeting of Stockholders and is incorporated
herein by reference. Information concerning Capital Gold’s executive officers is
set forth below.





Name
                    
                    Age
                    
                    PositionGifford
      A. Dieterle
                    
                    77
                    
                    Chief
      Executive Officer, TreasurerJohn
      Brownlie
                    
                    59
                    
                    President,
      Chief Operating OfficerChristopher
      M. Chipman
                    
                    36
                    
                    Chief
      Financial OfficerJ.
      Scott Hazlitt
                    
                    57
                    
                    Vice
      President – Mine
Development


46





Directors are elected at the meeting
of stockholders called for that purpose and hold office until the next
stockholders meeting called for that purpose or until their resignation or
death.  Officers of the corporation are elected by the directors at
meetings called by the directors for its purpose.





GIFFORD A. DIETERLE, Chief Executive
Officer, Treasurer  and Chairman of our Board of
Directors.  Mr. Dieterle was appointed President in September 1997 and
has been an officer and Chairman since 1981.  He has a M.S. in Geology
obtained from New York University.  From 1977 until July 1993, he was
Chairman, Treasurer, and Executive Vice-President of Franklin Consolidated
Mining Company.  From 1965 to 1987, he was lecturer in geology at the
City University of N.Y. (Hunter Division).  Mr. Dieterle has been
Secretary-Treasurer of  South American Minerals Inc. since 1997 and a
director of that company since 1996.





JOHN
BROWNLIE,President, Chief
Operating Officer and  Director, has been with the company since May
2006 and was instrumental in the development of the El Chanate mine
..  He currently oversees the operations and exploration activities in
Mexico and represents the company in investing activities.  Mr.
Brownlie provided team management for mining projects requiring technical,
administrative, political and cultural experience over his 35 year mining
career.  From 2000 to 2006, Mr. Brownlie was a consultant providing
mining and mineral related services to various companies including SRK, Oxus
Mining plc and Cemco Inc. From 1995 to 2000, he was the General Manager for the
Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million tonne per month
heap leach operation that produced over 450,000 ounces of gold annually. From
1988 to 1995, Mr. Brownlie served as the Chief Engineer and General Manager for
Monarch Resources in Venezuela, at both the El Callao Revemin Mill and La
Camorra gold mine. Before that, Mr. Brownlie was a resident of South Africa and
was associated with numerous mineral processing and mining projects throughout
Africa. He is  a mechanical engineer and fluent in
Spanish.  Mr. Brownlie is also a director of Palladon Ventures, a
publicly traded  mineral-related company.





CHRISTOPHER
M. CHIPMAN, Chief Financial Officer.  Mr. Chipman has been our Chief
Financial Officer since March 1, 2006.  Since November 2000, Mr.
Chipman has been a managing member of Chipman & Chipman, LLC, a consulting
firm that assists public companies with the preparation of periodic reports
required to be filed with the Securities and Exchange Commission and compliance
with Section 404 of the Sarbanes Oxley Act of 2002.  The firm also
provides outsourced financial resources to clients assisting in financial
reporting, forecasting and accounting services.  Mr. Chipman is a CPA
and, from 1996 to 1998, he was a senior accountant with the accounting firm of
Grant Thornton LLP. Mr. Chipman was the Controller of Frontline Solutions, Inc.,
a software company (March 2000 to November 2000); a Senior Financial Analyst for
GlaxoSmithKline (1998-2000); and an Audit Examiner for Wachovia Corporation
(1994-1996).  He received a B.A. in Economics from Ursinus College in
1994 and is a Certified Public Accountant.  He is a member of the
American and Pennsylvania Institute of Certified Public
Accountants.




47





J. SCOTT
HAZLITT, Vice President – Mine Development, has been in the mining business
since 1974. Since 2001, he has focused on development of our El Chanate
concessions.  Currently, he is involved in mine expansion plans and
corporate development.  He has worked primarily in reserves, feasibility,
development and mine operations.  Mr. Hazlitt was a  field
geologist for ARCO Syncrude Division at their CB oil Shale project in 1974 and
1975.  He was a contract geologist for Pioneer Uravan and others from
1975 to 1977.  He was a mine geologist for Cotter Corporation in 1978
and 1979, and was a mine geologist for ASARCO from 1979 to 1984.  He
served as Vice President of Exploration for Mallon Minerals from 1984 to
1988.  From 1988 to 1992, Mr. Hazlitt was a project geologist and Mine
Superintendent for the Lincoln development project.  From 1992 to
1995, he was self-employed as a consulting mining geologist in California and
Nevada.   He was Mine Operations Chief Geologist for Getchell
Gold from 1995 to 1999.  His work experience has included precious
metals, base metals, uranium, and oil shale.  Mr. Hazlitt served as
mine manager at our Hopemore Mine in Leadville, Colorado starting in November
1999.  His highest educational degree is Master of Science from
Colorado State University.  He is a registered geologist in the state
of California.





On September 17, 2009, the Company
terminated Jeffrey W. Pritchard as Executive Vice President and Secretary of the
Company without cause pursuant to a restructuring of its corporate investor
relations functions.  The termination was effective September 15,
2009.  Mr. Pritchard  resigned as a Director of the Company
effective September 29, 2009.





Code
of Ethics





We
adopted a Code of Ethics that applies to our officers, directors and employees,
including our principal executive officer, principal financial officer and
principal accounting officer.  The Code of Ethics is publicly
available in the Management section on our Website at www.capitalgoldcorp.com.
If we make any substantive amendments to this code of ethics or grant any
waiver, including any implicit waiver, from a provision of the code to our chief
executive officer, principal financial officer or principal accounting officer,
we will disclose the nature of such amendment or waiver on that Website or in a
report on Form 8-K.





Item
      11.
            Executive
      Compensation





Information
concerning this item is contained in Capital Gold’s definitive Proxy Statement,
filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 for the 2010 Annual Meeting of Stockholders and is incorporated
herein by reference.





Item
      12.
            Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters.





Information
concerning this item is contained in Capital Gold’s definitive Proxy Statement,
filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 for the 2010 Annual Meeting of Stockholders and is incorporated
herein by reference.





Item
13.  Certain
Relationships and Related Transactions, and Director Independence
(000’s).





Information
concerning this item is contained in Capital Gold’s definitive Proxy Statement,
filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 for the 2010 Annual Meeting of Stockholders and is incorporated
herein by reference.
  48





Item
14. Principal
Accountant Fees And Services.





Information
concerning this item is contained in Capital Gold’s definitive Proxy Statement,
filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 for the 2010 Annual Meeting of Stockholders and is incorporated
herein by reference.





PART IV





Item
      15.
            Exhibits and Financial
      Statement Schedules.





(a)  Financial Statements and
Schedules   See index to financial statements on page F-1 of this
Annual Report.





All other schedules called for under
regulation S-X are not submitted because they are not applicable or not
required, or because the required information is included in the financial
statements or notes thereto.





(b) Exhibits





Exhibits
marked with a single asterisk (*) are filed herewith.




Confidential treatment has been
requested for exhibits marked with a triple asterisk (***).




3.1
                  
                  Certificate
      of Incorporation of the Company dated September 22, 2005 (Incorporated by
      reference to Exhibit 3.3 to the Company’s Registration Statement on Form
      SB-2 (File No. 333-129939) filed on November 23, 2005), as amended by the
      Certificate of Amendment dated February 26, 2007 (Incorporated by
      reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB
      for the quarterly period ended January 31, 2007 and filed on March 19,
      2007), as further amended by the Certificate of Amendment dated January
      24, 2008 (Incorporated by reference to Exhibit 3.1 to the Company’s
      Current Report on Form 8-K filed on January 30, 2008).3.2
                  
                  Amended
      and Restated By-Laws of the Company dated September 1, 2009 (Incorporated
      by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K
      filed on September 3, 2009).4.1
                  
                  Specimen
      stock certificate for shares of common stock, par value $0.0001 per share
      (Incorporated by reference to Exhibit 4.1 to the Company’s Registration
      Statement on Form SB-2, filed on March 9, 2005).4.2
                  
                  Form
      of Warrant for Common Stock of the Company, issued to Standard Bank, PLC
      on July 8, 2009 (Incorporated by reference to Exhibit 4.7 to the Company’s
      Annual Report on Form 10-K for the year ended July 31, 2008 and filed on
      October 29, 2008).10.1
                  
                  Stock
      Purchase Option Agreement by and among AngloGold (Jerritt Canyon) Corp.,
      AngloGold North America Inc., Leadville Mining and Milling Corporation and
      Leadville, effective December 15, 2000 (subsequently transferred to Royal
      Gold, Inc.) (Incorporated by reference to Exhibit 10.a to the Company’s
      Quarterly Report on Form 10-QSB for the quarterly period ended January 31,
      2001 and filed on March 16,
2001).


49





10.2
                
                Stock
      Sales and Security Agreement by and between Leadville Mining and Milling
      Corporation, Leadville and Inmobiliaria Ruba S.A. de C.V., dated March 30,
      2002 (the “Minera Chanate Agreement”) (Incorporated by reference to
      Exhibit 10.a to the Company’s Quarterly Report on Form 10-QSB for the
      quarterly period ended April 30, 2002 and filed on June 20,
      2002).10.3
                
                English
      translation of the Minera Chanate Agreement (Incorporated by reference to
      Exhibit 10.b to the Company’s Quarterly Report on Form 10-QSB for the
      quarterly period ended April 30, 2002 and filed on June 20,
      2002).10.4
                
                English
      summary of the El Charro Agreement between Antonio Vargas Coronado and Oro
      de Altar S. de R. L. de C.V., signed on May 25, 2005 (Incorporated by
      reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB
      for the quarterly period ended April 30, 2005 and filed on June 20,
      2005).10.5
                
                Mining
      Contract for the Contract Mining at El Chanate Gold Mine by and between
      Minera Santa Rita S. de R.L. de C.V. and Sinergia Obras Civiles y Mineras,
      S.A. de C.V. dated November 24, 2005 (the “Mining Agreement”)
      (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
      Report on Form 10-QSB for the quarterly period ended October 31 2005 and
      filed on December 15, 2005).10.6
                
                Letter
      of Amendment to the Mining Agreement, dated August 2, 2006 (Incorporated
      by reference to Exhibit 10.12 to the Company’s Annual Report on Form
      10-KSB for the year ended July 31, 2006 and filed on November 1,
      2006).10.7
                
                2006
      Equity Incentive Plan (Incorporated by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-QSB for the quarterly period ended
      October 31, 2006 and filed on December 19, 2006).10.8
                
                Amendment
      2009-1 to the 2006 Equity Incentive Plan (Incorporated by reference to
      Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 24,
      2009).10.9
                
                Amended
      and Restated Credit Agreement among Minera Santa Rita S. de R.L. de C.V.
      and Oro de Altar S. de R.L. de C.V. (as borrowers), Capital Gold
      Corporation (as guarantor), and Standard Bank PLC (as lender), dated as of
      July 17, 2008 (Incorporated by reference to Exhibit 10.31 to the Company’s
      Annual Report on Form 10-K for the year ended July 31, 2008 and filed on
      October 29, 2008).10.10
                
                Service
      Agreement between Caborca Industrial S.A. de C.V. and Minera Santa Rita,
      S. de R.L. de C.V., dated January 1, 2008 (Incorporated by reference to
      Exhibit 10.32 to the Company’s Amended Annual Report on Form 10-K/A for
      the year ended July 31, 2008 and filed on February 13,
    2009).


50





10.11
                
                Mining
      Exploration Agreement between Roberto Preciado, Bertha Elena Martinez
      Espinoza and Oro de Altar S. de R.L. de C.V., dated April 4,
      2008.(*)10.12
                
                Amended
      and Restated Engagement Agreement between the Company and John Brownlie,
      effective as of January 1, 2009 (Incorporated by reference to Exhibit 10.1
      to the Company’s Quarterly Report on Form 10-Q for the quarterly period
      ended January 31, 2009 and filed on March 12, 2009).10.13
                
                Amended
      and Restated Engagement Agreement between the Company and Christopher
      Chipman, effective as of January 1, 2009 (Incorporated by reference to
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the
      quarterly period ended January 31, 2009 and filed on March 12,
      2009).10.14
                
                Amended
      and Restated Engagement Agreement between the Company and Scott Hazlitt,
      effective as of January 1, 2009 (Incorporated by reference to Exhibit 10.3
      to the Company’s Quarterly Report on Form 10-Q for the quarterly period
      ended January 31, 2009 and filed on March 12, 2009).10.15
                
                Executive
      Employment Agreement between the Company and Gifford Dieterle, effective
      as of January 1, 2009 (Incorporated by reference to Exhibit 10.4 to the
      Company’s Quarterly Report on Form 10-Q for the quarterly period ended
      January 31, 2009 and filed on March 12, 2009).10.16
                
                Executive
      Employment Agreement between the Company and Jeffrey Pritchard, effective
      as of January 1, 2009 (Incorporated by reference to Exhibit 10.5 to the
      Company’s Quarterly Report on Form 10-Q for the quarterly period ended
      January 31, 2009 and filed on March 12, 2009).10.17
                
                Indemnity
      Agreement between the Company and John Brownlie, effective November 17,
      2008 (Incorporated by reference to Exhibit 10.6 to the Company’s Quarterly
      Report on Form 10-Q for the quarterly period ended January 31, 2009 and
      filed on March 12, 2009).10.18
                
                Indemnity
      Agreement between the Company and Scott Hazlitt, effective September 18,
      2008 (Incorporated by reference to Exhibit 10.7 to the Company’s Quarterly
      Report on Form 10-Q for the quarterly period ended January 31, 2009 and
      filed on March 12, 2009).10.19
                
                Indemnity
      Agreement between the Company and Christopher Chipman, effective September
      18, 2008 (Incorporated by reference to Exhibit 10.8 to the Company’s
      Quarterly Report on Form 10-Q for the quarterly period ended January 31,
      2009 and filed on March 12,
2009).


51





10.20
                
                Severance
      Agreement and Release between the Company and Jeffrey Pritchard dated
      September 29, 2009.(*)(***)21
                
                Subsidiaries
      of Capital Gold Corporation23.1
                
                Consent
      of Wolinetz, Lafazan & Company, P.C., independent registered public
      accountants.*31.1
                
                Certification
      pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
      1934 from the Company’s Chief Executive Officer.*31.2
                
                Certification
      pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
      1934 from the Company’s Chief Financial Officer.*32.1
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 from the Company’s Chief Executive
      Officer.*32.2
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 from the Company’s Chief Financial
      Officer.*





Statements
contained in this Annual Report on Form 10-K as to the contents of any agreement
or other document referred to are not complete, and where such agreement or
other document is an exhibit to this Annual Report on Form 10-K or is included
in any forms indicated above, each such statement is deemed to be qualified and
amplified in all respects by such provisions.


