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, 2010
 o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 Commission
File No. 001-34618
 
 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 o   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
o  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 o
 
 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. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer,” “accelerated filer" and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 o Large accelerated
filer             x Accelerated
filer
 o Non-accelerated
filer               o 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 o  No o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes oNo x
 
 The
aggregate market value of the voting and non-voting common equity on January 31,
2010 held by non-affiliates computed by reference to the closing price of the
issuer’s Common Stock on that date, was $95,199,958 based upon the closing price
($2.94) multiplied by the 32,380,938 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 1, 2010: 61,202,028.
 
 The Proxy
Statement of Capital Gold Corporation to be filed in connection with our 2011
Annual Meeting of Stockholders is incorporated in Part III hereof, as specified
herein.
 
 ii
 
 CAPITAL
GOLD CORPORATION
 Form
10-K
 July 31,
2010
  Table of Contents
                                                PageGlossary
      of Technical Terms
                                                (iv)Part IItem
      1.
                                                Business.
                                                1Item
      1A.
                                                Risk
      Factors.
                                                3Item
      1B.
                                                Unresolved
      Staff Comments.
                                                14Item
      2.
                                                Property.
                                                14Item
      3.
                                                Legal
      Proceedings.
                                                37Item
      4.
                                                (Removed
      and Reserved).
                                                37Part IIItem
      5.
                                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                                                38Item
      6.
                                                Selected
      Financial Data.
                                                41Item
      7.
                                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                                42Item
      7A.
                                                Quantitative
      and Qualitative Disclosure About Market Risk
                                                63Item
      8.
                                                Financial
      Statements and Supplementary Data.
                                                65Item
      9.
                                                Changes
      in and Disagreement with Accountants on Accounting and Financial
      Disclosure.
                                                65Item
      9A
                                                Controls
      and Procedures.
                                                65Item
      9B
                                                Other
      Information.
                                                66Part IIIItem
      10.
                                                Directors,
      Executive Officers and Corporate Governance.
                                                67Item
      11.
                                                Executive
      Compensation.
                                                68Item
      12.
                                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                                                69Item
      13.
                                                Certain
      Relationships and Related Transactions and Director
      Independence
                                                69Item
      14.
                                                Principal
      Accounting Fees and Services.
                                                69Part IVItem
      15.
                                                Exhibits,
      Financial Statement Schedules.
                                                69Signatures
                                                74Supplemental
      Information
                                                N/AFinancial
      Statements
                                                F-1
 iii
  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.




iv
 
  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.Hydrometallurgical
      Plant:
              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.Major
      Intrusive 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.Microporphyritic
      Latite:
              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
      Circulation Drilling (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.


v
  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.


vi
  PART I
 
 Item
1.  Business
 
 Capital Gold Corporation (the
“Company”) is engaged in the mining, exploration and development of gold
properties in Mexico.  Our primary focus is on the operation and
development of the El Chanate project as well as the development of our Orion
Project in the State of Nayarit Mexico.   Through our recent
acquisition of Nayarit Gold, Inc. (“Nayarit”) on August 2, 2010, we control
approximately 257,000 acres (104,000 hectares) of mining concessions known as
the Orion Project.  The Orion Project lies in the Sierra Madre
Occidental, a prolific mining district in Western Mexico.  We also
conduct gold exploration in other locations in Sonora, Mexico. (The financial
data in this discussion is in thousands, except where otherwise specifically
noted.)
 
 On
February 10, 2010, Capital Gold Corporation entered into a
business combination agreement (the “Nayarit Business Combination
Agreement”), as amended and extended, with Nayarit, a corporation organized
under the Ontario Business Corporation Act (“OBCA”) pursuant to which, on
August 2, 2010, Nayarit became a wholly-owned subsidiary of Capital Gold
(the “Nayarit Business Combination”). We effected the amalgamation (the
“Amalgamation”) of Nayarit and a corporation, organized under the OBCA as a
wholly-owned subsidiary of the Company (“Merger Sub”), to form a combined entity
(“AmalgSub” or “Surviving Company”), with AmalgSub continuing as the surviving
entity following the Amalgamation.  By virtue of the Amalgamation, the
separate existence of each of Nayarit and Merger Sub cease, and AmalgSub, as the
surviving company in the Amalgamation, continue its corporate existence under
the OBCA as a wholly-owned subsidiary of the Company. Pursuant to the terms of
the Nayarit Business Combination Agreement, all of the Nayarit shares of common
stock (the “Nayarit Common Shares”) issued and outstanding immediately prior to
the consummation of the Nayarit Business Combination Agreement (other than
Nayarit Common Shares held by dissenting stockholders of Nayarit) were exchanged
into the Company’s common stock on the basis of 0.134048 shares of
Company common stock for each one (1) Nayarit Common Share (the
“Amalgamation Consideration”).
 
 On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) entered into a
definitive merger agreement pursuant to which, if consummated, Gammon Gold will
acquire all of the issued and outstanding common shares of Capital Gold in a
cash and share transaction (the “Gammon Transaction”). The total consideration
for the purchase of 100% of the fully diluted shares of Capital Gold is
approximately US$288 million or US$4.57 per Capital Gold share based on Gammon
Gold’s closing price on September 24, 2010 on the NYSE. The Gammon Transaction
has the unanimous support of both companies’ Boards of Directors and
Officers.  Under the terms of the Gammon Transaction, each common share of
Capital Gold will be exchanged for 0.5209 common shares of Gammon Gold and a
cash payment in the amount of US$0.79 per share. Based on the September 24, 2010
closing price of Capital Gold’s shares on the NYSE EURONEXT, the acquisition
price represents a 20% premium to the close on September 24th and a 30% premium
to the 20-day volume weighted average price on the NYSE EURONEXT ending on that
date.  The consummation of the Gammon Transaction is subject to
numerous contingencies as described in the related merger agreement including,
but not limited to, Capital Gold stockholder approval.
 
 Sonora,
Mexico Concessions
 
 Through
wholly-owned subsidiaries, Capital Gold Corporation owns 100% of 21 mining
concessions located in the State of Sonora, Republic of Mexico totaling
approximately 9,665 hectares (23,873 acres or 37.3 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.
  1
  In April
2008, we leased 12 mining concessions totaling 1,789 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,233 additional
hectares adjacent to this property. The approximate 4,022 hectare area is
accessible by paved roads and has cellular phone service from
hilltops.  These concessions and this claim are about 60 miles
northeast of the El Chanate project. Mineralization is evident throughout the
concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. We have completed exploration work consisting of
geological mapping, systematic geochemical sampling of rock and soils,
geophysical surveys, trenching and 73 reverse circulation drill holes totaling
6,121 meters and more recently a one meter interval topographic survey over the
concession area.  SRK of Lakewood, Colorado has visited the site and
has monitored the quality assurance and quality control during these drill
campaigns.  SRK will also assist on the next phase of the exploration
program.  All of the drill hole samples have been assayed by ALS
Chemex.  The ALS Chemex facility in Hermosillo does the sample
preparation, and the assays are performed at the ALS Chemex’s Vancouver
laboratory.
 
 In
January 2010, we initiated an additional drill campaign at Saric that consisted
of 13 core holes totaling approximately 1,100 meters.  The drilling
was completed on February 23, 2010 and targeted the existing mineralized
structure to confirm the geologic interpretation and confirm the accuracy of
previous reverse circulation drilling. The drill hole samples were assayed by
ALS Chemex.  Currently, we are planning to initiate a geophysical
survey in late 2010.  The intention of the geophysical survey is to
assist us in determining the focus of our next drill campaign.  We are also
continuing our work on an updated environmental report.
 
 Orion
Project
 
 The Orion Project lies in the prolific
Sierra Madre Occidental, which hosts numerous multi-million ounce gold-silver
deposits. The Orion Project is one of the larger contiguous concessions in the
Sierra Madre, composed of 257,000 acres (104,000 hectares).  The Orion
Project is located on the southeast flank of the Sierra Madre, about 125km south
of  the famous Tayoltita district which has reserves reported to be in
excess of 20 million gold equivalent ounces.  The concessions are
located approximately 110km north–northwest of Tepic, state capital of Nayarit,
México, 150km southeast of Mazatlan, Sinaloa.  The Orion Project is
located 13 km south–southeast of the town of Acaponeta, Nayarit, in the Motaje
Mining District as identified by the Servicio Geologico Mexicano (formerly the
Consejo de Recursos Minerales).  We anticipate to
progress  this project to a pre-feasibility stage by the second
quarter 2011.
  For more
information on our projects, please see  “Item 2. Property; Sonora
Concessions and Orion Project in Nayarit 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.
 
 2
 Human
Resources
 
 As of October 1, 2010, we had 174 full
time and 17 temporary employees working at our El Chanate mine in Sonora, Mexico
as well as 7 full time employees in the U.S. and Canada.  We also
utilize a mining and other contractors at the El Chanate mine which comprised a
total of 121 personnel onsite, including 28 related to leach pad
construction.
  A
national labor union has expressed interest in organizing the workers at Capital
Gold’s El Chanate Mine.
  The
workforce at El Chanate is currently non-unionized, however, a national labor
union is seeking to permit workers to vote on whether or not they would like to
organize under such labor union. Capital Gold is reviewing its options with
respect to the union’s activities. If the workforce were permitted to unionize,
such activity could result in higher production costs at the El Chanate mine;
however the Company would work to execute a favorable union contract. In
addition, although we have not experienced a work stoppage to date, if the
workforce chose not to unionize, the national labor seeking to unionize may
choose to illegally interrupt operations at El Chanate, which could have a
material adverse effect on our business, financial condition or results of
operations.
 Cautionary
Statement on Forward-Looking Statements
 
 Certain
statements in this report constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 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, strip ratio, 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, except as required by law.
 
 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.
 
 3
 Risks related to our
business and operations
 
 
 While
Capital Gold believes that it will continue to generate positive cash flow and
profits from operations, if it encounters unexpected problems, it may need to
raise additional capital.   If additional capital is required and
Capital Gold is unable to obtain it from outside sources, Capital Gold may be
forced to reduce or curtail its operations or its anticipated exploration
activities.
  Prior to
the first fiscal quarter of 2008, Capital Gold was not able to generate cash
flow from operations.  While it is now generating positive cash flow and
profits, if Capital Gold encounters unexpected problems and it is unable to
continue to generate positive cash flow and profits, it may need to raise
additional capital.  Capital Gold also may need to raise additional capital
for property acquisition and development and new exploration. To the extent that
Capital Gold needs to obtain additional capital, management intends to raise
such funds through the sale of its securities and/or joint venturing with one or
more strategic partners.  Capital Gold cannot assure that adequate
additional funding, if needed, will be available or on terms acceptable to
it.  If Capital Gold needs additional capital and it is unable to obtain it
from outside sources, Capital Gold may be forced to reduce or curtail its
operations or its anticipated exploration activities.
  Capital
Gold’s Credit Agreement with Standard Bank plc (“Standard Bank”) imposes
restrictive covenants on it.
  Capital
Gold’s Credit Agreement with Standard Bank requires it, among other obligations,
to meet certain financial covenants including, but not limited to, (i) a ratio
of current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S. $30,000,000, (iii) maintain a ratio of  debt to cash flow from
operations of no greater than 2.50:1.00, and (iv) a quarterly average minimum
liquidity of U.S. $500,000.  In addition, the Credit Agreement restricts,
among other things, Capital Gold’s ability to incur additional debt, create
liens on its property, dispose of any assets, merge with other companies, enter
into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with the
restrictions contained in the Credit Agreement could lead to an event of default
thereunder which could result in an acceleration of such indebtedness. As a
condition to closing the Nayarit Business Combination, Capital Gold obtained the
consent of Standard Bank.
  Capital
Gold’s mining contractor is using some reconditioned equipment which could
adversely affect its cost assumptions and its ability to economically and
successfully mine the project.
  Sinergia
Obras Civiles Y Mineras, S.A. de C.V. (“Sinergia”), Capital Gold’s mining
contractor, is using a combination of fully functioning new and older
equipment.  Such older equipment is subject to the risk of more frequent
breakdowns and need for repair than new equipment.  If the equipment
that Capital Gold or Sinergia uses breaks down and needs to be repaired or
replaced, Capital Gold will incur additional costs and operations may be
delayed, resulting in lower amounts of gold recovered.  In such event,
Capital Gold’s capital and operating cost assumptions may be inaccurate and its
ability to economically and successfully mine the El Chanate project may be
hampered, resulting in decreased revenues and, possibly, a loss from
operations.
  4
 The
gold deposit Capital Gold has identified at El Chanate is relatively
low-grade.  If Capital Gold’s estimates and assumptions are
inaccurate, its results of operation and financial condition could be materially
adversely affected.
  The gold
deposit Capital Gold is mining at its El Chanate mine is relatively
low-grade.  If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if Capital Gold experiences problems related to the mining,
processing, or recovery of gold from ore at the mine, Capital Gold’s results of
operation and financial condition could be materially adversely
affected.  Moreover, it is possible that actual costs and economic
returns may differ materially from Capital Gold’s best
estimates.  There can be no assurance that Capital Gold’s operations
at El Chanate will continue to be profitable.
  Gold
prices can fluctuate on a material and frequent basis due to numerous factors
beyond Capital Gold’s control.  Capital Gold’s ability to generate
profits from operations could be materially and adversely affected by such
fluctuating prices.
  The
profitability of any gold mining operations in which Capital Gold has an
interest will be significantly affected by changes in the market price of
gold.  Gold prices fluctuate on a daily basis.  During the
year ended July 31, 2010, the spot price for gold on the London Exchange has
fluctuated between $932.75 and $1,261.00 per ounce.  Gold prices are
affected by numerous factors beyond Capital Gold’s control,
including:
  ·
              industrial
      and commercial demand for gold,·
              the
      level of interest rates,·
              the
      rate of inflation,·
              central
      bank sales,·
              world
      supply of gold and·
              stability
      of exchange rates.
 
 Each of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments.  The current
significant instability in the financial markets heightens these
fluctuations.   The price of gold has historically fluctuated
widely and, depending on the price of gold, revenues from mining operations may
not be sufficient to offset the costs of such operations.
  Capital
Gold may not be successful in hedging against interest rate fluctuations and may
incur mark-to-market losses and lose money through its hedging
programs.
  Capital
Gold has entered into interest rate swap agreements.  The terms of
Capital Gold’s Credit Agreement with Standard Bank require that it hedge at
least 50% of its outstanding loan balance.  There can be no assurance
that Capital Gold will be able to successfully hedge against interest rate
fluctuations.
  Further,
there can be no assurance that the use of hedging techniques will always be to
Capital Gold’s benefit.   Hedging contracts also are subject to the
risk that the other party may be unable or unwilling to perform its obligations
under these contracts.  Any significant nonperformance could have a
material adverse effect on Capital Gold’s financial condition, results of
operations and cash flows.
  5
 Capital
Gold’s material property interests are in Mexico. Risks of doing business in a
foreign country could adversely affect its results of operations and financial
condition.
  Capital
Gold faces risks normally associated with any conduct of business in a foreign
country with respect to its El Chanate Project in Sonora, Mexico, and its wholly
owned subsidiary’s Orion Gold Project in the State of Nayarit, Mexico, including
various levels of political and economic risk.  The occurrence of one
or more of these events could have a material adverse impact on Capital Gold’s
efforts or operations which, in turn, could have a material adverse impact on
its cash flows, earnings, results of operations and financial
condition.  These risks include the following:
  ·
              labor
      disputes,·
              invalidity
      of governmental orders,·
              uncertain
      or unpredictable political, legal and economic
    environments,·
              war
      and civil disturbances,·
              changes
      in laws or policies,·
              taxation,·
              delays
      in obtaining or the inability to obtain necessary governmental
      permits,·
              governmental
      seizure of land or mining claims,·
              limitations
      on ownership,·
              limitations
      on the repatriation of earnings,·
              increased
      financial costs,·
              import
      and export regulations, including restrictions on the export of gold,
      and·
              foreign
      exchange controls.
 
 These
risks may limit or disrupt Capital Gold’s projects, restrict the movement of
funds or impair contract rights or result in the taking of property by
nationalization or expropriation without fair compensation.
  A
national labor union has expressed interest in organizing the workers at Capital
Gold’s El Chanate Mine.
  The
workforce at El Chanate is currently non-unionized, however, a national labor
union is seeking to permit workers to vote on whether or not they would like to
organize under such labor union. Capital Gold is reviewing its options with
respect to the union’s activities. If the workforce were permitted to unionize,
such activity could result in higher production costs at the El Chanate mine;
however the Company would work to execute a favorable union contract. In
addition, although we have not experienced a work stoppage to date, if the
workforce chose not to unionize, the national labor seeking to unionize may
choose to illegally interrupt operations at El Chanate, which could have a
material adverse effect on our business, financial condition or results of
operations.
 Capital
Gold sells gold in U.S. dollars; however, it incurs a significant amount of its
expenses in Mexican pesos.  If applicable currency exchange rates
fluctuate, Capital Gold’s revenues and results of operations may be materially
and adversely affected.
  Capital
Gold sells gold in U.S. dollars.  It incurs a significant amount of
its expenses in Mexican pesos.  As a result, Capital Gold’s financial
performance would be affected by fluctuations in the value of the Mexican peso
to the U.S. dollar.
  Changes
in regulatory policy could adversely affect Capital Gold’s exploration and
future production activities.
  Any
changes in government policy may result in changes to laws
affecting:
 
 6
 ·
              ownership
      of assets,·
              land
      tenure,·
              mining
      policies,·
              monetary
      policies,·
              taxation,·
              rates
      of exchange,·
              environmental
      regulations,·
              labor
      relations,·
              repatriation
      of income and/or·
              return
      of capital.
 