52


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





CAPITAL
      GOLD CORPORATIONDated:
      October 14, 2009
              By:
              /s/ Gifford A. DieterleGifford
      A. Dieterle
                Chief
      Executive Officer, Chairman of the
      Board and Treasurer(Principal
      Executive Officer)
  53




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




/s/ Gifford A. Dieterle
              
              October
      13, 2009Gifford
      A. Dieterle, Chief Executive Officer, Chairman of the Board and
      Treasurer
                (Principal
      Executive Officer)/s/ Christopher M. Chipman
              
              October
      13, 2009Christopher
      M. Chipman, Chief Financial Officer
                (Principal
      Financial Officer)/s/ John Brownlie
              
              October
      13, 2009John
      Brownlie, President, Chief Operating Officer, and
      Director/s/ Robert Roningen
              
              October
      13, 2009Robert
      Roningen, Senior Vice President, Director, Corporate
    Secretary/s/ Roger A. Newell
              
              October
      13, 2009Roger
      A. Newell, Director/s/ Leonard J. Sojka
              
              October
      13, 2009Leonard
      J. Sojka, Director/s/ John W. Cutler
              
              October
      13, 2009John
      W. Cutler, Director


54





SUPPLEMENTAL
INFORMATION





Supplemental Information to be
Furnished With Reports Filed Pursuant to Section 15(d) of the Act by
Registrants Which Have Not Registered Securities Pursuant to Section 12 of
the Act.





NOT
APPLICABLE.


55


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of Capital Gold
Corporation:




We have
audited the accompanying consolidated balance sheets of Capital Gold Corporation
and Subsidiaries ("the Company") as of July 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the three-year period ended July 31, 2009.  We
also have audited Capital Gold Corporation and Subsidiaries' internal control
over financial reporting as of July 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
"Management's Annual Report on Internal Control over Financial
Reporting".  Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the Company’s internal
control over financial reporting based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) 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. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position
of  Capital Gold Corporation and Subsidiaries as of July 31, 2009 and
2008, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended July 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.  Also in our opinion, Capital Gold Corporation and
Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of July 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).





WOLINETZ,
LAFAZAN & COMPANY, P.C.





Rockville
Centre, New York


October
12, 2009


F-1


CAPITAL
GOLD CORPORATION


CONSOLIDATED
BALANCE SHEET


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





July 31,
                    2009
                  
                  
                  July 31,
                    2008ASSETSCurrent
      Assets:Cash
      and Cash Equivalents (Note 2)
                  
                  $
                  6,448
                  
                  
                  $
                  10,992Accounts
      Receivable  (Note 2)
                  
                  
                  2,027
                  
                  
                  
                  1,477Stockpiles
      and Ore on Leach Pads (Note 5)
                  
                  
                  20,024
                  
                  
                  
                  12,176Material
      and Supply Inventories (Note 4)
                  
                  
                  1,381
                  
                  
                  
                  937Deposits
      (Note 6)
                  
                  
                  26
                  
                  
                  
                  9Marketable
      Securities  (Note 3)
                  
                  
                  35
                  
                  
                  
                  65Prepaid
      Expenses
                  
                  
                  277
                  
                  
                  
                  219Loans
      Receivable – Affiliate (Note 11 and 13)
                  
                  
                  33
                  
                  
                  
                  39Other
      Current Assets (Note 7)
                  
                  
                  1,042
                  
                  
                  
                  490Total
      Current Assets
                  
                  
                  31,293
                  
                  
                  
                  26,404Mining
      Concessions (Note 10)
                  
                  
                  51
                  
                  
                  
                  59Property
      & Equipment – net (Note 8)
                  
                  
                  22,417
                  
                  
                  
                  20,918Intangible
      Assets – net (Note 9)
                  
                  
                  318
                  
                  
                  
                  181Other
      Assets:Deferred
      Financing Costs (Note 16)
                  
                  
                  424
                  
                  
                  
                  599Mining
      Reclamation Bonds
                  
                  
                  -
                  
                  
                  
                  82Deferred
      Tax Asset (Note 21)
                  
                  
                  32
                  
                  
                  
                  573Security
      Deposits
                  
                  
                  66
                  
                  
                  
                  63Total
      Other Assets
                  
                  
                  522
                  
                  
                  
                  1,317Total
      Assets
                  
                  $
                  54,601
                  
                  
                  $
                  48,879LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                  
                  $
                  988
                  
                  
                  $
                  788Accrued
      Expenses (Note 20)
                  
                  
                  1,633
                  
                  
                  
                  2,673Derivative
      Contracts (Note 19)
                  
                  
                  193
                  
                  
                  
                  930Deferred
      Tax Liability (Note 21)
                  
                  
                  4,233
                  
                  
                  
                  2,063Current
      Portion of Long-term Debt (Note 16)
                  
                  
                  3,600
                  
                  
                  
                  4,125Total
      Current Liabilities
                  
                  
                  10,647
                  
                  
                  
                  10,579Reclamation
      and Remediation Liabilities (Note 12)
                  
                  
                  1,594
                  
                  
                  
                  1,666Other
      liabilities
                  
                  
                  78
                  
                  
                  
                  62Long-term
      Debt (Note 16)
                  
                  
                  4,400
                  
                  
                  
                  8,375Total
      Long-term Liabilities
                  
                  
                  6,072
                  
                  
                  
                  10,103Commitments
      and Contingencies (Note 22)
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share; Authorized 300,000,000 shares; Issued
      and Outstanding 193,855,555 and 192,777,326 shares,
      respectively
                  
                  
                  19
                  
                  
                  
                  19Additional
      Paid-In Capital
                  
                  
                  64,057
                  
                  
                  
                  63,074Accumulated
      Deficit
                  
                  
                  (22,089
                  )
                  
                  
                  (32,496
                  )Deferred
      Financing Costs (Note 16)
                  
                  
                  (1,808
                  )
                  
                  
                  (2,611
                  )Deferred
      Compensation
                  
                  
                  (319
                  )
                  
                  
                  (549
                  )Accumulated
      Other Comprehensive Income (Note 13)
                  
                  
                  (1,978
                  )
                  
                  
                  760Total
      Stockholders’ Equity
                  
                  
                  37,882
                  
                  
                  
                  28,197Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  54,601
                  
                  
                  $
                  48,879


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


F-2





CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF OPERATIONS


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





For The Year EndedJuly 31,2009
                
                
                2008
                
                
                2007RevenuesSales
      – Gold, net
                
                $
                42,757
                
                
                $
                33,104
                
                
                $
                -Costs
      and Expenses:Costs
      Applicable to Sales
                
                
                13,883
                
                
                
                10,690
                
                
                
                -Depreciation
      and Amortization
                
                
                3,019
                
                
                
                3,438
                
                
                
                891General
      and Administrative
                
                
                5,464
                
                
                
                5,586
                
                
                
                2,893Exploration
                
                
                1,600
                
                
                
                938
                
                
                
                1,816Total
      Costs and Expenses
                
                
                23,966
                
                
                
                20,652
                
                
                
                5,600Income
      (Loss) from Operations
                
                
                18,791
                
                
                
                12,452
                
                
                
                (5,600
                )Other
      Income (Expense):Interest
      Income
                
                
                43
                
                
                
                77
                
                
                
                146Interest
      Expense
                
                
                (597
                )
                
                
                (1,207
                )
                
                
                (792
                )Other
      Income (Expense)
                
                
                (313
                )
                
                
                (95
                )
                
                
                -Loss
      on change in fair value of derivative
                
                
                (1,975
                )
                
                
                (1,356
                )
                
                
                (1,226
                )Total
      Other Income (Expense)
                
                
                (2,842
                )
                
                
                (2,581
                )
                
                
                (1,872
                )Income
      (Loss) before Income Taxes
                
                
                15,949
                
                
                
                9,871
                
                
                
                (7,472
                )Income
      Tax Expense (Note 21)
                
                
                (5,542
                )
                
                
                (3,507
                )
                
                
                -Net
      Income (Loss)
                
                $
                10,407
                
                
                $
                6,364
                
                
                $
                (7,472
                )Income
      (Loss) Per Common ShareBasic
                
                $
                0.05
                
                
                $
                0.04
                
                
                $
                (0.05
                )Diluted
                
                $
                0.05
                
                
                $
                0.03
                
                
                $
                -Basic
      Weighted Average Common Shares Outstanding
                
                
                193,260,465
                
                
                
                175,039,996
                
                
                
                149,811,266Diluted
      Weighted Average Common Shares Outstanding
                
                
                199,531,079
                
                
                
                195,469,129
                
                
                
                -





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


F-3





CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


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





Common Stock
                        
                        
                        Additional
                            paid-in-
                        
                        
                        Accumulated
                        
                        
                        Accumulated
                            Other
                            Comprehensive
                        
                        
                        Deferred
                            Financing
                        
                        
                        Deferred
                        
                        
                        Total
                            Stockholders’Shares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        Deficit
                        
                        
                        Income/(Loss)
                        
                        
                        Costs
                        
                        
                        Compensation
                        
                        
                        EquityBalance
      at July 31, 2006
                        
                        
                        131,635,129
                        
                        
                        
                        13
                        
                        
                        
                        40,734
                        
                        
                        
                        (31,388
                        )
                        
                        
                        146
                        
                        
                        
                        (523
                        )
                        
                        
                        (52
                        )
                        
                        
                        8,930Deferred
      financing costs
                        
                        
                        1,150,000
                        
                        
                        
                        -
                        
                        
                        
                        351
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (351
                        )
                        
                        
                        -
                        
                        
                        
                        -Deferred
      financing costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,314
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3,314
                        )
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of deferred finance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        750
                        
                        
                        
                        -
                        
                        
                        
                        750Options
      and warrants issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        216
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        216Private
      placement, net
                        
                        
                        12,561,667
                        
                        
                        
                        2
                        
                        
                        
                        3,484
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,486Common
      stock issued for services provided
                        
                        
                        622,443
                        
                        
                        
                        -
                        
                        
                        
                        276
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        276Common
      stock issued upon the exercising of options and warrants
                        
                        
                        22,203,909
                        
                        
                        
                        2
                        
                        
                        
                        5,641
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,643Net
      loss for the year ended July 31, 2007
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,472
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,472
                        )Change
      in fair value on interest rate swaps
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47
                        )Equity
      adjustment from foreign currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        205
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        205Total
      comprehensive loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,314
                        )Balance
      at July 31, 2007
                        
                        
                        168,173,148
                        
                        
                        $
                        17
                        
                        
                        $
                        54,016
                        
                        
                        $
                        (38,860
                        )
                        
                        $
                        304
                        
                        
                        $
                        (3,438
                        )
                        
                        $
                        (52
                        )
                        
                        $
                        11,987





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


F-4


CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY – CONTINUED


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





Common Stock
                            
                            
                            Additional
                              paid-in-
                            
                            
                            Accumulated
                            
                            
                            Accumulated
                                Other
                              Comprehensive
                            
                            
                            Deferred
                              Financing
                            
                            
                            Deferred
                            
                            
                            Total
                              Stockholders’Shares
                            
                            
                            Amount
                            
                            
                            capital
                            
                            
                            Deficit
                            
                            
                            Income/(Loss)
                            
                            
                            Costs
                            
                            
                            Compensation
                            
                            
                            EquityBalance
      at July 31, 2007
                            
                            
                            168,173,148
                            
                            
                            $
                            17
                            
                            
                            $
                            54,016
                            
                            
                            $
                            (38,860
                            )
                            
                            $
                            304
                            
                            
                            $
                            (3,438
                            )
                            
                            $
                            (52
                            )
                            
                            $
                            11,987Amortization
      of deferred finance costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            930
                            
                            
                            
                            -
                            
                            
                            
                            930Equity
      based compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            433
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            194
                            
                            
                            
                            627Common
      stock issued upon the exercising of options and warrants
                            
                            
                            22,994,178
                            
                            
                            
                            2
                            
                            
                            
                            7,471
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            7,473Issuance
      of  restricted common stock
                            
                            
                            1,610,000
                            
                            
                            
                            -
                            
                            
                            
                            1,051
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (691
                            )
                            
                            
                            360Deferred
      finance costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            103
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (103
                            )
                            
                            
                            -
                            
                            
                            
                            -Net
      income for the year ended July 31, 2008
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,364
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,364Change
      in fair value on interest rate swaps
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (141
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (141
                            )Unrealized
      loss on marketable securities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (25
                            )
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (25
                            )Equity
      adjustment from foreign currency translation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            622
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            622Total
      comprehensive income
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,820Balance
      at July 31, 2008
                            
                            
                            192,777,326
                            
                            
                            $
                            19
                            
                            
                            $
                            63,074
                            
                            
                            $
                            (32,496
                            )
                            
                            $
                            760
                            
                            
                            $
                            (2,611
                            )
                            
                            $
                            (549
                            )
                            
                            $
                            28,197





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


F-5





CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY – CONTINUED


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





Common Stock
                        
                        
                        Additional
                          paid-in-
                        
                        
                        Accumulated
                        
                        
                        Accumulated
                            Other
                          Comprehensive
                        
                        
                        Deferred
                          Financing
                        
                        
                        Deferred
                        
                        
                        Total
                          Stockholders’Shares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        Deficit
                        
                        
                        Income/(Loss)
                        
                        
                        Costs
                        
                        
                        Compensation
                        
                        
                        EquityBalance
      at July 31, 2008
                        
                        
                        192,777,326
                        
                        
                        $
                        19
                        
                        
                        $
                        63,074
                        
                        
                        $
                        (32,496
                        )
                        
                        $
                        760
                        
                        
                        $
                        (2,611
                        )
                        
                        $
                        (549
                        )
                        
                        $
                        28,197Amortization
      of deferred finance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        803
                        
                        
                        
                        -
                        
                        
                        
                        803Equity
      based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        551
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        230
                        
                        
                        
                        781Common
      stock issued upon the exercising of options and warrants
                        
                        
                        855,729
                        
                        
                        
                        -
                        
                        
                        
                        319
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        319Issuance
      of  restricted common stock
                        
                        
                        222,500
                        
                        
                        
                        -
                        
                        
                        
                        113
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        113Net
      income for the year ended July 31, 2009
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,407
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,407Change
      in fair value on interest rate swaps
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        23Unrealized
      loss on marketable securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30
                        )Equity
      adjustment from foreign currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,731
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,731
                        )Total
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,670Balance
      at July 31, 2009
                        
                        
                        193,855,555
                        
                        
                        $
                        19
                        
                        
                        $
                        64,057
                        
                        
                        $
                        (22,089
                        )
                        
                        $
                        (1,978
                        )
                        
                        $
                        (1,808
                        )
                        
                        $
                        (319
                        )
                        
                        $
                        37,882





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


F-6


CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF CASH FLOWS


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





For TheYear EndedJuly 31,2009
                    
                    
                    2008
                    
                    
                    2007Cash
      Flow From Operating Activities:Net
      Income (Loss)
                    
                    $
                    10,407
                    
                    
                    $
                    6,364
                    
                    
                    $
                    (7,472
                    )Adjustments
      to Reconcile Net Loss to Net Cash Provided by (Used in) Operating
      Activities:Depreciation
      and Amortization
                    
                    
                    3,019
                    
                    
                    
                    3,388
                    
                    
                    
                    891Accretion
      of Reclamation and Remediation
                    
                    
                    156
                    
                    
                    
                    124
                    
                    
                    
                    31Loss
      on change in fair value of derivative
                    
                    
                    1,975
                    
                    
                    
                    1,356
                    
                    
                    
                    1,226Equity
      Based Compensation
                    
                    
                    894
                    
                    
                    
                    987
                    
                    
                    
                    492Changes
      in Operating Assets and Liabilities:Increase  in
      Accounts Receivable
                    