 Any such
changes may affect Capital Gold’s ability to undertake exploration and
development activities in respect of future properties in the manner currently
contemplated, as well as its ability to continue to explore, develop and operate
those properties in which it has an interest or in respect of which it has
obtained exploration and development rights to date. The possibility,
particularly in Mexico, that future governments may adopt substantially
different policies, which might extend to expropriation of assets, cannot be
ruled out.
  As
Capital Gold currently does not enter into forward sales, commodity, derivatives
or hedging arrangements with respect to its future gold production, it is
exposed to the impact of any significant decrease in the gold
price.
  As a
general rule, Capital Gold sells its gold at the prevailing market price.
Currently, Capital Gold generally does not enter into forward sales, commodity,
derivative or hedging arrangements to establish a price in advance for the sale
of future gold production, although it may do so in the future. As a result,
Capital Gold may realize the benefit of any short-term increase in the gold
price, but is not protected against decreases in the gold price, and if the
price of gold decreases significantly, Capital Gold’s revenues may be materially
adversely affected.
  Compliance
with environmental regulations could adversely affect Capital Gold’s exploration
and future production activities.
  With
respect to environmental regulation, future environmental legislation could
require:
  ·
              stricter
      standards and enforcement,·
              increased
      fines and penalties for non-compliance,·
              more
      stringent environmental assessments of proposed projects
    and·
              a
      heightened degree of responsibility for companies and their officers,
      directors and employees.
 
 There can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect Capital Gold’s operations.
Capital Gold could be held liable for environmental hazards that exist on the
properties in which it holds interests, whether caused by previous or existing
owners or operators of the properties. Any such liability could adversely affect
its business and financial condition.
  7
 Capital
Gold has insurance against losses or liabilities that could arise from its
operations.  If it incurs material losses or liabilities in excess of
its insurance coverage, its financial position could be materially and adversely
affected.
  Mining
operations involve a number of risks and hazards, including:
  ·
              environmental
      hazards,·
              industrial
      accidents,·
              metallurgical
      and other processing,·
              acts
      of God, and/or·
              mechanical
      equipment and facility performance
problems.
 
  Such
risks could result in:
  ·
              damage
      to, or destruction of, mineral properties or production
      facilities,·
              personal
      injury or death,·
              environmental
      damage,·
              delays
      in mining,·
              monetary
      losses, and/or·
              possible
      legal liability.
 
 Industrial
accidents could have a material adverse effect on Capital Gold’s future business
and operations.  Capital Gold currently maintains general liability,
business interruption, auto and property insurance
coverage.   Capital Gold cannot be certain that the insurance it
has in place will cover all of the risks associated with mining or that it will
be able to maintain insurance to cover these risks at economically feasible
premiums. Capital Gold also might become subject to liability for pollution or
other hazards which it cannot insure against or which it may elect not to insure
against because of premium costs or other reasons. Losses from such events may
have a material adverse effect on Capital Gold’s financial
position.
  Calculation
of reserves and metal recovery dedicated to future production is not exact,
might not be accurate and might not accurately reflect the economic viability of
Capital Gold’s properties.
  Reserve
estimates may not be accurate.  There is a degree of uncertainty
attributable to the calculation of reserves, resources and corresponding grades
being dedicated to future production.  Until reserves or resources are
actually mined and processed, the quantity of reserves or resources and grades
must be considered as estimates only. In addition, the quantity of reserves or
resources may vary depending on metal prices.  Any material change in
the quantity of reserves, resource grade or stripping ratio may affect the
economic viability of Capital Gold’s properties. In addition, there can be no
assurance that mineral recoveries in small scale laboratory tests will be
duplicated in large tests under on-site conditions or during
production.
  8
 Capital
Gold is dependent on the efforts of certain key personnel and contractors to
develop Capital Gold’s El Chanate Project and Orion Project.  If Capital
Gold loses the services of these persons and contractors and it is unable to
replace them, Capital Gold’s operations at its El Chanate Project may be
disrupted and/or materially adversely affected.
  Capital
Gold is dependent on a relatively small number of key personnel who oversee the
El Chanate Project and the Orion Project.  The loss of any one of
Capital Gold’s key personnel could have an adverse effect on Capital
Gold.  Capital Gold also is dependent upon Sinergia to provide mining
services.  Sinergia commenced mining operations on March 25, 2007, and
transitioned from the pre-production to production phase of the mining contract
in July 2007.  Sinergia’s mining fleet is comprised of new and
reconditioned equipment.  If Capital Gold loses the services of its
key personnel, or if Sinergia is unable to effectively maintain its fleet,
operations at its El Chanate Project may be disrupted and/or materially
adversely affected.
  There
are uncertainties as to title matters in the mining industry.  Capital
Gold believes that it has good title to its properties; however, any defects in
such title that cause Capital Gold to lose its rights in mineral properties
could jeopardize its business operations.
  Capital
Gold has investigated its rights to explore, exploit and develop its concessions
in manners consistent with industry practice and, to the best of Capital Gold’s
knowledge, those rights are in good standing.  However, Capital Gold
cannot assure that the title to or its rights of ownership in the El Chanate,
Orion and Huajicari concessions will not be challenged by third parties or
governmental agencies.  In addition, there can be no assurance that
the concessions in which Capital Gold has an interest are not subject to prior
unregistered agreements, transfers or claims and title may be affected by
undetected defects.  Any such defects could have a material adverse
effect on Capital Gold.
  Capital
Gold’s ability to maintain long-term profitability eventually will depend on its
ability to find, explore and develop additional properties.  Capital
Gold’s ability to acquire such additional properties could be hindered by
competition. If Capital Gold is unable to acquire, develop and economically mine
additional properties, it most likely will not be able to be profitable on a
long-term basis.
  Gold is a
non-renewable resource and gold mines continue to deplete their reserves while
in operation.  They eventually become depleted of ore or become
uneconomical to sustain mining operations.  The acquisition of gold
properties and their exploration and development are subject to intense
competition.  Companies with greater financial resources and larger
staffs for exploration and development may be in a better position than Capital
Gold to compete for such mineral properties.  If Capital Gold is
unable to find, develop and economically mine new properties, Capital Gold most
likely will not be able to be profitable on a long-term basis.
  Capital
Gold’s ability on a going forward basis to discover additional viable and
economic mineral reserves is subject to numerous factors, most of which are
beyond Capital Gold’s control and are not predictable. If Capital Gold is unable
to discover such reserves, it most likely will not be able to be profitable on a
long-term basis.
  Exploration
for gold is speculative in nature, involves many risks and is frequently
unsuccessful.  Few properties that are explored are ultimately
developed into commercially producing mines.  As noted above, Capital
Gold’s long-term profitability will be, in part, directly related to the cost
and success of exploration programs.  Any gold exploration program
entails risks relating to:
  9
 ·
              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
      use,
  ·
              water
      use,
  ·
              power
      use,
  ·
              importing
      and exporting gold, and
  ·
              environmental
      protection.
  The
effect of these factors cannot be accurately predicted.
  Risks Related to Ownership
of Capital Gold Stock
  The
issuance of a significant number of Capital Gold shares could adversely affect
the market price of Capital Gold shares.
  We
completed the business combination with Nayarit on August 2, 2010; consequently,
a significant number of additional shares of Capital Gold common stock became
available for trading in the public market.  The increase in the
number of Capital Gold shares may lead to sales of such shares or the perception
that such sales may occur, either of which may adversely affect the market for,
and the market price of, Capital Gold shares.
  The
NYSE EURONEXT may delist Capital Gold’s securities from its exchange which could
limit investors’ ability to make transactions in Capital Gold’s common stock and
subject it to additional trading restrictions.
  Capital
Gold’s common stock is listed on the NYSE EURONEXT, a national securities
exchange.  Although Capital Gold expects to continue to meet the
minimum continued listing standards, it cannot assure you that its securities
will continue to be listed on the NYSE EURONEXT in the future.
  10
 If the
NYSE EURONEXT delists Capital Gold’s common shares from trading on its exchange,
Capital Gold could face significant material adverse consequences,
including:
  ·
              a
      limited availability for market quotations for Capital Gold’s common
      stock;
  ·
              reduced
      liquidity with respect to Capital Gold’s common
  stock;
  ·
              a
      determination that Capital Gold’s common stock is a “penny stock,” which
      will require brokers trading in the common stock to adhere to more
      stringent rules and possibly result in a reduced level of trading activity
      in the secondary trading market for Capital Gold’s common
      stock;
  ·
              limited
      amount of news and analyst coverage for Capital Gold’s common stock;
      and
  ·
              a
      decreased ability to issue additional securities or obtain additional
      financing in the future.
  In
addition, Capital Gold would no longer be subject to NYSE EURONEXT rules,
including rules requiring Capital Gold to have a certain number of independent
directors and to meet other corporate governance standards.
  Capital
Gold does not intend to pay cash dividends in the near future.
  Capital
Gold’s board of directors determines whether to pay cash dividends on its issued
and outstanding shares.  The declaration of dividends will depend upon
Capital Gold’s future earnings, its capital requirements, its financial
condition and other relevant factors.  Capital Gold’s board does not
intend to declare any dividends on its shares for the foreseeable
future.  Capital Gold anticipates that it will retain any earnings to
finance the growth of its business and for general corporate
purposes.
   Additional Risks and
Uncertainties related to the Business Combination with Nayarit completed August
2, 2010, and the combined entity
  Having
a reduced share position, as a result of the Nayarit Business Combination,
may reduce the influence that Capital Gold’s stockholders have on the management
of Capital Gold.
  On August
2, 2010, Capital Gold issued approximately 12,454,354 shares of its common stock
in the Nayarit Business Combination to Nayarit's then current stockholders and
assumed warrants and options to purchase an additional approximately 1,621,981
and 903,483 shares of Capital Gold common stock held by Nayarit's warrant and
option holders, respectively.  Based on the number of outstanding
shares of Nayarit common stock and Capital Gold common stock, after the
Amalgamation, the former stockholders of Nayarit own approximately 20.4% of
Capital Gold.  Consequently, the ability of the continuing
stockholders of Capital Gold following the Nayarit Business Combination to
influence management of Capital Gold through the election of directors has been
substantially reduced.
  If
the Nayarit Business Combination’s benefits do not meet the expectations of
financial or industry analysts, the market price of Capital Gold’s securities
may decline.
  The
market price of Capital Gold’s securities may decline as a result of the
consummation of the Nayarit Business Combination if:
  ·
              the
      Company does not achieve the perceived benefits of the Nayarit Business
      Combination as rapidly, or to the extent anticipated by, financial or
      industry analysts; or
  11
 ·
              the
      effect of the Nayarit Business Combination on Capital Gold’s financial
      results is not consistent with the expectations of financial or industry
      analysts.
  