                    
                    (550
                    )
                    
                    
                    (1,477
                    )
                    
                    
                    -Increase
      in Prepaid Expenses
                    
                    
                    (58
                    )
                    
                    
                    (146
                    )
                    
                    
                    (32
                    )Increase
      in Inventory
                    
                    
                    (6,786
                    )
                    
                    
                    (8,913
                    )
                    
                    
                    (2,458
                    )Decrease
      (Increase) in Other Current Assets
                    
                    
                    (553
                    )
                    
                    
                    1,185
                    
                    
                    
                    2,975Decrease
      (Increase) in Other Deposits
                    
                    
                    (17
                    )
                    
                    
                    870
                    
                    
                    
                    (629
                    )Increase in Other Assets
                    
                    
                    (3
                    )
                    
                    
                    -
                    
                    
                    
                    (50
                    )Decrease (Increase) in Mining Reclamation Bond
                    
                    
                    82
                    
                    
                    
                    (46
                    )
                    
                    
                    -Decrease
      (Increase) in Deferred Tax Asset
                    
                    
                    541
                    
                    
                    
                    (573
                    )
                    
                    
                    -Increase
      in Accounts Payable
                    
                    
                    200
                    
                    
                    
                    171
                    
                    
                    
                    358Decrease
      in Derivative Liability
                    
                    
                    (2,689
                    )
                    
                    
                    (1,166
                    )
                    
                    
                    (460
                    )Increase
      (Decrease) in Reclamation and Remediation
                    
                    
                    (228
                    )
                    
                    
                    -
                    
                    
                    
                    1,218Increase
      in Other Liability
                    
                    
                    16
                    
                    
                    
                    62Increase
      in Deferred Tax Liability
                    
                    
                    2,170
                    
                    
                    
                    2,063Increase
      (Decrease) in Accrued Expenses
                    
                    
                    (1,040
                    )
                    
                    
                    2,069
                    
                    
                    
                    247Net
      Cash Provided By (Used in) Operating Activities
                    
                    
                    7,536
                    
                    
                    
                    6,318
                    
                    
                    
                    (3,663
                    )Cash
      Flow From Investing Activities:Decrease
      (Increase) in Other Investments
                    
                    
                    -
                    
                    
                    
                    28
                    
                    
                    
                    (4
                    )Purchase
      of Mining, Milling and Other Property and Equipment
                    
                    
                    (4,994
                    )
                    
                    
                    (5,417
                    )
                    
                    
                    (17,851
                    )Purchase
      of Intangibles
                    
                    
                    (180
                    )
                    
                    
                    (90
                    )
                    
                    
                    (570
                    )Net
      Cash Used in Investing Activities
                    
                    
                    (5,174
                    )
                    
                    
                    (5,479
                    )
                    
                    
                    (18,425
                    )





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


F-7





CAPITAL
GOLD CORPORATION


CONSOLIDATED
STATEMENT OF CASH FLOWS – CONTINUED


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





For TheYear EndedJuly 31,2009
                
                
                2008
                
                
                2007Cash
      Flow From Financing Activities:Proceeds
      from (Advances) to Affiliate, net
                
                $
                6
                
                
                $
                7
                
                
                $
                (5
                )Proceeds
      from Borrowing on Credit Facility
                
                
                -
                
                
                
                -
                
                
                
                12,500Repayments
      on Credit Facility
                
                
                (4,500
                )
                
                
                -
                
                
                
                -Proceeds
      From Issuance of Common Stock
                
                
                319
                
                
                
                7,474
                
                
                
                9,129Deferred
      Finance Costs
                
                
                -
                
                
                
                (175
                )
                
                
                (257
                )Net
      Cash (Used in)Provided By Financing Activities
                
                
                (4,175
                )
                
                
                7,306
                
                
                
                21,367Effect
      of Exchange Rate Changes
                
                
                (2,731
                )
                
                
                622
                
                
                
                205Increase
      (Decrease) In Cash and Cash Equivalents
                
                
                (4,544
                )
                
                
                8,767
                
                
                
                (516
                )Cash
      and Cash Equivalents - Beginning
                
                
                10,992
                
                
                
                2,225
                
                
                
                2,741Cash
      and Cash Equivalents – Ending
                
                $
                6,448
                
                
                $
                10,992
                
                
                $
                2,225Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                
                $
                647
                
                
                $
                1,235
                
                
                $
                879Cash
      Paid For Income Taxes
                
                $
                4,213
                
                
                $
                1,373
                
                
                $
                23Non-Cash
      Financing Activities:Issuance
      of common stock and warrants as payment of financing costs
                
                $
                -
                
                
                $
                103
                
                
                $
                3,665Change
      in Fair Value of Derivative Instrument
                
                $
                23
                
                
                $
                141
                
                
                $
                47Change
      in Fair Value of Asset Retirement Cost
                
                $
                222
                
                
                $
                293
                
                
                $
                -





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


F-8





CAPITAL
GOLD CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


JULY 31,
2008


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





NOTE 1 -
Basis of Presentation





Capital
Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
in February 1982 in the State of Nevada. During March 2003, the Company's
stockholders approved an amendment to the Articles of Incorporation to change
its name from Leadville Mining and Milling Corp. to Capital Gold Corporation. In
November 2005, the Company reincorporated in Delaware.  The Company
owns rights to property located in the State of Sonora, Mexico and the
California Mining District, Lake County, Colorado. The Company is engaged in the
exploration, development and production for gold and other minerals from its
properties in Mexico. All of the Company's mining activities are being performed
in Mexico.





On June
29, 2001, the Company exercised an option and purchased from AngloGold North
America Inc. and AngloGold (Jerritt Canyon) Corp. (“AngloGold”) 100% of the
issued and outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of
those two companies (“Minera Chanate”). Minera Chanate's assets consisted of
certain exploitation and exploration concessions in the States of Sonora,
Chihuahua and Guerrero, Mexico. These concessions are sometimes referred to as
the El Chanate Concessions.





Pursuant
to the terms of the agreement, on December 15, 2001, the Company made a $50
payment to AngloGold. AngloGold is entitled to receive the remainder of the
purchase price by way of an ongoing percentage of net smelter returns of between
2% and 4% plus 10% net profits interest (until the total net profits interest
payment received by AngloGold equals $1,000). AngloGold's right to a payment of
a percentage of net smelter returns and the net profits interest will terminate
at such point as they aggregate $18,018. In accordance with the agreement, the
foregoing payments are not to be construed as royalty payments. Should the
Mexican government or other jurisdiction determine that such payments are
royalties, the Company could be subject to and would be responsible for any
withholding taxes assessed on such payments.





Under the
terms of the agreement, the Company had granted AngloGold the right to designate
one of its wholly-owned Mexican subsidiaries to receive a one time option (the
“Option”) to purchase 51% of Minera Chanate (or such entity that owns the Minera
Chanate concessions at the time of option exercise) (the “Back-In Right”). That
Option was exercisable over a 180 day period commencing at such time as the
Company notifies AngloGold that it has made a good faith determination that it
has gold-bearing ore deposits on any one of the identified group of El Chanate
Concessions, when aggregated with any ore that the Company has mined, produced
and sold from such concessions, of in excess of two million ounces of contained
gold. The exercise price would equal twice the Company's project costs on the
properties during the period commencing on December 15, 2000 and ending on the
date of such notice.





In January 2008, pursuant to the terms
of the agreement, the Company made a good faith determination and notified
AngloGold that the drill indicated resources at the El Chanate gold mine
exceeded two million ounces of contained gold. The term "drill indicated
resources" is defined in the agreement.  A drill indicated resource
number does not rise to the level of, and should not be considered proven and
probable reserves as those terms are defined under SEC
guidelines.   AngloGold had 180 days from the date of
notification, or July 28, 2008, to determine whether or not it would choose to
exercise the Option for the Back-In Right. On July 1, 2008, AngloGold notified
the Company that it would not be exercising the Back-In Right.


F-9





During
the fiscal year ended July 31, 2007, the Company exited the development stage
since principal operations commenced.





NOTE 2 -
Summary of Significant Accounting Policies





Principals of
Consolidation





The consolidated financial statements
include the accounts of Capital Gold Corporation and its wholly owned and
majority owned subsidiaries, Leadville Mining and Milling Holding Corporation,
Minera Santa Rita, S.A de R.L. de C.V. (“MSR”) and Oro de Altar S. de R. L. de
C.V. (“Oro”) as well as the accounts within Caborca Industrial S.A. de C.V.
(“Caborca Industrial”), a Mexican corporation 100% owned by two of the Company’s
officers and directors for mining support services. These services include, but
are not limited to, the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at slightly above
cost.  This entity is considered a variable interest entity under
accounting rules provided under FIN 46, “Consolidation of Variable Interest
Entities.”  All significant intercompany accounts and transactions are
eliminated in consolidation.





Cash and Cash
Equivalents





The
Company considers highly liquid investments with original maturities of three
months or less from the date of purchase to be cash equivalents. Cash and cash
equivalents include money market accounts.





Accounts
Receivable





Accounts
receivable represents amounts due but not yet received from customers upon sales
of precious metals.  The carrying amount of the Company’s accounts
receivable balances approximate fair value.





Marketable
Securities





The
Company accounts for its investments in marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."





Management
determines the appropriate classification of all securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. The
Company has classified its marketable equity securities as available for sale
securities and has recorded such securities at fair value using the closing
quoted market price on the exchange the securities are traded as of the balance
sheet date. The Company uses the specific identification method to determine
realized gains and losses. Unrealized holding gains and losses are excluded from
earnings and, until realized, are reported as a separate component of
stockholders' equity.




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




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


F-10




Ore
on Leach Pads




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




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




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




In-process
Inventory




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




Precious
Metals Inventory




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




Materials
and Supplies




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




Property, Plant and Mine
Development




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


F-11




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




Impairment of Long-Lived
Assets




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




Reclamation and Remediation
Costs (“Asset Retirement Obligations”)




Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and closure costs. The Asset Retirement Obligation is based on when
the spending for an existing environmental disturbance and activity to date will
occur. The Company reviews, on an annual basis, unless otherwise deemed
necessary, the Asset Retirement Obligation at its mine site in accordance with
Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations” (“SFAS 143”).





Deferred Financing
Costs





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





Intangible
Assets





Purchased
intangible assets consisting of rights of way, easements, net profit interests,
etc. are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic lives of the respective assets,
generally five years or using the units of production method. It is the
Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
SFAS 144. There was no impairment at July 31, 2009.


F-12





Fair Value of Financial
Instruments





The
carrying value of the Company's financial instruments, including cash and cash
equivalents and accounts payable approximated fair value because of the short
maturity of these instruments.





Long-term
Debt





The carrying value of the Company’s
long-term debt approximates fair value.





Revenue
Recognition





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




Revenues
from by-product sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $1,076, $707 and $0
for the fiscal years ended July 31, 2009, 2008 and 2007,
respectively.




Foreign Currency
Translation





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





Comprehensive Income
(Loss)





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





Income
Taxes





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


F-13




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




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





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





Equity Based
Compensation





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





Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.35 to $0.85 per
share of common stock. Certain of these grants are exercisable immediately upon
grant while others vest. Certain grants have vested or are vesting over a period
of five years. Also, certain grants contain a provision whereby they become
immediately exercisable upon a change of control.





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





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





The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The estimated per share weighted average grant-date fair values of stock options
and warrants granted during the fiscal years ended July 31, 2009, 2008 and 2007
were $0.29,  $0.34 and $0.33, respectively. The fair values of the
options and warrants granted were estimated based on the following weighted
average assumptions:


F-14





Year
      ended July 31,2009
                
                2008
                
                2007Expected
      volatility
                
                69.98
      – 79.72%
                
                47.60
      – 60.88%
                
                73%Risk-free
      interest rate
                
                0.86
      – 1.56%
                
                4.61%
                
                5.75%Expected
      dividend yield
                
                -
                
                -
                
                -Expected
      life
                
                2 -
      5 years
                
                5.5
      years
                
                2.4
      years





Stock
option and activity for employees during the fiscal years ended July 31, 2009,
2008 and 2007 are as follows (all tables in thousands, except for option, price
and term data):




Number of
                    Options
                  
                  
                  Weighted
                    average
                    exercise
                      price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                    term (years)
                  
                  
                  Aggregate
                      intrinsic valueOutstanding
      at July 31, 2006
                  
                  
                  5,570,454
                  
                  
                  $
                  .16
                  
                  
                  
                  -
                  
                  
                  $
                  702Options
      granted
                  
                  
                  1,050,000
                  
                  
                  
                  .36
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (3,570,909
                  )
                  
                  
                  .08
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (549,545
                  )
                  
                  
                  .22
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2007
                  
                  
                  2,500,000
                  
                  
                  $
                  .34
                  
                  
                  
                  1.20
                  
                  
                  $
                  255Options
      granted*
                  
                  
                  2,500,000
                  
                  
                  
                  .63
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (1,450,000
                  )
                  
                  
                  .32
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2008
                  
                  
                  3,550,000
                  
                  
                  $
                  .55
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted*
                  
                  
                  1,000,000
                  
                  
                  
                  .49
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (705,729
                  )
                  
                  
                  .37
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (344,271
                  )
                  
                  
                  .35
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2009
                  
                  
                  3,500,000
                  
                  
                  $
                  .59
                  
                  
                  
                  5.18
                  
                  
                  $
                  70Options
      exercisable at July 31, 2009
                  
                  
                  1,750,000
                  
                  
                  $
                  .59
                  
                  
                  
                  2.18
                  
                  
                  $
                  35




*
Issuances under 2006 Equity Incentive Plan.


F-15




Unvested
stock option balances for employees at July 31, 2009, 2008 and 2007 are as
follows:





Number
      of
                  Options
              
              
              Weighted
                average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contracted
                  term
      (years)
              
              
              Aggregate
                Intrinsic
      valueOutstanding
      at July 31, 2006
              
              
              150,000
              
              
              $
              .32
              
              
              
              1.67
              
              
              
              17Options
      granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at July 31, 2007
              
              
              150,000
              
              
              $
              .32
              
              
              
              1.67
              
              
              $
              17Options
      granted
              
              
              2,500,000
              
              
              
              .63
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (900,000
              )
              
              
              .58
              
              
              
              -
              
              
              
              -Unvested
      Options Outstanding at July 31, 2008
              
              
              1,750,000
              
              
              $
              .63
              
              
              
              4.49
              
              
              $
              8Options
      granted
              
              
              1,000,000
              
              
              
              .49
              
              
              
              -
              
              
              
              -Options
      vested
              
              
              (1,000,000
              )
              
              
              .56
              
              
              
              -
              
              
              
              -Unvested
      Options outstanding at July 31, 2009
              
              
              1,750,000
              
              
              $
              .59
              
              
              
              5.18
              
              
              $
              35


F-16




Stock
option and warrant activity for non-employees during the years ended July 31,
2009, 2008 and 2007 are as follows:





Number
      of options
              
              
              Weighted
                average
                exercise
                  price
              
              
              Weighted
                average
                remaining
                contracted
                term
      (years)
              
              
              Aggregate
                Intrinsic
      valueWarrants
      and options outstanding at July 31, 2006
              
              
              25,561,000
              
              
              $
              .29
              
              
              
              1.33
              
              
              $
              1,940Options
      granted
              
              
              16,982,542
              
              
              
              .33Options
      exercised
              
              
              (18,633,000
              )
              
              
              .29
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (1,375,000
              )
              
              
              .31
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2007
              
              
              22,535,542
              
              
              $
              .33
              
              
              
              1.48
              
              
              $
              2,578Options
      granted*
              
              
              1,715,000
              
              
              
              .66Options
      exercised
              
              
              (21,555,542
              )
              
              
              .33
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (680,000
              )
              
              
              .30
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2008
              
              
              2,015,000
              
              
              $
              .62
              
              
              
              3.54
              
              
              $
              54Options
      granted
              
              
              1,400,000
              
              
              
              .50
              
              
              
              -
              
              
              
              -Options
      exercised
              
              
              (150,000
              )
              
              
              .39
              
              
              
              -
              
              
              
              -Options
      expired
              
              
              (150,000
              )
              
              
              .39
              
              
              
              -
              
              
              
              -Warrants
      and options outstanding at July 31, 2009
              
              
              3,115,000
              
              
              $
              .59
              
              
              
              3.36
              
              
              $
              73Warrants
      and options exercisable at July 31, 2009
              
              
              2,152,500
              
              
              $
              .61
              
              
              
              1.41
              
              
              $
              3




*
1,115,000 issued under 2006 Equity Incentive Plan.