 Accordingly,
investors may experience a loss as a result of a decline in the market price of
Capital Gold’s securities.   A decline in the market price of
Capital Gold’s securities also could adversely affect its ability to issue
additional securities and its ability to obtain additional financing in the
future.
 
 The
combined company may not realize the benefits currently anticipated due to
challenges associated with integrating the operations of Capital Gold and
Nayarit.
  The
success of the combined company will depend in large part on the success of
management of the combined company integrating the operations of Nayarit with
those of Capital Gold going forward.  The failure of the combined
company to achieve such integration could result in the failure of the combined
company to realize the anticipated benefits of the Nayarit Business Combination
and could impair the results of operations, profitability, and financial results
of the combined company.
  There
can be no assurance that Capital Gold or Nayarit uncovered every item that could
have a material adverse effect on the combined company.
  Although
Capital Gold conducted business, financial and legal due diligence in connection
with the Nayarit Business Combination, there can be no assurance that due
diligence uncovered every item that could have a material adverse effect on the
combined company.  Accordingly, there may be matters involving Nayarit
and its financial statements that were not identified during their due
diligence.  Any of these issues could materially and adversely affect
the combined company’s financial condition.
  Additional
risks and uncertainties related to our proposed merger with Gammon Gold Inc.
which could materially adversely affect our business, financial condition or
operating results.
 
 Our
merger with Gammon Gold is subject to certain conditions to closing that could
result in the merger not being consummated or being delayed, either of which
could negatively impact our stock price and future business and results of
operations.
 
 Consummation
of the merger is subject to a number of customary conditions, including, but not
limited to, the approval of the agreement and plan of merger by the stockholders
of Capital Gold, the effectiveness of a Form F-4 registration statement to be
filed by Gammon with the Securities and Exchange Commission to register the
shares of Gammon common stock to be issued in connection with the merger and
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. There is no assurance that Capital Gold will
receive the necessary approvals or satisfy the other conditions necessary for
completion of the merger. If any of the conditions to the merger are not
satisfied or, where waiver is permissible, not waived, the merger will not be
consummated. Failure to complete the merger would prevent Capital Gold from
realizing the anticipated benefits of the merger. Capital Gold has already and
expects to continue to incur significant costs associated with transaction fees,
professional services, taxes and other costs related to the merger. In the event
that the merger is not completed, Capital Gold will remain liable for these
costs and expenses. Furthermore, if the merger is not consummated, under some
circumstances we may be required to promptly pay a $10.3 million breakup fee to
Gammon, which could impact Capital Gold’s liquidity and results of
operations.In addition,
the current market price of Capital Gold common stock may reflect a market
assumption that the merger will occur, and a failure to complete the merger
could result in a negative perception by the market of us generally and a
resulting decline in the market price of our common stock. Any delay in the
consummation of the merger or any uncertainty about the consummation of the
merger could also negatively impact Capital Gold’s stock price and future
business and results of operations. We cannot assure you that the merger will be
consummated, that there will be no delay in the consummation of the merger or
that the merger will be consummated on the terms contemplated by the merger
agreement.
 
 12
 Whether
or not the merger is completed, the announcement and pendency of the merger
could impact or cause disruptions in our business, which could have an adverse
effect on our business and results of operations.
 
 Whether
or not the merger is consummated, the announcement and pendency of the merger
could cause disruptions in or otherwise negatively impact our business and
results of operations. Among others:
 
 ·
              our
      employees may experience uncertainty about their future roles with the
      combined company, which might adversely affect our ability to retain and
      hire key personnel and other
employees;
  
 ·
              the
      attention of our management may be directed toward the completion of the
      merger and transaction-related considerations and may be diverted from the
      day-to-day operations and pursuit of other opportunities that could have
      been beneficial to our business;
and
  
  ·
              distributors
      or other vendors or suppliers may seek to modify or terminate their
      business relationships with us.
  These
disruptions could be exacerbated by a delay in the completion of the merger or
termination of the merger agreement and could have an adverse effect on our
business, results of operations or prospects if the merger is not completed or
the business, results of operations or prospects of the combined company if the
merger is completed.
 
 Several
lawsuits have been filed against Capital Gold and other parties challenging the
Gammon Transaction, and an adverse judgment in such lawsuits may prevent the
Merger from becoming effective or from becoming effective within the expected
timeframe.
 
 Capital Gold, the members of Capital
Gold’s board of directors, Gammon Gold, and in some instances Capital Gold’s CFO
or Capital Gold AcquireCo have been named as defendants in purported class
action lawsuits brought by Capital Gold stockholders challenging the proposed
Gammon Transaction, seeking, among other things, to enjoin the defendants from
consummating the Gammon Transaction on the agreed-upon terms.
 
 The
outcome of the pending and potential future litigation is difficult to predict
and quantify and the defense of such claims or actions can be costly. In
addition to diverting financial and management resources and general business
disruption, we may suffer from adverse publicity that could harm our reputation,
regardless of whether the allegations are valid or whether we are ultimately
held liable. A temporary or permanent injunction could delay or prevent
completion of the Gammon Transaction and such delay or failure of the
transaction could cause the adverse results discussed above.
 
 A
judgment or settlement that is not covered by or is significantly in excess of
our insurance coverage for any claims, or our obligations to indemnify the
individual defendants, could materially and adversely affect our financial
condition, results of operations and cash flows.
 
 13
 See "Item
3. Litigation" for more information about the putative class action lawsuits
related to the Gammon Transaction that have been filed.
 
 Item
1B.  Unresolved Staff
Comments
 
 None.
 
 Item
2.  Property
 
 Sonora
Concessions
  
 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.
 
 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.
  14
  
 During
fiscal 2009 and the first fiscal quarter ended October 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 (U.S.), Inc. (“SRK”) of
Lakewood, Colorado, an independent consulting firm, used this data to
re-estimate El Chanate’s Mineral Reserves. These efforts resulted in a
significant expansion of our reserve estimates, which we reported in our Form
10-K for the year ended July 31, 2009.  With the receipt of SRK’s
technical report titled NI 43-101 Technical Report, Capital Gold Corporation, El
Chanate Gold Mine, Sonora, Mexico and dated November 27, 2009 (the “SRK
Report”), with respect to the updated reserve estimation and the updated mine
plan and mine production schedule, current as of October 1, 2009, we
re-published our previously announced reserve estimates along with additional
information. The SRK Report complies with Canadian National Instrument 43-101
Standards of Disclosure for Mineral Projects (“NI 43-101”). Both Bart A. Stryhas
PhD., Principal Resource Geologist, and Bret C. Swanson, BE(Mining), MAusIMM,
are “Qualified Persons” as defined by NI 43-101.
 
 Our
proven and probable reserve tonnage increased to 70.6 million metric tonnes with
an average gold grade of 0.66 grams per tonne (77.7 million US short tons
at 0.0193 ounces per ton). The proven and probable reserve has 1,504,000
contained ounces of gold. The open pit strip ratio for the life of mine is
2.88:1 (2.88 tonnes of waste to one tonne of ore).  For the next year,
our mine plan anticipates the open pit strip ratio will average 2:1.
Determination of operational pre-stripping (increase in strip ratio) will be
made after further geological drilling and determination of corporate strategy
within the three year window of opportunity. There is also the potential to
improve the life of mine strip ratio as the report identifies material within
the pit design classified as waste that with additional drilling could be
reclassified as ore. The updated pit design for the revised mine plan is based
on a plant recovery of gold that varies by rock types, but is expected to
average 58.25%. A gold price of US$800 (SEC three year average as of October 1,
2009) per ounce was used to re-estimate the reserves compared with a gold price
of $750 per ounce used in the previous reserve estimate.  The stated
proven and probable mineral reserves have been prepared in accordance with the
Canadian Institute of Mining, Metallurgy and Petroleum (CIM).  CIM
definitions for proven and probable reserves convert directly from measured and
indicated mineral resources with the application of appropriate economic
parameters. These reserves are equivalent to proven and probable reserves as
defined by the United States Securities and Exchange Commission (SEC) Industry
Guide 7.
 
 15
 The
following summary is extracted from the SRK Report.   Please note
that the reserves as stated are an estimate of what can be economically and
legally recovered from the mine and, as such, incorporate losses for dilution
and mining recovery.  The 1,504,000 ounces of
contained gold represents ounces of gold contained in ore in the ground, and
therefore does not reflect losses in the recovery process.  Total gold
produced is estimated to be 876,000 ounces, or approximately 58.25% of the
contained gold. The gold recovery rate is expected to average approximately
58.25% for the entire ore body.  Individual portions of the ore body
may experience varying recovery rates ranging from about 48% to
65%.  Oxidized and sandstone ore types may have recoveries of about
65%; siltstone ore types recoveries may be about 48% and latite intrusive ore
type recoveries may be about 50%.
 