F-17




Unvested
stock option balances for non-employees at July 31, 2009, 2008 and 2007 are as
follows:




Number
      of
                  
                  
                  Weighted
                    Average
                    Exercise
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                  
                  
                  Aggregate
                    IntrinsicOptions
                  
                  
                  price
                  
                  
                  term
      (years)
                  
                  
                  valueOutstanding
      at July 31, 2006
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Options
      granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2007
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Options
      granted
                  
                  
                  650,000
                  
                  
                  
                  .63
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (195,000
                  )
                  
                  
                  .63
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      options outstanding at July 31, 2008
                  
                  
                  455,000
                  
                  
                  
                  .63
                  
                  
                  
                  4.49
                  
                  
                  $
                  3Options
      granted
                  
                  
                  1,275,000
                  
                  
                  
                  .49Options
      vested
                  
                  
                  (767,500
                  )
                  
                  
                  .51
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      options outstanding at July 31, 2009
                  
                  
                  962,500
                  
                  
                  $
                  .54
                  
                  
                  
                  4.88
                  
                  
                  $
                  70




The impact on the Company’s results of
operations of recording equity based compensation for the fiscal years ended
July 31, 2009, 2008 and 2007, for employees and non-employees was approximately
$894, $987 and $492 and reduced earnings per share by $0.01, $0.01 and $0.00 per
basic and diluted share, respectively.  The Company has not recognized
any tax benefit or expense for the fiscal years ended July 31, 2009, 2008 and
2007, related to these items due to the Company’s net operating losses and
corresponding valuation allowance within the U.S. (See Note 22).




As of July 31, 2009, 2008 and 2007,
there was approximately $792, $686 and $53, respectively, of unrecognized equity
based compensation cost related to options granted to executives and employees
which have not yet vested.





Reclassifications





Certain
items in these financial statements have been reclassified to conform to the
current period presentation. These reclassifications had no impact on the
Company’s results of operations, stockholders’ equity or cash
flows.





Net Loss Per Common
Share





Basic and
diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Equivalent common shares,
consisting of stock options and warrants, which amounted to 25,035,542 shares,
is excluded from the calculation of diluted net loss per share for the fiscal
year ended July 31, 2007 since its effect would be anti-dilutive.





F-18





Concentrations of Credit
Risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and marketable
securities. The Company maintains cash balances at financial institutions which
exceed the current Federal Deposit Insurance Corporation limit of $200,000 at
times during the year.





Accounting for Derivatives
and Hedging Activities





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





On
February 24, 2009, the Company settled with Standard Bank, Plc., the remaining
58,233 ounces of gold under the original Gold Price Protection arrangements
entered into in March 2006. The purpose of these arrangements at the time was to
protect the Company in the event the gold price dropped below $500 per ounce.
Total remuneration to unwind these arrangements was approximately $1,906. In
conjunction with the settlement of the gold price protection agreement, the
Company incurred an Other
Expense of approximately $1,391 during the fiscal quarter ended April 30,
2009.





The
Company entered into interest rate swap agreements in accordance with the terms
of its credit facility, which requires that the Company hedge at least 50
percent of the Company’s outstanding debt under this facility.  The
agreements entered into cover $9,375 or 75% of the outstanding debt. Both swaps
covered this same notional amount of $9,375, but over different time
horizons.  The first covered the six months commencing October 11,
2006 and terminated on March 31, 2007 and the second covering the period from
March 30, 2007 with a termination date of December 31, 2010.  The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense.  No component of hedge results will be excluded from
the assessment of hedge effectiveness.





Use of
Estimates





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





F-19





Recently Issued Accounting
Pronouncements





Fair
Value Accounting





In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value
Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of
FAS 157 were adopted January 1, 2009. In February 2008, the FASB staff
issued FSP No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP
FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157
for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The provisions of FSP FAS 157-2 are effective
for companies beginning January 1, 2009, and are not expected to have a
significant impact on the Company.





In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
FAS 157-3”), which clarifies the application of FAS 157 in an inactive
market. The intent of FSP FAS 157-3 is to provide guidance on how the fair value
of a financial asset is to be determined when the market for that financial
asset is inactive. FSP FAS 157-3 states that determining fair value in
an inactive market depends on the facts and circumstances requires the use of
significant judgment and, in some cases, observable inputs may require
significant adjustment based on unobservable data. Regardless of the valuation
technique used, an entity must include appropriate risk adjustments that market
participants would make for nonperformance and liquidity risks when determining
fair value of an asset in an inactive market. FSP FAS 157-3 was effective
upon issuance. The Company has incorporated the principles of FSP FAS 157-3
in determining the fair value of financial assets when the market for those
assets is not active.





FAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:




Level 1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities;Level 2
              Quoted
      prices in markets that are not active, or inputs that are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability; andLevel 3
              Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (supported by little or no
      market activity).




The
following table sets forth the Company’s financial assets and liabilities
measured at fair value by level within the fair value hierarchy. As required by
FAS 157, assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.





Fair
      Value at July 31, 2009
                              (in
      thousands)Total
                            
                            
                            Level
      1
                            
                            
                            Level
      2
                            
                            
                            Level
      3Assets:Cash
      equivalents
                            
                            $
                            3,334
                            
                            
                            $
                            3,334
                            
                            
                            $
                            -
                            
                            
                            $
                            -Marketable
      securities
                            
                            
                            35
                            
                            
                            
                            35
                            
                            
                            
                            -
                            
                            
                            
                            -$
                            3,369
                            
                            
                            $
                            3,369
                            
                            
                            $
                            -
                            
                            
                            $
                            -Liabilities:Interest
      rate swap
                            
                            
                            193
                            
                            
                            
                            -
                            
                            
                            
                            193
                            
                            
                            
                            -$
                            193
                            
                            
                            $
                            -
                            
                            
                            $
                            193
                            
                            
                            $
                            -






F-20




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





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





In
April 2009, the FASB issued Staff Position No. FAS 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP
FAS 157-4”), which provides additional guidance on determining fair value when
the volume and level of activity for an asset or liability have significantly
decreased and includes guidance on identifying circumstances that indicate when
a transaction is not orderly. In April 2009, the FASB issued Staff Position
No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), which: 1)
clarifies the interaction of the factors that should be considered when
determining whether a debt security is other than temporarily impaired, 2)
provides guidance on the amount of an other-than-temporary impairment recognized
in earnings and other comprehensive income and 3) expands the disclosures
required for other-than-temporary impairments for debt and equity securities.
Also in April 2009, the FASB issued Staff Position No. 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS
107-1 and APB 28-1”), which requires disclosures about the fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Adoption of these Staff Positions is
required for the Company’s interim reporting period beginning April 1, 2009
with early adoption permitted. The Company adopted the provisions of FSP FAS
157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1 for the
interim period ended April 30, 2009. The adoption of this standard did not have
a material impact on the financial condition or the results of the Company’s
operations.





Fair
Value Option





In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” (“FAS 159”).
FAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value, with the objective of improving financial
reporting by mitigating volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of FAS 159 were adopted
January 1, 2009. The Company did not elect the Fair Value Option for any of
its financial assets or liabilities, and therefore, the adoption of FAS 159
had no impact on the Company’s consolidated financial position, results of
operations or cash flows.





Derivative
Instruments





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


F-21





Accounting
for the Useful Life of Intangibles




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




Business
Combinations





In
April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (“FSP FAS 141(R)-1”), which amends and clarifies FAS 141(R).
The intent of FSP FAS 141(R)-1 is to address application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. This FSP is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after January 1, 2009. The Company will apply the provisions of FSP FAS
141(R)-1 to all future business combinations.





Equity
Method Investment




In
November 2008, the Emerging Issues Task Force (“EITF”) reached consensus on
Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF
08-6”), which clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. The intent of EITF 08-6 is
to provide guidance on (i) determining the initial measurement of an equity
method investment, (ii) recognizing other-than-temporary impairments of an
equity method investment and (iii) accounting for an equity method
investee’s issuance of shares. EITF 08-6 was effective for the Company’s fiscal
year beginning August 1, 2009 and has been applied prospectively. The
adoption of EITF 08-6 had no impact on the Company’s consolidated financial
position or results of operations.




Equity-linked
Financial Instruments




In
June 2008, the EITF reached consensus on Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“EITF 07-5”). EITF 07-5 clarifies the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which would
qualify as a scope exception under FASB Statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“FAS 133”). EITF 07-5 was
effective for the Company’s fiscal year beginning August 1, 2009. The adoption
of EITF 07-5 had no impact on the Company’s consolidated financial position or
results of operations.





Subsequent Events




In
May 2009, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 165 “Subsequent Events” (“FAS 165”) which establishes
accounting and reporting standards for events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The statement sets forth (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet in its financial
statements, and (iii) the disclosures that an entity should make about
events or transactions occurring after the balance sheet date in its financial
statements. The Company adopted the provisions of FAS 165 for the interim period
ended June 30, 2009. The adoption of FAS 165 had no impact on the Company’s
consolidated financial position, results of operations or cash
flows.




F-22




Variable Interest
Entities





In
June 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB
Interpretation No. 46(R)” (“FAS 167”), which requires an entity to perform a
qualitative analysis to determine whether the enterprise’s variable interest
gives it a controlling financial interest in a variable interest entity (“VIE”).
This analysis identifies a primary beneficiary of a VIE as the entity that has
both of the following characteristics: i) the power to direct the activities of
a VIE that most significantly impact the entity’s economic performance and ii)
the obligation to absorb losses or receive benefits from the entity that could
potentially be significant to the VIE. FAS 167 also amends FIN 46(R) to require
ongoing reassessments of the primary beneficiary of a VIE. The provisions of FAS
167 are effective for the Company’s fiscal year beginning January 1, 2010.
The Company currently accounts for Caborca Industrial (“CI”) as a VIE and is
evaluating the potential impact of adopting this statement on the Company’s
consolidated financial position, results of operations and cash
flows.





The Accounting Standards
Codification





In
June 2009, the FASB issued FASB Statement No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles—a replacement of FASB Statement No. 162” (“FAS 168”
or “the Codification”).  FAS 168 will become the source of
authoritative U.S. GAAP to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The Codification will
supersede all non-SEC accounting and reporting standards.  All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative.  FAS 168 is effective for the Company’s
interim quarterly period beginning after September 15, 2009. The Company does
not expect the adoption of FAS 168 to have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.





NOTE 3 -
Marketable Securities





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





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Marketable
      equity securities, at cost
                  
                  $
                  50
                  
                  
                  $
                  50Marketable
      equity securities, at fair value(See
      Notes 12 & 14)
                  
                  $
                  35
                  
                  
                  $
                  65





F-23





NOTE 4 –
Material and Supplies Inventories





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Materials,
      supplies and other
                  
                  $
                  1,381
                  
                  
                  $
                  937Total
                  
                  $
                  1,381
                  
                  
                  $
                  937




NOTE 5 -
Ore on Leach Pads and Inventories (“In-Process Inventory”)




(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Ore
      on leach pads
                  
                  $
                  20,024
                  
                  
                  $
                  12,176Total
                  
                  $
                  20,024
                  
                  
                  $
                  12,176




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




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





NOTE 6 –
Deposits





Deposits are classified as current
assets and represent payments made on mining equipment for the Company’s El
Chanate Project in Sonora, Mexico. Deposits are summarized as
follows:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Equipment
      deposits
                  
                  $
                  26
                  
                  
                  $
                  9Total
      Deposits
                  
                  $
                  26
                  
                  
                  $
                  9


F-24





NOTE 7 –
Other Current Assets





Other
current assets consist of the following:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Value
      added tax to be refunded
                  
                  $
                  1,032
                  
                  
                  $
                  425Other
                  
                  
                  10
                  
                  
                  
                  65Total
      Other Current Assets
                  
                  $
                  1,042
                  
                  
                  $
                  490





NOTE 8 –
Property and Equipment





Property
and Equipment consist of the following:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Process
      equipment and facilities
                  
                  $
                  26,477
                  
                  
                  $
                  21,693Mining
      equipment
                  
                  
                  2,248
                  
                  
                  
                  974Mineral properties
                  
                  
                  175
                  
                  
                  
                  141Construction
      in progress
                  
                  
                  70
                  
                  
                  
                  1,277Computer
      and office equipment
                  
                  
                  389
                  
                  
                  
                  316Improvements
                  
                  
                  16
                  
                  
                  
                  16Furniture
                  
                  
                  47
                  
                  
                  
                  38Total
                  
                  
                  29,422
                  
                  
                  
                  24,455Less:
      accumulated depreciation
                  
                  
                  (7,005
                  )
                  
                  
                  (3,537
                  )Property
      and equipment, net
                  
                  $
                  22,417
                  
                  
                  $
                  20,918





Depreciation
expense for the fiscal years ended July 31, 2009, 2008 and 2007 was
approximately $3,468, $2,779 and $720, respectively.





NOTE 9 -
Intangible Assets





Intangible
assets consist of the following:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Repurchase
      of Net Profits Interest
                  
                  $
                  500
                  
                  
                  $
                  500Water
      Rights
                  
                  
                  241
                  
                  
                  
                  134Reforestation
      fee
                  
                  
                  73
                  
                  
                  
                  -Mobilization
      Payment to Mineral Contractor
                  
                  
                  70
                  
                  
                  
                  70Investment
      in Right of Way
                  
                  
                  18
                  
                  
                  
                  18Total
                  
                  
                  902
                  
                  
                  
                  722Accumulated
      Amortization
                  
                  
                  (584
                  )
                  
                  
                  (541
                  )Intangible
      assets, net
                  
                  $
                  318
                  
                  
                  $
                  181





Purchased
intangible assets consisting of rights of way, water rights, easements, net
profit interests, etc. are carried at cost less accumulated amortization.
Amortization is computed using the straight-line method over the economic lives
of the respective assets, generally five years or using the UOP method. It is
the Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
SFAS 144. There was no impairment at July 31, 2009.




F-25




On September 13, 2006, the Company
repurchased the 5% net profits interest formerly held by Grupo Minera FG (“FG”),
and subsequently acquired by Daniel Gutierrez Cibrian, with respect to the
operations at the El Chanate mine. That net profits interest had originally been
granted to FG in connection with the April 2004 termination of the joint venture
agreement between FG and MSR, the Company’s wholly owned Mexican
subsidiary.  FG also received a right of first refusal to carry out
the work and render construction services required to effectuate the El Chanate
Project.  This right of first refusal is not applicable where a
funding source for the project determines that others should render such works
or services.  FG has assigned or otherwise transferred to MSR all
permits, licenses, consents and authorizations (collectively, “authorizations”)
for which FG had obtained in its name in connection with the development of the
El Chanate Project to the extent that the authorizations are
assignable.  To the extent that the authorizations are not assignable
or otherwise transferable, FG has given its consent for the authorizations to be
cancelled so that they can be re-issued or re-granted in MSR’s
name.  The foregoing has been completed.  The purchase price
for the buyback of the net profits interest was $500, and was structured as part
of the project costs financed by the loan agreement with Standard Bank. (See
Note 17). Mr. Cibrian retained a 1% net profits interest in MSR, payable only
after a total US $20 million in net profits has been generated from operations
at El Chanate.  The Company recorded this transaction on its balance
sheet as an intangible asset under guidance provided by FAS 142 – Goodwill and Other Intangible
Assets to be amortized over the period of which the asset is expected to
contribute directly or indirectly to the Company’s cash flow.  On
March 23, 2007, the Company reacquired the remaining 1% net profits interest
(see Note 18).





The Right of Way, Water Rights,
Reforestation Fee and the Mobilization Payment were recorded at cost and are
being amortized using the units of production method.  Amortization
expense for the year ended July 31, 2009, 2008 and 2007 was approximately $43,
$530 and $7, respectively.  The net profits interest from FG was fully
amortized as of July 31, 2008.





NOTE 10 -
Mining Concessions





Mining
concessions consists of the following:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008El
      Chanate
                  
                  $
                  45
                  
                  
                  $
                  45El
      Charro
                  
                  
                  25
                  
                  
                  
                  25Total
                  
                  
                  70
                  
                  
                  
                  70Less:
      accumulated amortization
                  
                  
                  (19
                  )
                  
                  
                  (11
                  )Total
                  
                  $
                  51
                  
                  
                  $
                  59





The El Chanate concessions are carried
at historical cost and are being amortized using the units of production method.
They were acquired in connection with the purchase of the stock of Minera
Chanate (see Note 1).   Amortization expense for the years ended
July 31, 2009, 2008 and 2007 was approximately $8, $8 and $3,
respectively.





MSR acquired an additional mining
concession – El Charro. El Charro lies within the current El Chanate property
boundaries. MSR is required to pay 1 1/2% net smelter royalty in connection with
the El Charro concession.





NOTE 11 -
Loans Receivable - Affiliate





Loans receivable - affiliate consist of
expense reimbursements due from a publicly-owned corporation in which the
Company has an investment. The Company's chairman of the board of directors and
chief executive officer was an officer and director of that corporation. On March 10, 2008, the Company’s
chairman of the board of directors resigned as both an officer and director of
this corporation.These loans are non-interest bearing and due
on demand (see Note 3 & 14).




F-26




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




The Company includes environmental and
reclamation costs on an ongoing basis, in our internal revenue and cost
projections.  No assurance can be given that environmental regulations
will not be changed in a manner that would adversely affect the Company’s
planned operations.  As of July 31, 2009, we estimated the reclamation
costs for the El Chanate site to be approximately $2,950.  Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either the
timing or amount of the reclamation and abandonment costs.  The Asset
Retirement Obligation is based on when the spending for an existing
environmental disturbance and activity to date will occur. The Company reviews,
on an annual basis, unless otherwise deemed necessary, the Asset Retirement
Obligation at each mine site.  The Company reviewed the estimated
present value of the El Chanate mine reclamation and closure costs as of July
31, 2009.  As of July 31, 2009 and 2008, approximately $1,594 and
$1,666, respectively, was accrued for reclamation obligations relating to
mineral properties in accordance with SFAS No. 143, “Accounting for Asset
Retirement Obligations.”




The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the years ended July 31, 2009 and 2008:




(in
      thousands)Balance
      as of July 31, 2007
                              
                              $
                              1,249Additions,
      changes in estimates and other
                              
                              
                              293Liabilities
      settled
                              
                              
                              -Accretion
      expense
                              
                              
                              124Balance
      as of July 31, 2008
                              
                              $
                              1,666Additions,
      changes in estimates and other
                              
                              
                              (184
                              )Liabilities
      settled
                              
                              
                              (44
                              )Accretion
      expense
                              
                              
                              156Balance
      as of July 31, 2009
                              
                              $
                              1,594





NOTE 13 –
Accumulated Other Comprehensive Income





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





Foreign
                        currency items
                      
                      
                      Unrealized
      gain
                        (loss) on securities
                      
                      
                      Change
      in fair
                        value
      on interest
                        rate swaps
                      
                      
                      Accumulated
      other
                        comprehensive
                        incomeBalance
      as of July 31, 2006
                      
                      $
                      106
                      
                      
                      $
                      40
                      
                      
                      $
                      -
                      
                      
                      $
                      146Income
      (loss)
                      
                      
                      (47
                      )
                      
                      
                      -
                      
                      
                      
                      205
                      
                      
                      
                      158Balance
      as of July 31, 2007
                      
                      $
                      59
                      
                      
                      $
                      40
                      
                      
                      $
                      205
                      
                      
                      $
                      304Income
      (loss)
                      
                      
                      622
                      
                      
                      
                      (25
                      )
                      
                      
                      (141
                      )
                      
                      
                      456Balance
      as of July 31, 2008
                      
                      
                      681
                      
                      
                      
                      15
                      
                      
                      
                      64
                      
                      
                      
                      760Income
      (loss)
                      
                      
                      (2,731
                      )
                      
                      
                      (30
                      )
                      
                      
                      23
                      
                      
                      
                      (2,738
                      )Balance
      as of July 31, 2009
                      
                      $
                      (2,050
                      )
                      
                      $
                      (15
                      )
                      
                      $
                      87
                      
                      
                      $
                      (1,978
                      )




F-27




The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the years ended July 31, 2009, 2008 and 2007.





NOTE 14 -
Related Party Transactions





In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $6, $6 and $9 in expense reimbursements including office rent from
this entity for the years ended July 31, 2009, 2008 and 2007, respectively (see
Notes 3 and 11).





The Company utilizes Caborca
Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the
Company’s Chief Executive Officer, and Jeffrey W. Pritchard, the Company’s
former Executive Vice President, for mining support services. These services
include but are not limited to the payment of mining salaries and related costs.
Caborca Industrial bills the Company for these services at slightly above cost.
Mining expenses charged by Caborca Industrial and eliminated upon consolidation
amounted to approximately $4,767, $3,775 and $702 for the year ended July 31,
2009, 2008 and 2007, respectively.





During the years ended July 31, 2009,
2008 and 2007, the Company paid Jack Everett, its former Vice President
Exploration and Director, consulting fees of $0, $100 and $0,
respectively.  In addition, this individual earned wages of $120
during the years ended July 31, 2007.  During the years ended July 31,
2009, 2008 and 2007, the Company paid Robert Roningen, a director, legal and
consulting fees of $8, $35 and $24, respectively.





NOTE 15 -
Stockholders' Equity





Common
Stock





At various stages in the Company’s
development, shares of the Company’s common stock has been issued at fair market
value in exchange for services or property received with a corresponding charge
to operations, property and equipment or additional paid-in capital depending on
the nature of services provided or property received.





The Company issued 1,150,000 shares of
common stock and 12,600,000 common stock purchase warrants to Standard Bank as
part of a commitment fee to entering into the credit facility on August 15,
2006, with its wholly-owned subsidiaries MSR and Oro.  The Company
recorded the issuance of the 1,150,000 shares of common stock and 12,600,000
warrants as deferred financing costs of approximately $351 and $3,314,
respectively, as a reduction of stockholders' equity on the Company's balance
sheet. The issuance of 1,150,000 shares was recorded at the fair market value of
the Company's common stock at the closing date or $0.305 per
share.  The warrants were valued at approximately $3,314 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet (See
Note 17).  The balance of deferred financing costs, net of
amortization, as of July 31, 2009 and 2008, as a reduction of stockholders'
equity, was approximately $1,808 and $2,611.  Amortization expense for
the years ended July 31, 2009, 2008 and 2007, was approximately $803, $930 and
$750, respectively.





The Company closed two private
placements in January 2007 pursuant to which it issued an aggregate of
12,561,667 units, each unit consisting of one share of its common stock and a
warrant to purchase 1⁄4 of a share of its common stock at $0.30 per unit for
proceeds of approximately $3,486, net of commissions of approximately
$283.  Each warrant issued  in the January 2007 placements
is exercisable for 1⁄4 of a share of common stock, at an exercise price equal to
$0.40 per share.  Thus, a holder must exercise four warrants to
purchase one share of common stock.  Each warrant has a term of
eighteen months and is fully exercisable from the date of
issuance.  The Company issued to the placement agents eighteen month
warrants to purchase up to an aggregate of 942,125 shares of common stock at an
exercise price of $0.30 per share.  Such placement agent warrants are
valued at approximately $142 using the Black-Scholes option pricing
method.


F-28





The Company also received proceeds of
approximately $319, $7,473 and $5,643 during the years ended July 31, 2009, 2008
and 2007, from the exercising of an aggregate of 855,729, 22,994,178 and
22,203,909 of warrants and options, respectively, issued to investors in past
private placements, to officers and directors as well as to outside parties for
services rendered.





On March 22, 2007, the Company issued
500,000 shares of common stock to John Brownlie, the Company’s Chief Operating
Officer under the Company’s 2006 Equity Incentive Plan. The fair value of the
shares issued in March 2007 amounted to $225 or $0.45 per share.  The
shares, which were granted to Mr. Brownlie as compensation for services already
provided to the Company, vested immediately.  The compensation expense
was fully recognized on the date of the grant.





In March 2007, the Company issued
65,625 shares of common stock to an independent contractor for services provided
related to the Company’s El Chanate project. The fair value of the services
provided amounted to $26 or $0.40 per share. In April 2007, this independent
contractor was engaged as the general manager of the Company’s El Chanate
project for a six month term with an option for an additional six month term, if
mutually agreed upon by both parties. Pursuant to the agreement, the Company
issued 113,636 shares of common stock with a fair value of $50 or $0.44 per
share at the fair market value of the Company’s common stock on the date of the
agreement. The issuance of these shares vest over the six-month
term.  The independent contractor and the Company mutually agreed to
terminate the contractor after three months as construction was
complete.  The Company issued 56,818 shares of the Company’s common
stock on the vested portion of the 113,636 shares or 50%.





On
December 20, 2007, at the recommendation of the Compensation Committee of the
Board of Directors, the Company’s executive officers, directors and employees
were granted 1,095,000 restricted shares under our 2006 Equity Incentive Plan
(the “Plan”).   The restricted shares granted vest equally over
three years from the date of grant.  The fair value of the Company’s
stock was $0.63 on the date of grant resulting in the Company recording
approximately $690 in deferred compensation cost.  For the year ended
July 31, 2008, the Company has recorded approximately $194 in equity
compensation expense upon the vesting of a portion of restricted
shares.





On July
17, 2008, at the recommendation of the Compensation Committee of the Board of
Directors, the Company’s executive officers and directors were granted 515,000
shares under our 2006 Equity Incentive Plan. The restricted shares granted
vested immediately.  The fair value of the Company’s stock was $0.70
on the date of grant resulting in the Company recording approximately $361 in
equity compensation expense.





During the year ended July 31, 2009,
the Company issued 222,500 restricted shares to employees  under its
2006 Equity Incentive Plan. The restricted shares granted vested
immediately.  The fair value of the Company’s stock ranged from $0.34
to $0.52 on the date of grant resulting in the Company recording approximately
$113 in equity compensation expense.





Recapitalization





In February 2007, the Company's
Certificate of Incorporation was amended to increase the Company's authorized
shares of capital stock from 200,000,000 to 250,000,000 shares.  In
January 2008, the Company amended its Certificate of Incorporation to increase
the Company’s authorized shares of capital stock from 250,000,000 to 300,000,000
shares.




F-29




Stock
Split





In September 2008, our Board of
Directors (the "Board") recommended to our stockholders a proposal to effect a
reverse stock split of all outstanding shares of our Common Stock in an amount
which our Board of Directors deems appropriate to result in a sustained per
share market price above $2.00 per share, to be at a ratio of not less than
one-for-four and not more than one-for-six (the "Reverse Stock
Split").  In conjunction with the Reverse Stock Split, our Board has
approved and is recommending to our stockholders a proposal to effect a
reduction in the number of shares of Common Stock authorized for issuance and an
increase in the par value thereof in proportion to the Reverse Stock
Split.  Our stockholders subsequently approved the reverse stock split
in October 2008.  We will not issue fractional shares in connection
with the Reverse Stock Split. Any fractional shares that result from the Reverse
Stock Split will be rounded up to the next whole share.  However, if
the Board determines that effecting these capitalization changes would not be in
the best interests of our stockholders, the Board can determine not to effect
any or all of the changes.  As of July 31, 2009, the board of
directors has not affected a capitalization change.




Warrants and
Options





The fair value of each warrant and
option award is estimated on the date of grant using a Black-Scholes option
valuation model.  The Company issues warrants and options to purchase
common stock with an exercise price of no less than fair market value of the
underlying stock at the date of grant.





On November 30, 2006, the Company’s
board of directors granted 100,000 common stock options to each of John Postle,
Ian A. Shaw and Mark T. Nesbitt, the Company’s independent directors. The
options are to purchase shares of the Company’s common stock at an exercise
price of $0.33 per share (the closing price of its common stock on that date)
for a period of two years. The Company utilized the Black-Scholes Method to fair
value the 300,000 options received by the directors and recorded approximately
$40 as equity based compensation expense.  The grant date fair value
of each stock option was $0.13.





On December 13, 2006, the Company
issued two year options to purchase the Company’s common stock at an exercise
price of $0.36 per share to its Chief Operating Officer, Chief Financial Officer
and the Company’s Canadian counsel.  These options are for the
purchase of 250,000 shares, 100,000 shares and 100,000 shares,
respectively.  The Company utilized the Black-Scholes Method to fair
value the 450,000 options received by these individuals and recorded
approximately $61 as stock based compensation expense.  The grant date
fair value of each stock option was $0.14.





On March 22, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.45 per share to the Company’s then SEC Counsel.  These options are
for the purchase of 100,000 shares and were issued under the 2006
Equity-Incentive Plan.  The Company utilized the Black-Scholes Method
to fair value these options and recorded approximately $15 as equity based
compensation expense.  The grant date fair value of each stock option
was $0.15.





On June 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.384 per share to the Company’s CFO.  These options are for the
purchase of 500,000 shares and were issued under the 2006 Equity Incentive
Plan.  The Company utilized the Black-Scholes Method to fair value
these options and recorded approximately $65 as equity based compensation
expense.  The grant date fair value of each stock option was
$0.13.