 El Chanate
Mine
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 16
 
 Production
Summary
 
 Metric
                        U.S.MaterialsReservesProven
                        22.4
      Million Tonnes @   0.70   g/t(1)
                        24.7
      Million Tons @   0.0204 opt(1)Probable
                        48.2 Million
      Tonnes  @  0.65   g/t(1)
                        53.0 Million Tons
      @   0.0189 opt(1)Total
      Reserves(2)
                        70.6
      Million Tonnes  @  0.66   g/t(1)
                        77.7
      Million Tons @   0.0193 opt(1)Waste
                        203.5 Million Tonnes
                        224.3 Million TonsTotal
      Ore/Waste
                        274.1
      Million Tonnes
                        302.0
      Million tonsContained
      Gold
                        46.78
      Million grams
                        1,504,000  OzProductionOre
      Crushed
                        5.4
      Million Tonnes /Year
                        6.0
      Million Tons/Year14,868
      Mt/d(1)
                        16,390
      t/d(1)Operating
      Days/Year
                        365
      Days per year
                        365
      Days per yearGold
      Plant Average Recovery
                        58.25%
                        58.25%Average
      Annual Production
                        2.1  Million
      grams
                        67,391  OzTotal
      Gold Produced
                        27.25
      Million grams
                        876,080  Oz
 
 (1)
              “g/t”
      means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
      metric tonnes per day and “t/d” means tons per
  day.
 (2)
              The
      reserve estimates are mainly based on a gold cutoff grade of 0.15 g/t for
      sandstone and 0.19 grams for siltstone and latite within the pit
      design.
 
  The SRK
resource estimation is based on information from 371 holes for a total of 55,294
meters of drilling.  There are 333 reverse circulation holes and 38
core holes.  The drill holes were carefully logged, sampled and tested
with gold fire assay (industry standard).  A geological model was
constructed based on four general rock groups which are cut by thrust faults and
normal faults.  The mineral resource model blocks are 6m (meters) x 6m
x 6m. All block grade estimates were made using 6m bench
composites.  An ordinary Kriging algorithm was employed to generate a
categorical indicator grade shell based on a 0.1ppm gold
threshold.  An inverse distance cubed algorithm was used for the gold
grade estimation within the grade shells.
  
 The life
of mine plan used as the basis for the reserve is based on operating gold cutoff
grades of 0.15 to 0.19 g/t, depending on the ore type to be
processed.  The internal (in-pit) and break even cutoff grade
calculations are as follows:
  17
 Cutoff
      Grade Calculation Basic Parameters
                      Internal
      Cutoff Grade
                      Break
      Even Cutoff GradeGold
      Price
                      US$800/oz
                      US$800/ozGold
      Selling Cost (4% Royalty,   Refining, Transport, Silver
      Credit, etc)
                      $25.258/oz
                      $25.258/ozGold
      Recovery*
                      58.25%
                      58.25%Operating
      Costs per Tonne of OreMining
                      
                      $1.08/tonneProcessing
      – Heap leach
                      $2.357/tonne
                      $2.357/tonneTotal
                      $2.357/tonne
                      $3.44/tonneCutoff
      Grade
                      Grams
      per Tonne
                      Grams
      per TonneHead
      Grade Cutoff (58.25% average recovery)
                      0.15
      g/t gold
                      0.24
      g/t goldRecovered
      Gold Grade Cutoff
                      0.09
      g/t gold
                      0.14
      g/t gold
  * Plant
recovery of gold varies by rock type but weighted average gold recovery is
expected to average 58.25% based on work done to date.
 
 In August
2009, we initiated the construction of an additional leach pad area at El
Chanate with capacity for eight million tonnes of ore, at an estimated cost of
approximately $3,300.  Permitting and site clearing was completed, the
construction contractor completed the earthworks and the geomembrane liners were
applied to the new leach pad area.  We initiated leaching of ore on
the new leach pad as of December 31, 2009.  Golder Engineering of
Tucson, Arizona oversaw construction activities and quality control and
assurance for the project. The final actual construction cost of this additional
leach pad area was approximately $3,000.
 
 In
October 2009, we procured additional water rights at El Chanate that has enabled
us to drill another water supply well.  The new well was completed in
October 2010 and will allow for a further increase in solution flow to the leach
pads.
 
 In
December 2009, we completed the procurement and commissioning of a new tertiary
crusher for the El Chanate mine.  The cost for this equipment was
approximately $1,100.  In addition, we increased the speed of the
tertiary crushers by 20% which has resulted in a finer crush size which is
anticipated to speed up the recovery time of the metal content.  We
also made maintenance and scheduling improvements to the crushing circuit,
including the design of the cone crushing liners, which have maximized the
availability of the crushing plant and improved both crushing and stacking
rates. Lastly, we upgraded the platform supports for three of our crushers in
May 2010.  These upgrades cost approximately $800.
 
 We
commenced a drill campaign in April 2010 within the El Chanate pit area which
consists of approximately 92 reverse circulation drill holes totaling
approximately 11,586 meters.  The primary reason for the infill
drilling  is to replace depleted reserves and improve the forecast
accuracy of the mine plan.  In addition, some holes will test the
north pit wall for mineralization as well as the outer limits of the
pit.  The data from both the infill and exploration drilling will be
used to update the resource estimate which we anticipate to be complete before
the end of our fiscal year ended 2011.
 
 18
 In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
aggregate capacity will be approximately 20.1 million tonnes.  This capital
expenditure is anticipated to be expended over the next twelve months. 
Site clearing was initiated in May 2010 and construction commenced in July
2010.  The first panel is anticipated to be ready for stacking towards the
end of the calendar year with complete construction anticipated to be completed
by May 2011 (See Note 8).
 
 In July
2010, the Company commenced the use of belt agglomeration with cement which is
added to the crushed ore at the El Chanate mine to improve the flow of leaching
solution.   We have engaged an independent consultant with respect to heap
leaching optimization, which has resulted in recommendations to increase the
barren solution flow to the leach pad, increase the pregnant solution flow to
the recovery plant, and redirect the low grade solution to the leach pads.
 When fully implemented, these operational changes combined with the
agglomeration with cement and barren solution may result in immediate
improvements in leaching time.  We ordered two agglomeration drums
which are expected to arrive by January 2011.  The current belt
agglomeration is a temporary measure until the drums are delivered.  The
use of agglomeration drums will allow for better mixing of cement and lime with
the crushed ore, producing a consistent quality control of the
product.  The cost of these agglomeration drums and an additional
overland conveyor is anticipated to be $2,000 (See Note 23).
 
 
 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,
                      2010
                    
                    
                    July
      31,
                      2009
                    
                    
                    July
      31,
                      2008Ore
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Beginning
      balance (Ktonnes)
                    
                    
                    40,911
                    
                    
                    
                    35,417
                    
                    
                    
                    38,916Additions
                    
                    
                    30,388
                    
                    
                    
                    9,342
                    
                    
                    
                    -Reductions
                    
                    
                    (4,587
                    )
                    
                    
                    (3,848
                    )
                    
                    
                    (3,499
                    )Ending
      Balance
                    
                    
                    66,712
                    
                    
                    
                    40,911
                    
                    
                    
                    35,417Contained
      goldBeginning
      balance (thousand of ounces)
                    
                    
                    859
                    
                    
                    
                    719
                    
                    
                    
                    814Additions
                    
                    
                    662
                    
                    
                    
                    239
                    
                    
                    
                    -Reductions
                    
                    
                    (110
                    )
                    
                    
                    (99
                    )
                    
                    
                    (95
                    )Ending
      Balance
                    
                    
                    1,411
                    
                    
                    
                    859
                    
                    
                    
                    719
 
 
 El
Chanate is an open pit mining and heap leach processing
operation.  Ore is hauled by truck from the pits to the processing
plant.  The recovery of gold from certain gold ores is achieved
through the heap leaching process. Under this method, ore is placed on
impermeable leach pads where it is treated with dilute alkaline cyanide bearing
solution, which dissolves gold and silver contained within the ore. The
resulting “pregnant” solution is further processed in a plant where the gold is
recovered.  The processing is a closed circuit, solution is reused,
and the process is zero discharge. The mining and other mobile equipment is
mostly refurbished as is the smaller of the two Adsorption, Desorption, Refinery
(“ADR”) processing plants.  All other equipment and infrastructure at
the El Chanate mine are new.  Management continuously analyzes
production results and considers improvements and modernizations as deemed
necessary.
 
 19
 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.
 
 We
commenced gold production at the El Chanate mine on July 31,
2007.  During the fiscal years ended July 31, 2010, 2009 and 2008, we
sold 54,304, 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.  We believe that the improvements and enhancements in
production being made at the El Chanate mine will elevate and maintain El
Chanate’s production profile to 65,000 to 70,000 ounces per
annum.
 
 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.  Minera Santa Rita
S.A. de C.V. (“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 additional 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 (22
miles) 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 (1,700 meters) long by
2,558 feet (780 meters) wide.  There is evidence of potential
additional mineralization within the El Chanate concessions that warrant further
exploration.
 