On August 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price
ranging from $0.43 to $0.50 per share to outside parties for services
provided.  These options are for the purchase of 465,000 shares and
were issued under the 2006 Equity-Incentive Plan.  The Company
utilized the Black-Scholes Method to fair value these options and recorded
approximately $58 as equity based compensation expense.  The average
grant date fair value of each stock option was $0.12 with an exercise price of
no less than fair market value of the underlying stock at the date of
grant.


F-30




On December 20 2007,  at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s executive officers, directors and employees, Gifford Dieterle, John
Brownlie, Christopher Chipman, Jeffrey Pritchard, Scott Hazlitt, Ian Shaw, John
Postle, Mark Nesbitt, Roger Newell, Robert Roningen, and employees were granted
500,000, 500,000, 500,000, 500,000, 350,000, 150,000, 150,000, 150,000, 100,000,
100,000 and 150,000 stock options, respectively, aggregating 3,150,000 stock
options under our 2006 Equity Incentive Plan. The stock options have a term of
seven years and vest as follows: 20% vested upon issuance and the balance vest
20% annually thereafter. The exercise price of the stock options is $0.63 per
share (per the Plan, the closing price on the Toronto Stock Exchange on the
trading day immediately prior to the day of determination converted to U.S.
Dollars). In the event of a termination of continuous service (other than as a
result of a change of control, as defined in the Plan), unvested stock options
shall terminate and, with regard to vested stock options, the exercise period
shall be the lesser of the original expiration date or one year from the date
continuous service terminates. Upon a change of control, all unvested stock
options and unvested restricted stock grants immediately vest.  The
Company utilized the Black-Scholes method to fair value the 3,150,000 options
received by these individuals totaling $1,060.  For the fiscal year
ended July 31, 2008, the Company recorded approximately $375 in equity
compensation expense on the vested portion of these stock options. The grant
date fair value of each stock option was $0.34.





On July 17, 2008, the Company closed in
escrow pending execution of Mexican collateral documents and certain other
ministerial matters an Amended And Restated Credit Agreement (the “Credit
Agreement”) involving our wholly-owned Mexican subsidiaries Minera Santa Rita S.
de R.L. de C.V. (“MSR”) and Oro de Altar S. de R.L. de C.V. (“Oro”), as
borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank, as the
lender. Pursuant to the Credit Agreement, the Company agreed to issue to
Standard Bank a two year warrant to purchase an aggregate of 600,000 shares of
our common stock at an exercise price of $0.852 per share.  The
warrants were valued at approximately $103 using the Black-Scholes option
pricing model and were reflected as deferred financing costs as a reduction of
stockholders' equity on the Company’s balance sheet as of July 31, 2008 (See
Note 17).  The grant date fair value of each stock warrant was
$0.17.





On November 1, 2008, the Company issued
stock options with a two year term to purchase the Company’s common stock at an
exercise price of $0.65 per share to an investor relations firm for services
provided.  These options are for the purchase of 100,000
shares.  The Company utilized the Black-Scholes Method to fair value
the 100,000 options received by this firm and recorded approximately $6 as
equity based compensation expense.  The grant date fair value of each
stock option was $0.06.





On December 3, 2008, the Company issued
stock options with a two year term to purchase the Company’s common stock at an
exercise price of $0.35 per share to its then securities
counsel.  These options are for the purchase of 25,000
shares.  The Company utilized the Black-Scholes Method to fair value
the 25,000 options received by these individuals and recorded approximately $4
as equity based compensation expense.  The grant date fair value of
each stock option was $0.16.





On January 20, 2009, at the
recommendation of the Compensation Committee and on the approval by the Board of
Directors, the Company’s executive officers and directors were granted 2,275,000
stock options under our 2006 Equity Incentive Plan as incentive compensation.
The stock options were awarded as follows:  Gifford Dieterle – 500,000,
John Brownlie – 500,000, Jeffrey Pritchard – 500,000, Christopher Chipman –
250,000, Scott Hazlitt – 250,000, Ian Shaw – 75,000, John Postle – 50,000, Mark
T. Nesbitt – 50,000, Roger Newell -50,000 and Robert Roningen – 50,000. The stock options
have a term of five years and vest as follows: one-third vested upon issuance
and the balance vest on a one-third basis annually thereafter. The exercise
price of the stock options is $0.49 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a termination of
continuous service (other than as a result of a change of control, as defined in
the Plan), unvested stock options shall terminate and, with regard to vested
stock options, the exercise period shall be the lesser of the original
expiration date or one year from the date continuous service terminates. Upon a
change of control, all unvested stock options and unvested restricted stock
grants immediately vest.  The Company utilized the Black-Scholes
method to fair value the 2,275,000 options received by these individuals
totaling $647.  The grant date fair value of each stock option was
$0.29.


F-31




2006 Equity Incentive
Plan





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





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





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





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





On July 23, 2009, at the recommendation
of the Compensation Committee and upon approval by the Board of Directors, the
Company amended the 2006 Equity Incentive Plan to provide for cashless exercises
of options by participants under the Plan.  Payment of the option exercise
price may now be made (i) in cash or by check payable to the Company, (ii) in
shares of Common Stock duly owned by the option holder (and for which the option
holder has good title free and clear of any liens and encumbrances), valued at
the fair market value on the date of exercise, or (iii) by delivery back to the
Company from the shares acquired on exercise of the number of shares of common
stock equal to the exercise price, valued at the fair market value on the date
of exercise. Previously, the exercise price of an option must have been paid in
cash.  No options may be granted under the Plan after the tenth
anniversary of its effective date.  Unless the Board determines
otherwise, there are certain continuous service requirements and the options are
not transferable.





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


F-32




Information  regarding
the options approved by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2009, 2008 and 2007 is summarized
below:





2007
                                      
                                      
                                      2008
                                      
                                      
                                      2009Shares
                                      
                                      
                                      Option
                                        Price
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        Price
                                      
                                      
                                      Shares
                                      
                                      
                                      Option
                                        Price
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        Price
                                      
                                      
                                      Shares
                                      
                                      
                                      Option Price
                                      
                                      
                                      Weighted
                                        Average
                                        Exercise
                                        PriceOutstanding
      beginning at year
                                      
                                      
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      
                                      1,050,000
                                      
                                      
                                      $
                                      0.36-0.45
                                      
                                      
                                      $
                                      0.38
                                      
                                      
                                      
                                      4,665,000
                                      
                                      
                                      $
                                      0.36-0.45
                                      
                                      
                                      $
                                      0.38Granted
                                      
                                      
                                      1,050,000
                                      
                                      
                                      
                                      0.36-0.45
                                      
                                      
                                      $
                                      0.38
                                      
                                      
                                      
                                      3,615,000
                                      
                                      
                                      
                                      0.38-0.63
                                      
                                      
                                      $
                                      0.61
                                      
                                      
                                      
                                      2,400,000
                                      
                                      
                                      
                                      0.35-0.65
                                      
                                      
                                      $
                                      0.50Canceled
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (344,271
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (705,729
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Outstanding
      end of year
                                      
                                      
                                      1,050,000
                                      
                                      
                                      $
                                      0.36-0.45
                                      
                                      
                                      $
                                      0.38
                                      
                                      
                                      
                                      4,665,000
                                      
                                      
                                      $
                                      0.36-0.63
                                      
                                      
                                      $
                                      0.56
                                      
                                      
                                      
                                      6,015,000
                                      
                                      
                                      $
                                      0.35-0.65
                                      
                                      
                                      $
                                      0.56Exercisable
                                      
                                      
                                      1,050,000
                                      
                                      
                                      $
                                      0.36-0.45
                                      
                                      
                                      $
                                      0.38
                                      
                                      
                                      
                                      3,360,000
                                      
                                      
                                      $
                                      0.36-0.63
                                      
                                      
                                      $
                                      0.54
                                      
                                      
                                      
                                      3,902,500
                                      
                                      
                                      $
                                      0.35-0.65
                                      
                                      
                                      $
                                      0.60Weighted  average
      remaining contractual life (years)
                                      
                                      1-2
      years
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      5-6
      years
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      4-5
      years
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Available
      for future grants
                                      
                                      
                                      8,450,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,225,000
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      602,500
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -





Restricted
stock awards granted by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2009, 2008 and 2007, were 222,500,
500,000 and 1,610,000 shares, respectively.





NOTE 16 -
Debt





Long
      term debt consists of the following:
                
                (in
      thousands)July
      31,
                  2009
                
                
                July
      31,
                  2008Total
      long-term debt
                
                $
                8,000
                
                
                $
                12,500Less
      current portion
                
                
                3,600
                
                
                
                4,125Long-term
      debt
                
                $
                4,400
                
                
                $
                8,375




F-33


In September 2008, the Company entered
into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving
our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”),
the Company, as guarantor, and Standard Bank, as the lender. The Credit
Agreement amends and restates the prior credit agreement between the parties
dated August 15, 2006 (the “Original Agreement”).  Under the Original
Agreement, MSR and Oro borrowed money in an aggregate principal amount of up to
US$12,500 (the “Term Loan”) for the purpose of constructing, developing and
operating the El Chanate gold mining project in Sonora State,
Mexico.  The Company guaranteed the repayment of the Term Loan and the
performance of the obligations under the Credit Agreement.  As of July
31, 2009 and 2008, the accrued interest on this facility was approximately $21
and $72, respectively.





The Credit Agreement also established a
new senior secured revolving credit facility that permits the Borrowers to
borrow up to $5,000 during the one year period after the closing of the Credit
Agreement.  Term Loan principal shall be repaid quarterly commencing
on September 30, 2008 and consists of four payments in the amount of $1,125,
followed by eight payments in the amount of $900 and two final payments in the
amount of $400.  There is no prepayment fee.  There was no
amount outstanding on the revolving credit facility as of July 31,
2009.  Principal under the Term Loan and the credit facility shall
bear interest at a rate per annum equal to the LIBO Rate plus 2.5% and 2.0% per
annum, respectively.





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





As of
July 31, 2009, the Company and its related entities were in compliance with all
debt covenants and default provisions.  The accounts of Caborca
Industrial are not subject to the debt covenants and default
provisions.





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





In March 2006, the Company entered into
a gold price protection arrangement to protect it against future fluctuations in
the price of gold and interest rate swap agreements in October 2006 in
accordance with the terms of the credit arrangements with Standard Bank (See
Note 19 for more details on these transactions).





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





Fiscal
      Years Ending July 31,2010
                  
                  $
                  3,6002011
                  
                  
                  3,6002012
                  
                  
                  800$
                  8,000





NOTE 17 –
Mining, Engineering and Supply Contracts





In early December 2005, the Company’s
wholly-owned Mexican subsidiary, MSR, which holds the rights to develop and mine
El Chanate Project, entered into a Mining Contract with a Mexican mining
contractor, Sinergia Obras Civiles y Mineras, S.A. de C.V, ("Sinergia"). The
Mining Contract becomes effective if and when MSR sends the Contractor a formal
"Notice of Award".


F-34





On August 2, 2006, the Company amended
the November 24, 2005 Mining Contract between its subsidiary, MSR, and Sinergia.
Pursuant to the amendment, MSR's right to deliver the notice to Proceed to
Sinergia was extended to November 1, 2006. Provided that this Notice was
delivered to Sinergia on or before that date, with a specified date of
commencement of the Work (as defined in the contract) not later than February 1,
2007, the mining rates set forth in the Mining Contract would still apply;
subject to adjustment for the rate of inflation between September 23, 2005
and the date of commencement of the work.  As consideration for these
changes, the Company paid Sinergia $200 of the requisite advance payment
discussed below.  On November 1, 2006, MSR delivered the Notice of
Award specifying January 25, 2007, as the date of commencement of
Work.   Based on a revised crushing and stacking plan and since
MSR is placing the leach pad overliner material both Sinergia and MSR mutually
agreed to delay mining until the end of March 2007. Mining of the El Chanate
Project initiated on March 25, 2007.





Pursuant to the Mining Contract,
Sinergia, using its own equipment, generally is performing all of the mining
work (other than crushing) at the El Chanate Project for the life of the
mine.  MSR delivered to the Contractor a mobilization payment of $70
and the advance payment of $520.  The advance payments are recoverable
by MSR out of 100% of subsequent payments due to Sinergia under the Mining
Contract.  Pursuant to the Mining Contract, upon termination, Sinergia
would be obligated to repay any portion of the advance payment that had not yet
been recouped.  Sinergia’s mining rates are subject to escalation on
an annual basis.  This escalation is tied to the percentage escalation
in Sinergia’s costs for various parts for its equipment, interest rates and
labor.  One of the principals of Sinergia is one of the former
principals of FG.  FG was the Company’s former joint venture
partner.  As of July 31, 2008, the entire advance payment was
recovered by MSR.





On March 23, 2007, the Company
reacquired the remaining 1% net profits interest in its Mexican affiliate, MSR
from one of the successors to FG (“FG’s Successor”). When the joint venture was
terminated in March 2004, FG received, among other things, a participation
certificate entitling it to receive 5% of the annual dividends of MSR, when
declared. The participation certificate also gave FG the right to participate,
but not to vote, in the meetings of MSR’s Board of Managers, Technical Committee
and Partners. In August 2006, the Company repurchased the participation
certificate from FG’s Successor for $500 with FG’s Successor retaining a 1% net
profits interest in MSR, payable only after a total $20 million in net profits
has been generated from operations at El Chanate. The Company reacquired the
remaining 1% net profits interest in consideration of its advancing $319 to
Sinergia under the Mining Contract. FG’s Successor is a principal of
Sinergia.  As of July 31, 2008, the entire advance was
recovered.





NOTE 18 -
Employee and Consulting Agreements





The Company entered into employment
agreements, effective July 31, 2006, with the following executive officers:
Gifford A. Dieterle, President and Treasurer, Roger A. Newell, Vice President of
Development, Jack V. Everett, Vice President of Exploration, and Jeffrey W.
Pritchard, Vice President of Investor Relations.  On December 5, 2006,
effective January 1, 2007, the Company entered into an employment agreement with
J. Scott Hazlitt, Vice President of Mine Development.





Mr. Dieterle is entitled to a base
annual salary of at least $180, Mr. Hazlitt is entitled to a base annual salary
of at least $125 and each of the other executives is entitled to a base annual
salary of at least $120.  Each executive is entitled to a bonus or
salary increase in the sole discretion of the board of directors.  In
addition, Messrs. Dieterle, Newell, Everett and Pritchard each received two year
options to purchase an aggregate of 250,000 shares of the Company’s common stock
at an exercise price of $0.32 per share (the closing price on July 31,
2006).  These options have all been exercised.




F-35


On September 14, 2007, the Company
entered into a Second Amended Engagement Agreement (the “Agreement”) with
Christopher Chipman, the Company’s Chief Financial Officer, effective May 1,
2007.  The Agreement supersedes and replaces Mr. Chipman’s prior
agreement that expired on August 31, 2007.  He receives an annual fee
of $175.  Mr. Chipman can terminate the Agreement on 60 days prior
notice.  The Company can terminate the Agreement without cause on 30
days prior notice and for cause (as defined in the Agreement).  The
Agreement also terminates upon Mr. Chipman’s disability (as defined in the
Agreement) or death. In the event that the Company terminates the Agreement
without cause, Mr. Chipman will be entitled to a cash termination payment equal
to his Annual Fee in effect upon the date of termination, payable in equal
monthly installments beginning in the month following his
termination.  In the event the Agreement is terminated by Mr. Chipman
at his election or due to his death or disability, Mr. Chipman will be entitled
to the fees otherwise due and payable to him through the last day of the month
in which such termination occurs.  In conjunction with Agreement, the
Company entered into a change of control agreement similar to the agreements
entered into with the Company’s other executive
officers.    In connection with the original engagement
agreement with Mr. Chipman in March 2006, Mr. Chipman received a two year option
to purchase an aggregate of 50,000 shares of Company Common Stock at an exercise
price of $.34 per share.  This option has been exercised in
full.





On May 12, 2006, the Company entered
into an employment agreement with John Brownlie, pursuant to which Mr. Brownlie
originally served as Vice President Operations.  Mr. Brownlie became
our Chief Operating Officer in February 2007.  Mr. Brownlie serves as
Vice President Operations. Mr. Brownlie receives a base annual salary of $150
and is entitled to annual bonuses. Upon his employment, he received options to
purchase an aggregate of 200,000 shares of the Company’s common stock at an
exercise price of $.32 per share. 50,000 options vested immediately and the
balance vest upon the Company achieving "Economic Completion" as that term is
defined in the Standard Bank Credit Facility (when the Company has commenced
mining operations and has been operating at anticipated capacity for 60 to 90
days). The term of the options is two years from the date of vesting. The
agreement runs for an initial two year period, and automatically renews
thereafter for additional one year periods unless terminated by either party
within 30 days of a renewal date. The Company can terminate the agreement for
cause or upon 30 days notice without cause. Mr. Brownlie can terminate the
agreement upon 60 days notice without cause or, if there is a breach of the
agreement by the Company that is not timely cured, upon 30 days notice. In the
event that the Company terminates him without cause or he terminates due to the
Company’s breach, he will be entitled to certain severance payments. The Company
utilized the Black-Scholes method to fair value the 200,000 options received by
Mr. Brownlie. The Company recorded approximately $70 as deferred compensation
expense as of the date of the agreement and recorded the vested portion or $18
as stock based compensation expense for the year ended July 31,
2006.





As discussed below, these agreements
have been amended to provide for salary increases and other items.





On June 6, 2007, Jack V. Everett
resigned as Vice President of Exploration and a Director of the Company and
entered into a consulting agreement with the Company to provide mining and
mineral exploration consultation services.





On September 10, 2007, Roger A. Newell
resigned as Vice President of Development. He will continue to serve as a member
of the Company’s Board of Directors.





On August 29, 2007, at the
recommendation of the Compensation Committee, the Board increased the salaries
of the Company’s executive officers to be commensurate with industry standards
and amended their respective agreements accordingly. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $250; John Brownlie, Chief Operating Officer, $225; Christopher Chipman,
Chief Financial Officer, $175 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $195; Roger A. Newell, Vice
President - Development, $135; and J. Scott Hazlitt, Vice President - Mine
Development, $135. The salary increase for Mr. Brownlie and the consulting fee
increase for Mr. Chipman were retroactive to May 1, 2007 and the salary increase
for Mr. Pritchard is retroactive to August 1, 2007.





On July 17, 2008, at the recommendation
of the Compensation Committee of our Board of Directors, our executive officers
were awarded salary increases effective August 1, 2008. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $288; John Brownlie, Chief Operating Officer, $259; Christopher Chipman,
Chief Financial Officer, $201 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $224; and J. Scott Hazlitt, Vice
President - Mine Development, $155.


F-36





On
October 28, 2008, we entered into an Engagement Agreement with John Brownlie,
our Chief Operating Officer.  The agreement supersedes a May 12, 2006
employment agreement between us and Mr. Brownlie.  Pursuant to the
Engagement Agreement, Mr. Brownlie serves as our Chief Operating Officer and
receives a base annual fee of at least $259 and is entitled to annual
bonuses.  The Engagement Agreement runs through August 31, 2009, and
automatically renews thereafter for additional one year periods unless
terminated by either party within 30 days of a renewal date. We can terminate
the agreement for cause or upon 30 days notice without cause. Mr. Brownlie can
terminate the agreement upon 60 days notice without cause or, if there is a
breach of the agreement by us that is not timely cured, upon 30 days notice. In
the event that we terminate him without cause or he terminates due to our
breach, he will be entitled to certain severance payments. We previously entered
into a change of control agreement with Mr. Brownlie similar to the agreements
entered into with our other executive officers.





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





On
January 20, 2009, at the recommendation of the Compensation Committee and upon
approval by the Board of Directors, effective as of January 1, 2009, the Company
entered into (i) amended and restated employment agreements with Gifford
Dieterle, President and Treasurer, and Jeffrey Pritchard, Executive Vice
President and (ii) amended and restated engagement agreements with
Christopher Chipman, Chief Financial Officer, John Brownlie, Chief Operating
Officer, and Scott Hazlitt, Vice President of Mine Development (collectively,
the “Amended Agreements”).





Each of
the Amended Agreements modify the previous employment agreement or engagement
agreement in three ways.  First, the Company removed a provision from
the Agreement Regarding Change in Control, which is attached as an exhibit to
each of the Amended Agreements, that provided that, upon a change in control of
the Company, the exercise price of all issued and outstanding options would
decrease to $0.01. Second, the Company made the terms of each of the Amended
Agreements consistent so that each Amended Agreement expires on December 31,
2011.  Finally, the Amended Agreements incorporate amendments made in
December 2008 to the employment agreements and engagement agreements to bring
such agreements into documentary compliance with Section 409A of the Internal
Revenue Code of 1986, as amended, and the rules and regulations promulgated
thereunder.





The Company has the right to terminate
any executive’s employment for cause or on 30 days’ prior written notice without
cause or in the event of the executive’s disability (as defined in the
agreements).  The agreements automatically terminate upon an
executive’s death.  “Cause” is defined in the agreements as (1) a
failure or refusal to perform the services required under the agreement; (2) a
material breach by executive of any of the terms of the agreement; or (3)
executive’s conviction of a crime that either results in imprisonment or
involves embezzlement, dishonesty, or activities injurious to the Company’s
reputation. In the event that the Company terminates an executive’s employment
without cause or due to the disability of the executive, the executive will be
entitled to a lump sum severance payment equal to one month’s salary, in the
case of termination for disability, and up to 12 month’s salary (depending upon
years of service), in the case of termination without cause.


F-37




Each executive has the right to
terminate his employment agreement on 60 days’ prior written notice or, in the
event of a material breach by the Company of any of the terms of the agreement,
upon 30 days’ prior written notice.  In the event of a claim of
material breach by the Company of the agreement, the executive must specify the
breach and its failure to either (i) cure or diligently commence to cure the
breach within the 30 day notice period, or (ii) dispute in good faith the
existence of the material breach.   In the event that an
agreement terminates due to the Company’s breach, the executive is entitled to
severance payments in equal monthly installments beginning in the month
following the executive’s termination equal to three month’ salary plus one
additional month’s salary for each year of service to the
Company.  Severance payments cannot exceed 12 month’s
salary.





In conjunction with the employment
agreements, the Company’s board of directors deeming it essential to the best
interests of its stockholders to foster the continuous engagement of key
management personnel and recognizing that, as is the case with many publicly
held corporations, a change of control might occur and that such possibility,
and the uncertainty and questions which it might raise among management, might
result in the departure or distraction of management personnel to the detriment
of the company and its stockholders, determined to reinforce and encourage the
continued attention and dedication of members of the Company’s management to
their engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of the
company, it entered into identical agreements regarding change in control with
the executives.  Each of the agreements regarding change in control
continues through December 31, 2009 (December 31, 2010 for Mr. Hazlitt) and
extends automatically to the third anniversary thereof unless the Company gives
notice to the executive prior to the date of such extension that the agreement
term will not be extended. Notwithstanding the foregoing, if a change in control
occurs during the term of the agreements, the term of the agreements will
continue through the second anniversary of the date on which the change in
control occurred.  Each of the agreements entitles the executive to
change of control benefits, as defined in the agreements and summarized below,
upon his termination of employment with the Company during a potential change in
control, as defined in the agreements, or after a change in control, as defined
in the agreements, when his termination is caused (1) by the Company for any
reason other than permanent disability or cause, as defined in the agreement (2)
by the executive for good reason as defined in the agreements or, (3) by the
executive for any reason during the 30 day period commencing on the first date
which is six months after the date of the change in control.  Each
executive would receive a lump sum cash payment of three times his base salary
and three times his bonus award from the prior year, as well as outplacement
benefits.  Each agreement also provides that the executive is entitled
to a payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.





A “Change of Control” is deemed to
occur on the earlier of (1) the date any person is or becomes the beneficial
owner of securities representing 30% or more of the voting power of the
Company’s then outstanding securities; (2) the date on which the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: (i)individuals who, as of the date of the Change of
Control Agreement, constitute the Board and (ii) any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company’s
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date of
the Change of Control Agreement or whose appointment, election or nomination for
election was previously so approved or recommended; (3) the consummation of a
merger or consolidation of the Company or any direct or indirect subsidiary with
another entity, other than a transaction where the individuals serving on the
board of directors constitute at least a majority of the combined entity and the
outstanding securities continue to represent at least 50% of the combined voting
power of the combined entity or a transaction to effect a recapitalization of
the Company where no person is or becomes the holder of securities representing
30% or more of the combined voting power; (4) the approval by the stockholders
of the Company or a plan of complete liquidation or dissolution of the Company;
or (5) the sale or disposition or all or substantially all of the Company’s
assets, other than a sale or disposition to an entity of which 50% the combined
voting power is held by the Company’s stockholders.


F-38





However, a Change in Control will not
be deemed to occur if the record holders of the Company’s stock continue to have
substantially the same proportionate ownership of the Company following such
transaction or series of transactions.





A “Potential Change of Control”
occurs when (1) the Company enters into an agreement, the consummation of which
would result in a Change in Control; (2) a person publicly announces an
intention to take or to consider taking actions, the consummation of which would
result in a Change in Control, which announcement has not been rescinded; (3) a
person becomes the beneficial owner of securities representing 20% or more of
outstanding shares of common stock of the Company or the combined voting power
of the Company’s then outstanding securities; or (4) the Board adopts a
resolution that a Potential Change of Control exists, which resolution has not
been modified.




NOTE 19 -
Sales Contracts, Commodity and Financial Instruments





Gold Price Protection
Agreement





In March 2006, in conjunction with the
Company’s credit facility, the Company entered into two identically structured
derivative contracts with Standard Bank (See Note 16).  Both
derivatives consisted of a series of forward sales of gold and a purchase gold
cap.  Under these contracts, the Company agreed to sell a total volume
of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce
on a quarterly basis during the period from March 2007 to September
2010.  The Company also agreed to purchase gold caps.  The
caps allow the Company to buy gold at a price of $535 per ounce covering the
same volume and horizon as the forward sales.  This combination of
forward sales with purchased call options synthesizes a put position, which, in
turn, serves to put a floor on the Company’s sales price.





On
February 24, 2009, the Company settled with Standard Bank, the remaining 58,233
ounces of gold under the original Gold Price Protection arrangements entered
into in March 2006. The purpose of these arrangements at the time was to protect
the Company in the event the gold price dropped below $500 per ounce. Total
remuneration to unwind these arrangements was approximately $1,906. In
conjunction with the settlement of the gold price protection agreement, the
Company incurred an Other
Expense of approximately $1,391 during the year ended July 31,
2009.





Prior to unwinding these arrangements,
the volume of these derivative positions represented about 44% and 86% of sales
during the year ended July 31, 2009 and 2008, respectively, such that these
derivative positions mitigate the Company’s gold price risk, rather than
eliminate or reverse the natural exposure of the Company.





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





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





(in
      thousands)Asset
      balance as of July 31, 2006
                  
                  $
                  (218
                  )Loss
      on change in fair value of derivative
                  
                  
                  1,226Net
      cash settlements
                  
                  
                  (460
                  )Liability
      balance as of July 31, 2007
                  
                  $
                  548Loss
      on change in fair value of derivative
                  
                  
                  1,356Net
      cash settlements
                  
                  
                  (1,166
                  )Liability
      balance as of July 31, 2008
                  
                  $
                  738Loss
      on change in fair value of derivative
                  
                  
                  1,975Net
      cash settlements
                  
                  
                  (2,713
                  )Liability
      balance as of July 31, 2009
                  
                  $
                  -




F-39





Rather than modifying the original
Gold Price Protection agreement with Standard Bank to satisfy these forward sale
obligations, the Company opted for a net cash settlement between the call option
purchase price of $535 and the forward sale price of $500, or $35.00 per ounce.




Interest Rate Swap
Agreement





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




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




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




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




(in
      thousands)Balance
      as of July 31, 2006
                  
                  $
                  -Change
      in fair value of swap agreement
                  
                  
                  48Interest
      expense (income)
                  
                  
                  -Net
      cash settlements
                  
                  
                  -Liability
      balance as of July 31, 2007
                  
                  $
                  48Change
      in fair value of swap agreement
                  
                  
                  141Interest
      expense (income)
                  
                  
                  78Net
      cash settlements
                  
                  
                  (75
                  )Liability
      balance as of July 31, 2008
                  
                  $
                  192Change
      in fair value of swap agreement
                  
                  
                  130Interest
      expense (income)
                  
                  
                  50Net
      cash settlements
                  
                  
                  (179
                  )Liability
      balance as of July 31, 2009
                  
                  $
                  193




F-40




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




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




Quarter
                        Ended
                      
                      Derivatives in Cash
                        Flow Hedging
                        Relationships
                      
                      Effective
                        Results
                        Recognized
                        in OCI
                      
                      Location of Results
                        Reclassifed from AOCI to
                        Earnings
                      
                      Amount
                        Reclassified
                        from
                        AOCI to
                        Income
                      
                      
                      Ineffective
                        Results
                        Recognized
                        in Earnings
                      
                      
                      Location
                        of
                        Ineffective
                        Results10/31/07
                      
                      Interest
      Rate contracts
                      
                      $
                      (66
                      )
                      Interest
      Income (Expense)
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      N/A1/31/08
                      
                      Interest
      Rate contracts
                      
                      $
                      (201
                      )
                      Interest
      Income (Expense)
                      
                      
                      (5
                      )
                      
                      
                      -
                      
                      
                      
                      N/A4/30/08
                      
                      Interest
      Rate contracts
                      
                      $
                      28
                      
                      Interest
      Income (Expense)
                      
                      
                      (24
                      )
                      
                      
                      -
                      
                      
                      
                      N/A7/31/08
                      
                      Interest
      Rate contracts
                      
                      $
                      19
                      
                      Interest
      Income (Expense)
                      
                      
                      (49
                      )
                      
                      
                      -
                      
                      
                      
                      N/A10/31/08
                      
                      Interest
      Rate contracts
                      
                      $
                      (38
                      )
                      Interest
      Income (Expense)
                      
                      
                      (38
                      )
                      
                      
                      -
                      
                      
                      
                      N/A1/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (95
                      )
                      Interest
      Income (Expense)
                      
                      
                      (35
                      )
                      
                      
                      -
                      
                      
                      
                      N/A4/30/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (16
                      )
                      Interest
      Income (Expense)
                      
                      
                      (55
                      )
                      
                      
                      -
                      
                      
                      