 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
(358,333 cubic meters, or 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 (270,000 cubic meters, or 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 (566 cubic meters) per year.  In
October 2009, in preparation for future growth, we acquired additional water
rights and a water well which allows us to allocate an additional 158.5 million
gallons per year (600,000 cubic meters).  This gives us a total
allocation of approximately 317.4 million gallons (1,202,270 cubic meters per
year, or 38.1 liters per second).  Based on current and anticipated
future water consumption, we believe we have sufficient water to meet our
current development and production requirements.
 
 20
 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 are 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
level of the historical small scale mining.
 
 Geology
 
 The project area is underlain by
deformed 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.    Sandstone, conglomerate and lesser mudstone
that lies above the Chanate fault areof the Middle Cretaceous Chanate
Group.  Below the Chanate fault siltstone,  and sandstone
lenses are assigned to the Arroyo Sasabe Formation of the Lower Cretaceous
Bisbee Group.  The Arroyo Sasabe formation overlies the Morita
Formation of the Bisbee Group.  The Escalante, Arroyo Sasabe, and
Morita formations are  mineralized proximal to the Chanate
fault.
 
 The main
structural feature of the project area is the Chanate fault zone, a 7 km long
(minimum) northwest-striking, variably southwest-dipping structure that has been
interpreted to be a thrust fault.  The Chanate fault  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 andesite dikes, and a change from
sandstone to siltstone.   The Chanate Fault Zone is offset by a
series of high angle normal faults which also strike northwest. Intrusions of
the microporphyritic latite are primarily below the Chanate fault zone, in the
mine area, and also predate mineralization.
 
 21
 Alteration/Mineralization
 
 Alteration
and mineralization, associated with the Chanate Fault zone, are exposed over a
north 60 west strike length of over 3.5 km.  The final open pit mine
dimensions are 1,700 meters along strike n60w, 775 meters normal to strike, and
the pit will be 280 meters deep .  The rock units within this zone are
altered to varying degrees by sericite, pyrite, ankerite and quartz
veining.  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.  Sub-parallel ‘sheeted’ zones of quartz 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 often parallel to the Chanate
fault and the steep normal faults.  The fault zone itself is generally
weakly mineralized, while rock units in the adjacent hanging and footwalls are
well mineralized.
 
 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.  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, 2010, we have incurred approximately $5,567
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, 2010, we have approximately $11,451 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 a target
number of 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.
 
 22
 El
Oso Project - Saric Properties – Sonora, Mexico
 
 In April
2008, we leased 12 mining concessions totaling 1,789 hectares located northwest
of Saric, Sonora. In addition, we own a claim for approximately 2,233 additional
hectares adjacent to this property. The approximate 4,022 hectare area is
accessible by paved roads and has cellular phone service from
hilltops.  These concessions and this claim are about 60 miles
northeast of the El Chanate project. Mineralization is evident throughout the
concession group and is hosted by shear zones and stockwork quartz veins in
volcanic and intrusive rocks. We have completed exploration work consisting of
geological mapping, systematic geochemical sampling of rock and soils,
geophysical surveys, trenching and 73 reverse circulation drill holes totaling
6,121 meters and more recently a one meter interval topographic survey over the
concession area.  SRK of Lakewood, Colorado has visited the site and
has monitored the quality assurance and quality control during these drill
campaigns.  SRK will also assist on the next phase of the exploration
program.  All of the drill hole samples have been assayed by ALS
Chemex.  The ALS Chemex facility in Hermosillo does the sample
preparation, and the assays are performed at the ALS Chemex’s Vancouver
laboratory.
 
 In
January 2010, we initiated an additional drill campaign at Saric that consisted
of 13 core holes totaling approximately 1,100 meters.  The drilling
was completed on February 23, 2010 and targeted the existing mineralized
structure to confirm the geologic interpretation and confirm the accuracy of
previous reverse circulation drilling. The drill hole samples were assayed by
ALS Chemex.  Currently, we are planning to initiate a geophysical
survey in late 2010.  The intention of the geophysical survey is to
assist us in determining the focus of our next drill campaign.  We are also
continuing our work on an updated environmental report and clarifying the
surface ranch land ownership.
 
 The lease agreement required an initial
payment of $45 upon execution of the lease.  We are required to pay an
additional $250, consisting of ten payments of $25 every four months beginning
six months after execution of the lease agreement (See Note 23). The agreement
also contains an option to acquire the mining concessions for a cash payment of
$1,500 at the end of the term (December 2011).  If we elect not to
exercise this option, we would have the ability to mine the concessions by
paying a 1% net smelter return to the owners of the leased concessions, capped
at $3,000.  Prior payments made under this lease agreement would be
deductible from the $3,000 cap.
 
 Orion
Project
 
 Through
our recent acquisition of Nayarit on August 2, 2010, we control approximately
257,000 acres (104,000 hectares) of mining concessions known as the Orion
Project.  The Orion Project lies in the Sierra Madre Occidental, a
prolific mining district in Western Mexico. Nayarit was a junior mineral
exploration company that was incorporated in November, 2003 and became a public
company by virtue of its amalgamation with Canhorn Chemical Corporation on May
2, 2005.  With this recent acquisition, our plan is to continue
exploration work on the Orion Project in the State of Nayarit, Mexico. As an
exploration stage project, the Orion Project currently does not produce any
gold.  The original exploration focus was on the known mineralization
of the La Estrella property, one of the original properties making up the Orion
Gold Project. With expansion of the property area by almost 1200% in 2005 and
2006, other targets were identified and the strategy has taken on more of a
district approach. A reconnaissance drill program initiated in 2007 throughout a
small portion of the northern area in the concession resulted in the discovery
of the Animas System, which was the focus of Nayarit's diamond drill
program.
  23
 Portions
of the following disclosure relating to the Orion Project have been derived from
two independent technical reports prepared for Nayarit entitled “National
Instrument 43-101 Technical Report on Resources – Nayarit Gold Inc. – Orion
Project, State of Nayarit, Mexico” dated December 29, 2009, and “National
Instrument 43-101 Preliminary Economic Assessment – Nayarit Gold Inc. – Orion
Project, Animas/Del Norte Zone, State of Nayarit, Mexico” dated February 5, 2010
authored by qualified persons (collectively, the “Authors”) of SRK Consulting
(U.S.) Inc., 7175 W. Jefferson Avenue, Suite 3000, Lakewood,
CO  80235.  These technical reports have been completed in
accordance with the terms of National Instrument 43-101 and the Authors are
“qualified persons” within the meaning of National Insturment 43-101 and are
independent of Nayarit and Capital Gold.   The disclosure in this
document has been reviewed by Mr. Ramon Hiram Luna Espinoza, P. Geonga, a
consultant to Capital Gold who is a "qualified person" under National Instrument
4-3-101 and is not independent of Capital Gold.
 
 The Orion
Project lies in the prolific Sierra Madre Occidental, which hosts numerous
multi-million ounce gold-silver deposits. The Orion Project is one of the larger
contiguous concessions in the Sierra Madre, composed of 257,000 acres (104,000
hectares).  The Orion Project is located on the southeast flank of the
Sierra Madre, about 125km south of  the famous Tayoltita district which has
reserves reported to be in excess of 20 million gold equivalent
ounces.  The concessions are located approximately 110km
north–northwest of Tepic, state capital of Nayarit, México, 150km southeast of
Mazatlan, Sinaloa.  The Orion Project is located 13 km south–southeast
of the town of Acaponeta, Nayarit, in the Motaje Mining District as identified
by the Servicio Geologico Mexicano (formerly the Consejo de Recursos
Minerales).  We anticipate progressing  this project to a
pre-feasibility stage by the second quarter 2011.
 
 24
  Figure 1.
Orion Project Concessions Area on Nayarit State.
  
   Royalties,
Agreements and Encumbrances
  Nayarit Gold de Mexico, S.A. de C.V.
(“Nayarit Mexico”), our wholly-owned subsidiary, has the exclusive right to
explore and, as the case may be, exploit the “La Estrella” (title 196009) mining
concession, in accordance with the terms of an exploration agreement (the
“Exploration Agreement”) dated November 28, 2003 which was entered into by and
between Mr. Adrian Evodio Prado Gomez and Minera Portree de Zacatecas, S.A. de
C.V., which conveyed its rights to Nayarit Mexico in accordance with the terms
of a Conveyance Agreement dated May 20, 2004 (the “Conveyance Agreement”) and
amendments thereto dated May 17, 2004, July 29, 2004, November 28, 2007,
November 28, 2008 and a letter of intent for a new amendment dated December 4,
2009 (the “Estrella Amendments”).
  For
the exploration rights of La Estrella as described above, Nayarit Mexico has
paid up to date the amount of $550 plus applicable Value Added Tax, and shall
pay the following amounts in the dates indicated below, after which payment,
Nayarit Mexico will acquire 100% interest to La Estrella
concession:
   (i)
              $100
      plus applicable Value Added Tax, in December 8,
  2010;
  25
  (ii)
              $100
      plus applicable Value Added Tax, in June 8,
  2011;
   (iii)
              $175
      plus applicable Value Added Tax, in December
      8;  2011
   (iv)
              $175
      plus applicable Value Added Tax, in June 8, 2012;
  and
   (v)
              $350
      plus applicable Value Added Tax, in December 8,
  2012.
  
 The Exploration Agreement and
Amendments thereto may be terminated by Nayarit Mexico at any time through a
written communication addressed to Prado.
 
 Nayarit Mexico has the unlimited right
to explore the following mining concessions (“Huajicari Concessions”), in
accordance with the terms of and Exploration and Assignment Option Agreement of
Mining Concessions (the “Option Agreement”) dated May 8, 2008, which was entered
into by and between Compañía Minera Huajicari, S.A. de C.V. (“Huajicari”) and
Nayarit Mexico and amendment thereto, dated December 10, 2009:
  CLAIM
                      
                      TITLE NUMBER“San
      Juan Fracc. I”
                      
                      
                      205392“San
      Juan Fracc. II”
                      
                      
                      205393“San
      Francisco Tres”
                      
                      
                      203136“San
      Juan I”
                      
                      
                      221365“Isis”
                      
                      
                      214395“San
      Miguel”
                      
                      
                      224392
  For the exploration rights of the
Huajicari Concessions as described above, Nayarit Mexico has paid up to date the
amount of $2,250, and shall pay $250 by October 31, 2010, after which payment,
Nayarit Mexico will acquire 100% interest to Huajicari Concessions.
 
 The term
granted to Nayarit Mexico for the exploration of the above mentioned mining
is 2 years commencing as of the date of execution of the Option Agreement but
Nayarit Mexico may terminate the agreement at any time through a written
communication addressed to Huajicari.
 
 Nayarit Mexico has the option to
acquire 100% interest to the Huajicari Concessions at any time as of the date of
execution of the Option Agreement, provided it complies with the obligations set
forth in the Option Agreement.
 
 Nayarit
Gold Inc. purchased the Orion Concession by Asset Purchase Agreement dated
January 30, 2004. With respect to the Orión concession, Nayarit has granted a
3.5 percent net smelter return royalty payable to Belitung Limited, an Ontario
incorporated company. Nayarit may purchase the royalty outright at any time for
CDN$250 in cash or non-assessable common shares. In addition, Nayarit is also
subject to a net profits interest on Orión of 10% payable to a previous property
owner.
 
 26
  Table:
Mining Concessions Controlled by Nayarit Gold de Mexico, SA de CV
  Concession
      Name
                        Title
                        File
      No.
                        
                        Owner
                        Surface
      (ha)BONANZA
      I
                        227603
                        6923
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        200.00EL
      DORADO
                        228887
                        7013
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        23,001.85EL
      MAGNIFICO
                        221592
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        7,595.74EL
      MAGNIFICO F-I
                        221588
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        6.90EL
      MAGNIFICO F-II
                        221589
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        32.00EL
      MAGNIFICO F-III
                        221590
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        6.96EL
      MAGNIFICO F-IV
                        221591
                        6758
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        8.84GROSS
      F I
                        228826
                        7002
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        67,148.77GROSS
      F- II
                        228827
                        7002
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        16.00ORION
                        205616
                        6253
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        527.50REESE
                        227775
                        6980
                        
                        NAYARIT
      GOLD DE MÉXICO SA de CV
                        3,104.29SAN
      JUAN I
                        221365
                        3/1/639
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        45.63SAN
      FRANCISCO 3
                        203136
                        3/1.3/243
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        32.75SAN
      JUAN F - II
                        205393
                        6250
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        0.81ISIS
                        214395
                        6617
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        101.34SAN
      JUAN F-I
                        205392
                        6250
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        1,339.01SAN
      MIGUEL
                        224392
                        3/1/723
                        
                        COMPAÑIA
      MINERA HUAJICARI SA de CV
                        1,177.38LA
      ESTRELLA
                        196009
                        3/1.3/232
                        
                        ADRIAN
      EVODIO PRADO GÓMEZ
                        146.35
   Environmental
Liabilities and Permitting
  Nayarit Gold has initiated the
generation of an environmental impact assessment of the concession(s) (the
“EIA”) which is substantially complete. There are no known environmental
liabilities on the Concession.
  Accessibility,
Climate, Local Resources, Infrastructure and Physiography
  Access
to Property
  Access to the Orion Project site is
from Tepic, state capital of Nayarit, Mexico via 220km of multi-lane paved toll
road to Acaponeta near the Nayarit–Sinaloa state border.  Primary
access to the Orion Project is located 10km to the east, towards the El Motaje
ranch, where a secondary dirt road passes northward towards the La Estrella
mineralized area.  A second access road connecting the Motaje ranch
and the La Estrella zone has been maintained by Nayarit Gold since 2005. A
1,000m long, unpaved fixed wing airstrip and two bus depots for local and
external transportation are also available in Acoponeta.
  Power and Water Supplies
  Low voltage residential electrical
power services are available at El Resbalón, Motaje and El Carrizo, while a
major 115kV line which is part of the interconnected National Power line Net
crosses the El Magnífico claim 2 km west of the La Estrella
zone.  Water for industrial purposes has not been adequately
investigated in the region, however surface water is abundant.
  Climate
and Length of Operating Season
  The general climate in the region is
warm and sub-humid with a well-defined primary rainy season between June and
September, and which commonly extends through October. Average annual rainfall
is in the order of 1,307mm, of which 92% falls from July to
September.  The annual mean temperature is
26.7°C.  Exploration work can be carried out year round at the Orion
Project.
  27
 Surface
Rights
  According to Mexican legislation,
surface rights are not part of mining concessions and require that specific
purchase or rental agreements with property owners must be
fulfilled.  At Animas/Del Norte, La Estrella, San Francisco and most
of the northern exploration targets within the Orion Project surface rights are
held by the Indigenous
Community of San Blasito and annexesof the Acaponeta municipality based
in the village of Motaje, southeast of La Estrella.  Nayarit Gold has
established private agreements with local communities to obtain permission for
exploration activities.  In all cases, the main responsibility agreed
to by Nayarit Gold is to give priority to the local population for the
non-specialized jobs created by the advancement of the Orion Project, provide
them with mandatory Social Security registration and assist with mobile
equipment support for improvement of access roads to the neighboring
communities.
  Topography,
Elevation and Vegetation
  Topography at the Motate Carrizo is
characterized by moderate relief, with elevations ranging between 60m to a
maximum of 620m above sea level (masl). In the area of the concessions, more
than 40 different species of plants have been identified and can be generally
grouped as oak tree forests and sub-caducifolia and sub-perennifolia scrub trees
and bush forest.  The main use of vegetation in the region is for
human consumption, wood for fuel, fence poles, furniture making and a few
edibles.  It has been observed in some reports that local vegetation
has partially been altered due to forest fires, as well as deforestation
resulting from agriculture and the raising of cattle.
  Physiography
  The Orion project is located along the
western flank of the Sierra Madre Occidental, a mountain range that defines the
central spine of northern Mexico.  The north-northwest-trending Sierra
Madre Occidental is composed of a relatively flat-lying sequence of Tertiary
volcanic rocks that forms a volcanic plateau.  The Sierra Madre
Occidental gives way to the west to an extensional terrane that represents the
southward continuation of the Basin and Range Province of the western United
States, and then further west to the coastal plain of western
Mexico.  The property lies at the boundary between the Mexican Basin
and Range Province and the coastal plain.  The Orion project area is
hilly, but not mountainous, with densely vegetated, steep-sided
slopes.  The hills are cut by a number of intermittent streams that
flood in the June – September rainy season.
  The area is sparsely populated and
cattle raising and cultivation of market crops, are the main district land
use.  Agriculture produced from the area includes corn, beans, nuts,
sorghum, avocados and a variety of other fruits and vegetables.  Local
activities in the municipality of Acaponeta include agriculture with 18,000ha of
corn, beans, sorghum, chili pepper, avocado and mango production, cattle raising
(32,000ha) and forestry (7,000ha) with minor artisanal mining
activities.
  History
  Past
Exploration and Development
  The Orion project area lies within the
Motaje mining district in the Municipality of Acaponeta, Nayarit,
Mexico.  The district is reported to have had moderate but unknown
quantities of gold and silver production dating from Spanish colonial times,
possibly as early as the late 1500’s.  Many small adits and
superficial workings along the district’s two main mineralized structural
trends, the La Estrella – Animas - Pantaleona and the El Rey - La Escondida -
Bonanza trends, attest to past mining activity.
  28
  A small, 5t/d, operation was carried
out between 1955 and 1970 at La Estrella. In 1973 a total of 15,000 tons was
produced from the Bonanza Mine, 4.7 km east of La Estrella, while the Las Animas
Mine was operated around 1998. Currently, Minerales Vane , S.A. de C.V. is
carrying out small scale mining of 1500 TPM at the Diablito high grade mine in
the neighboring Las Lumbres District, located 16km southwest of La
Estrella.
  Mineral exploration was carried out at
La Estrella Concession area by Lac Minerals (USA) in 1993 – 1994 including the
completion of 21 drill holes. Previously, exploration was carried out by Minas
Caopas on the San Francisco – La Sebastianna mine areas in 1986-1987 located
just south of La Estrella, when 21 drill holes were completed by Minas
Caopas.
  Geologic
Setting
  Regional Geology
  The Sierra Madre Occidental
metallogenic province, in which the Orión Gold Project is located, is one of the
world’s largest epithermal precious metal terrains and hosts most of Mexico’s
gold and silver deposits.  The general geology of the Orión Gold
Project area is characterized by Early to Mid-Tertiary volcanic rocks, which can
be divided geologically into two main units referred to as the Upper and Lower
Volcanic Groups.  The Lower Volcanic Group is of a generally andesitic
composition and hosts most of the mineral deposits.  The Upper
Volcanic Group is of a generally dacitic to rhyolitic composition and covers the
Lower Volcanic Groups except where erosion has removed it entirely, or deep
river valleys have cut down to expose the underlying lower volcanics. Between
the time of deposition of the Upper and Lower volcanics, the rocks were intruded
by shallow, fine-grained to porphyritic igneous rocks of a generally felsic
composition. This assemblage is typical and extends through the Sierra Madre
Occidental in eastern Sonora, western Chihuahua, Durango, Sinaloa and Nayarit
states.
  29
  Figure 2.
Regional geologic map illustrating geology, the Animas/Del Norte Resource area
and various targets throughout the concession. A more detailed view of the
Animas/Del Norte area is illustrated in Figure 3.
  