                      N/A7/31/09
                      
                      Interest
      Rate contracts
                      
                      $
                      (19
                      )
                      Interest
      Income (Expense)
                      
                      
                      (55
                      )
                      
                      
                      -
                      
                      
                      
                      N/A




Quarter
                            Ended
                          
                          Derivatives Not
                            Designated in Hedging
                            Relationships
                          
                          Location of Results
                          
                          Amount of
                            Gain (Loss)10/31/07
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (358
                          )1/31/08
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (345
                          )4/30/08
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (337
                          )7/31/08
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (319
                          )10/31/08
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (304
                          )1/31/09
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          (274
                          )4/30/09
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          -7/31/09
                          
                          Gold
      contracts
                          
                          Other
      Income (Expense)
                          
                          $
                          -




F-41




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




Liability DerivativesBalance Sheet Location
                            
                            Fair ValuesOctober
      31, 2007Derivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Other
      Liabilities
                            
                            $
                            115Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                            
                            Other
      Liabilities
                            
                            $
                            613January
      31, 2008
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Other
      Liabilities
                            
                            $
                            313Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                            
                            Other
      Liabilities
                            
                            $
                            660April
      30, 2008
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Other
      Liabilities
                            
                            $
                            274Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                            
                            Other
      Liabilities
                            
                            $
                            702July
      31, 2008
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Other
      Liabilities
                            
                            $
                            192Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                            
                            Other
      Liabilities
                            
                            $
                            738Liability
      DerivativesOctober
      31, 2008
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Current
      Liabilities
                            
                            $
                            199Derivatives
      designated as non- hedging instrumentsGold
      derivatives
                            
                            Current
      Liabilities
                            
                            $
                            734Liability
      DerivativesJanuary
      31, 2009
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Current
      Liabilities
                            
                            $
                            268Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                            
                            Current
      Liabilities
                            
                            $
                            719Liability
      DerivativesApril
      30, 2009
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Current
      Liabilities
                            
                            $
                            228Liability
      DerivativesJuly
      31, 2009
                            
                            Balance
      Sheet Location
                            
                            Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                            
                            Current
      Liabilities
                            
                            $
                            193


F-42


NOTE 20 –
Accrued Expenses





Accrued
expenses at July 31, 2009 and 2008 consists of the following:





(in
      thousands)July 31,2009
                
                
                2008Net
      profit interest
                
                $
                -
                
                
                $
                753Net
      smelter return
                
                
                212
                
                
                
                189Mining
      contract
                
                
                30
                
                
                
                193Income
      tax payable
                
                
                507
                
                
                
                777Utilities
                
                
                128
                
                
                
                110Interest
                
                
                21
                
                
                
                72Legal
      and professional
                
                
                125
                
                
                
                80Salaries,
      wages and related benefits (Mexico)
                
                
                533
                
                
                
                334Other
      liabilities
                
                
                77
                
                
                
                165$
                1,633
                
                
                $
                2,673





NOTE 21 -
Income Taxes





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





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Current:United
      States
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  (3,909
                  )
                  
                  
                  (2,111
                  )
                  
                  
                  -(3,909
                  )
                  
                  
                  (2,111
                  )
                  
                  
                  -Deferred:United
      States
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
                  
                  
                  (1,633
                  )
                  
                  
                  (1,396
                  )
                  
                  
                  -(1,633
                  )
                  
                  
                  (1,396
                  )
                  
                  
                  -Total
                  
                  $
                  (5,542
                  )
                  
                  $
                  (3,507
                  )
                  
                  $
                  -





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





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008
                  
                  
                  July
      31,
                    2007United
      States
                  
                  $
                  (6,631
                  )
                  
                  $
                  (6,556
                  )
                  
                  $
                  (5,514
                  )Foreign
                  
                  
                  22,580
                  
                  
                  
                  16,427
                  
                  
                  
                  (1,958
                  )Total
                  
                  $
                  15,949
                  
                  
                  $
                  9,871
                  
                  
                  $
                  (7,472
                  )





The
Company’s income tax expense differed from the amounts computed by applying the
United States statutory corporate income tax rate for the following
reasons:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Income
      (loss) before income tax
                  
                  $
                  15,949
                  
                  
                  $
                  9,871
                  
                  
                  $
                  (7,472
                  )US
      statutory corporate income tax rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %
                  
                  
                  34
                  %Income
      tax (expense) benefit computed at US statutory corporate income tax
      rate
                  
                  
                  (5,423
                  )
                  
                  
                  (3,356
                  )
                  
                  
                  2,540Reconciling
      items:Change
      in valuation allowance on deferred tax assets
                  
                  
                  (1,474
                  )
                  
                  
                  (1,137
                  )
                  
                  
                  (2,540
                  )Difference
      in foreign tax
                  
                  
                  1,355
                  
                  
                  
                  986
                  
                  
                  
                  -Income
      tax expense
                  
                  $
                  (5,542
                  )
                  
                  $
                  (3,507
                  )
                  
                  $
                  -




F-43




Components
of the Company’s deferred income tax assets (liabilities) are as
follows:





(in
      thousands)July
      31,
                    2009
                  
                  
                  July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Net
      deferred income tax assets,  non current:Remediation
      and reclamation costs
                  
                  $
                  (44
                  )
                  
                  $
                  (29
                  )
                  
                  $
                  -Net
      operating losses
                  
                  
                  11,888
                  
                  
                  
                  9,334
                  
                  
                  
                  8,197Depreciation
      and amortization
                  
                  
                  76
                  
                  
                  
                  602
                  
                  
                  
                  -$
                  11,920
                  
                  
                  $
                  9,907
                  
                  
                  $
                  8,197Valuation
      allowances
                  
                  
                  (11,888
                  )
                  
                  
                  (9,334
                  )
                  
                  
                  (8,197
                  )$
                  32
                  
                  
                  $
                  573
                  
                  
                  $
                  -Net
      deferred income tax liabilities, current:Depreciation
      and amortization
                  
                  $
                  -
                  
                  
                  $
                  12
                  
                  
                  $
                  -Foreign
      currency exchange
                  
                  
                  (5
                  )
                  
                  
                  2
                  
                  
                  
                  -Inventory
      valuation
                  
                  
                  (3,846
                  )
                  
                  
                  (1,925
                  )
                  
                  
                  -Accounts
      receivable
                  
                  
                  (567
                  )
                  
                  
                  (413
                  )
                  
                  
                  -Other
                  
                  
                  185
                  
                  
                  
                  261
                  
                  
                  
                  -$
                  (4,233
                  )
                  
                  $
                  (2,063
                  )
                  
                  $
                  -





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




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




Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that the Company will not be liable for
any excess flat tax for calendar year 2009 and, accordingly, has recorded a
Mexican income tax provision as of July 31, 2009.




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





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


F-44


For income tax purposes in the United
States, the Company had available net operating loss carryforwards ("NOL") as of
July 31, 2009, 2008 and 2007 of approximately $27,912, $22,179 and $17,464,
respectively to reduce future federal taxable income. If any of the NOL's are
not utilized, they will expire at various dates through 2028. There may be
certain limitations as to the future annual use of the NOLs due to certain
changes in the Company's ownership.




NOTE 22 -
Commitments and Contingencies





Lease
Commitments





The Company occupies office space in
New York City under a non-cancelable escalating operating lease that commenced
on September 1, 2007 and terminates on August 31, 2012. In addition to base
rent, the lease calls for payment of utilities and other occupancy
costs.  The Company also occupies office space in Caborca, Sonora,
Mexico that commenced on March 2, 2009 and terminates on March 1, 2013. The
Company leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora, Mexico.  These concessions are about a sixty mile
drive northeast of the El Chanate project.  The lease agreement, which
allows us to explore the property,  required an initial payment of $45
upon execution of the lease.  In addition, we are required to make ten
payments of $25 every four months beginning six months after execution of the
lease agreement. The agreement also contains an option for us to acquire the
mining concessions for a cash payment of $1,500 at the end of the term or
December 2010.  If we elect not to exercise this option, we would have
the ability to mine the concessions but pay a 1% net smelter return capped at
$3,000.  Prior payments made under this lease agreement would be
deductible from the $3,000 cap.





Approximate
future minimum payments under these operating leases are as follows (in
thousands):





Fiscal
      Years Ending July 31,2010
                      
                      $
                      2472011
                      
                      
                      2522012
                      
                      
                      2312013
                      
                      
                      30$
                      760





Rent expense was approximately $155,
$107 and $66 for the years ended July 31, 2009, 2008 and 2007,
respectively.





Land
Easement





On May 25, 2005, MSR entered into an
agreement for an irrevocable access easement and an irrevocable fluids
(electricity, gas, water and others) easement to land located at Altar, Sonora,
Mexico. The term of the agreement is five years, extendable for 1-year
additional terms, upon MSR’s request. The agreement would be suspended only by
force majeure; and extendable for the duration of the suspension.  In
consideration for these easements, $18 was paid upon the signing of the
agreement and yearly advance payments equal to two annualized general minimum
wages (365 X 2 general minimum wages) in force in Altar, Sonora, Mexico, are
required. These yearly payments are to be made on September 1 of each year,
using the minimum wage in effect on that day for the calculation of the amount
payable. These payments are to be made for as long as the construction and
production mining works and activities of MSR are being carried out, and are to
cease as soon as such works and activities are permanently stopped.




F-45




El
Charro





In May 2005, the Company acquired
rights to the El Charro concession for approximately $20 and a royalty of 1.5%
of net smelter return.  The Company acquired the El Charro concession
because it contains a known gold occurance and is surrounded entirely by the
Company’s other concessions.





NOTE 23 –
Unaudited Supplementary Data




The
following is a summary of selected fiscal quarterly financial information
(unaudited and 000’s except per share data and price):




2009Three Months EndedOctober 31
                    
                    
                    January 31
                    
                    
                    April 30
                    
                    
                    July 31Revenues
                    
                    $
                    9,175
                    
                    
                    $
                    11,369
                    
                    
                    $
                    12,395
                    
                    
                    $
                    9,818Costs
      applicable to sales
                    
                    $
                    3,042
                    
                    
                    $
                    3,655
                    
                    
                    $
                    3,698
                    
                    
                    $
                    3,488Net
      income applicable to common shares
                    
                    $
                    1,936
                    
                    
                    $
                    3,196
                    
                    
                    $
                    2,554
                    
                    
                    $
                    2,721Net
      income per common share, basic
                    
                    $
                    0.01
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01Net
      income per common share, diluted
                    
                    $
                    0.01
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.01
                    
                    
                    $
                    0.01Basic
      weighted-average shares outstanding
                    
                    
                    192,844
                    
                    
                    
                    193,195
                    
                    
                    
                    193,363
                    
                    
                    
                    193,578Diluted
      weighted-average shares outstanding
                    
                    
                    198,342
                    
                    
                    
                    198,706
                    
                    
                    
                    200,827
                    
                    
                    
                    200,818Closing
      price of common stock
                    
                    $
                    0.29
                    
                    
                    $
                    0.63
                    
                    
                    $
                    0.54
                    
                    
                    $
                    0.61





2008Three Months EndedOctober 31
                      
                      
                      January 31
                      
                      
                      April 30
                      
                      
                      July 31Revenues
                      
                      $
                      6,526
                      
                      
                      $
                      8,043
                      
                      
                      $
                      8,730
                      
                      
                      $
                      9,805Costs
      applicable to sales
                      
                      $
                      2,204
                      
                      
                      $
                      2,419
                      
                      
                      $
                      2,717
                      
                      
                      $
                      3,350Net
      income applicable to common shares
                      
                      $
                      1,747
                      
                      
                      $
                      2,126
                      
                      
                      $
                      2,740
                      
                      
                      $
                      (249
                      )Net
      income per common share, basic
                      
                      $
                      0.01
                      
                      
                      $
                      0.01
                      
                      
                      $
                      0.02
                      
                      
                      $
                      0.00Net
      income per common share, diluted
                      
                      $
                      0.01
                      
                      
                      $
                      0.01
                      
                      
                      $
                      0.01
                      
                      
                      $
                      0.00Basic
      weighted-average shares outstanding
                      
                      
                      170,855
                      
                      
                      
                      174,765
                      
                      
                      
                      175,645
                      
                      
                      
                      175,040Diluted
      weighted-average shares outstanding
                      
                      
                      192,998
                      
                      
                      
                      196,191
                      
                      
                      
                      197,239
                      
                      
                      
                      195,469Closing
      price of common stock
                      
                      $
                      0.63
                      
                      
                      $
                      0.70
                      
                      
                      $
                      0.65
                      
                      
                      $
                      0.65


F-46





2007Three Months EndedOctober 31
                
                
                January 31
                
                
                April 30
                
                
                July 31Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Costs
      applicable to sales
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Net
      loss applicable to common shares
                
                $
                (1,161
                )
                
                $
                (1,673
                )
                
                $
                (2,649
                )
                
                $
                (1,989
                )Net
      loss per common share, basic
                
                $
                (0.01
                )
                
                $
                (0.01
                )
                
                $
                (0.02
                )
                
                $
                (0.01
                )Net
      income loss per common share, diluted(1)
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Basic
      weighted-average shares outstanding
                
                
                132,598
                
                
                
                138,074
                
                
                
                164,582
                
                
                
                149,811Diluted
      weighted-average shares outstanding(1)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Closing
      price of common stock
                
                $
                0.31
                
                
                $
                0.40
                
                
                $
                0.41
                
                
                $
                0.44


(1)
                Net
      loss per common share, diluted and computation of diluted weighted average
      common shares  was not included as their effect would have been
      anti-dilutive.





NOTE 24 –
Subsequent Events





In August
2009, we initiated the construction of an additional leach pad
area.  Permitting and site clearing has been completed and the
construction contractor has begun earthworks. Golder Engineering of Tucson,
Arizona will oversee construction activities and quality control and assurance
for the project. The construction schedule anticipates that stacking ore on the
new pad will commence in January 2010 and will cost approximately
$3,300.  On October 1, 2009, the Company committed to the procurement
of a new secondary crusher for the El Chanate mine.  The cost for this
equipment is approximately $1,000 with one-third due upon execution of the sales
order, one-third due in 30 days and one-third upon shipment.




On
September 17, 2009, the Company’s senior secured revolving credit facility that
permits the Borrowers to borrow up to $5,000 during the one year period after
the closing of the Credit Agreement expired.  The Company had not
drawn on this facility during the term period and determined that it was not
cost beneficial to maintain the credit facility on a going forward
basis.





On
September 17, 2009, the Company terminated Jeffrey W. Pritchard as Executive
Vice President and Secretary of the Company without cause pursuant to a
restructuring of its corporate investor relations functions.  The
termination was effective September 15, 2009.  Mr. Pritchard also
resigned as a Director of the Company effective September 29,
2009.  As part of the settlement, Mr.
Pritchard is to receive a lump sum payment of approximately $426, and an
additional payment of approximately $65, if Mr. Pritchard fulfills certain terms
of the termination agreement.Mr. Pritchard will be entitled to
change in control benefits should the Company enter into a transaction on or
before December 31, 2009 with certain entities that would result in a “Change in
Control” as defined in his Change In Control Agreement with the Company. In
addition, on September 17, 2009, the Company appointed Robert Roningen Secretary
of the Company.  Mr. Roningen previously was Secretary of the Company
from 2000 to February, 2007.


F-47