   Local
and Property Geology
  The northern portion of Nayarit Gold’s
concessions includes a number of epithermal veins which are developed along
east-west fracture systems. Mineralized veins form two discrete mineralized
corridors separated by about 2km from one another. Animas/Del Norte is the
southernmost of two major mineralized corridors defined at the project, each
more than 4 kilometers long. The southern mineralized corridor includes the
Animas/Del Norte veins and the Pantaleona, San Francisco and La Estrella veins,
which generally dip to the north and is more than 4 km long, as is the northern
vein.  The La Estrella structure is a northwest striking splay off the
Del Norte vein.  The northern corridor includes the El Rey, La
Escondida, El Carmen, Bonanza 1 veins, which generally dip to the south and
includes the previously producing Bonanza mine, which is in a competitor owned
mining concession internal to Nayarit Gold’s land package.
  30
  Figure 3.
Northern portion of the concession where most of the exploration has been
carried out to date. The mapped veins are illustrated in red with the various
targets.
  
   Exploration
  Nayarit Gold has been exploring the
Orion Project since 2004.  Exploration to date has focused in the
northern portion of the concession where the company has identified two +4km
parallel vein sets, which hosts most of the known mineral zones to date (see
above image). Most of the focus has been on the Las Animas/Del Norte system, in
the southern vein, which hosts the majority of mineral resources found to date.
Exploration was initiated by underground and surface sampling and mapping of the
Las Animas structure. Rock and soil programs over the area were carried out
which was followed by a series of drill hole programs. All mapping and sampling
was carried out by company personnel while drilling was contracted to HD
Drilling.
  To the east and west Animas/Del Norte
the company has also explored several known zones and advanced exploration to an
initial drill phase. These zones include San Francisco and San Sebastiana to the
west and Pantaleona to the east. Drilling has identified mineral zones in all
locations, although not as prominent as that at Animas/Del Norte. More work is
necessary especially at San Sebastiana and Pantaleona areas.
  The northern vein set which is host to
El Rey, Escondida, Bonanza, El Carmen, Bonanza 1 has also been explored by
surface and underground sampling and mapping, and drilling. Surface samples have
shown promise in the area, however, drilling to date has been less consistent.
More exploration is necessary to determine the best drill targets.
  Nayarit
has also completed exploration on select targets throughout the southern portion
of its Orion Concession (see Figure 2 for locations of the following targets).
At Lazaro Cardenas, 22 km S-SE of Animas/Del Norte and Rosa Amarilla, 19 km
south of Animas/Del Norte, the company has completed surface work and drilling,
with drill results showing promise. Both areas show considerable promise and
further exploration and drilling is needed.
  31
  At El Frontal, 22 km southeast of
Animas/Del Norte, the company has carried out a surface and minor underground
sampling program. This target is a historic mine which according to COREMI,
1994, has 1.5 km of underground development. As with other targets, this one is
an epithermal gold-silver prospect and needs additional exploration followed by
drilling to assess its potential. Grab samples in the underground workings
collected by Nayarit geologists assayed up to 6.18 g/t gold and 179 g/t
silver.
  Other targets that have been sampled
but not drilled throughout the southern concession include El Chinacate (28 km
southeast of the Animas/Del Norte), Las Camillas (22.5 km south from the Las
Animas/Del Norte) and La Paloma (16 km south of the Animas/Del Norte). All zones
have shown gold and silver grades from surface veins.
  In general, Nayarit has not completed
any significant exploration throughout the southern concession area, expect for
the known historic target zones listed above.
  All sampling and drilling has been
carried out in such a manner that its reliability is high. A Quality
Assurance/Quality Control (“QA/QC”) program for sampling including rocks, soils
and drill core samples are submitted with commercial standards for assay check
as well as blanks and duplicates.
  Mineralization
  The
mineralized zones at Animas/Del Norte are composed of a series of 2 to 4m wide
discrete quartz veins within a zone of dense quartz stockwork and breccias,
averaging 12m wide and reaching widths greater than 25m, generally enveloped in
andesites of the lower volcanic series. Epithermal textures ranging from
colloform banding in chalcedonic quartz to cockade texture in crystalline quartz
are common.  Nayarit Gold personnel have observed that two different
mineral assemblages occur in the veins and that one assemblage is more favorable
for high-grade mineralization.  An early district wide event resulted
in the formation of crystalline quartz and pyrite, observed in all the known
veins in the district.  This event is characterized by well
crystallized pyrite and low silver: gold ratios.  The event is gold
dominant and does have potentially economically mineable grades in several
drillholes in the La Estrella area.  A later event, characterized by
very finely crystalline to chalcedonic quartz, is accompanied by very fine
pyrite, acanthite/argentite, light colored sphalerite and very minor
chalcopyrite and galena.  Dark, sulphide rich bands (ginguro bands)
and breccia fragments containing remnants of such bands are
common.  This event has high silver: gold ratios and is the dominant
style of mineralization observed in the Del Norte and Pantaleona areas, and is
less well developed in the San Francisco area.  Only traces of the
younger fine-grained quartz/argentite event have been observed at La
Estrella.  The more favorable silver rich event is present along the
northern mineralized corridor, but has not been identified in significant
volumes along at El Rey, La Escondida and Bonanza 1.  It is noted that
along the northern vein system, the Bonanza mine appears to have this mineral
assemblage well developed on rocks taken from the dumps.
  Relevant
Geological Controls
  The principal geologic controls to
mineralization at Animas/Del Norte are favorable, dilatant structural flexures
and favorable host rocks.  The highest-grade mineralization for gold
and silver in the Animas/Del Norte veins is localized in a 200m vertical range
from 100m above sea level to 100m below sea level. A mineral assemblage
including argentite/ginguro, light colored sphalerite and low temperature quartz
locally alternates with a mineral assemblage including hypogene hematite
(evidence of an oxidizing fluid) and kaolinite.  The hematite and
kaolinite are best developed in zones with very high gold and silver
grades.
  32
  A major bend in the mapped veins
crossing the Animas hill is known as the Animas/Del Norte
Flexure.  Most movement on the faults hosting the veins was normal dip
slip movement, but a small component of left lateral movement formed a dilatant,
permeable zone.  The widest and highest grade portions of the
Animas/Del Norte deposit are in and adjacent to this structural
flexure.
  The andesite crystal-lithic tuff unit
is an andesite lithic tuff with a sufficiently competent matrix to fracture
well, and is favorable for mineralization.  This rock occurs in the
hanging wall of the Del Norte vein throughout the vertical extent of the
favorable horizon.  The rock unit is also present in the hanging wall
at Pantaleona and is likely to occur at depth at La Estrella.
  Drilling
  Type
and Extent of Drilling
  Two hundred sixty-four diamond core
holes, ten reverse circulation holes and eight holes started with reverse
circulation and finished with core have been drilled by Nayarit Gold on the
Orion Project.  A total of 51,927m of core have been drilled and a
total of 11,860m of reverse circulation have been drilled.  Nayarit
Gold’s database maintains information on hole diameter indicating which portions
of each hole were drilled by reverse circulation, HQ diameter core or NQ
diameter core.  Of the total meters drilled, 55,782m were included in
the resource model and 8,005m were drilled on targets outside of the resource
area.
  Procedures
  All drill sites were pre-selected by
Nayarit Gold management before drilling.  Sites were located in the
field by handheld GPS units and drill pads constructed using a D-7 Caterpillar
tractor.  Drill alignment was established on the drill pads by
handheld Brunton compass before the rig was moved onto the pad and alignment and
inclination checked by the rig geologist before drilling
commenced.  For diamond core drilling, all drill operations were
carried out by the drill contractor’s personnel.  Rig geologists
visited the drill a minimum of two times per day and were required to be present
at the rig when difficult drilling or bad ground conditions were
encountered.  Core is retrieved from the drill string using
conventional wireline techniques.  Core is removed from the core tube
by HD drilling personnel and carefully placed in plastic core
boxes.  Filled core boxes are removed from the drill site twice daily
(early morning and evening) by Nayarit Gold personnel to the secure core logging
facility in Acaponeta, Nayarit, 40 km from the Orion Project
site.  For reverse circulation drilling, the rig geologist was present
at the drill during all drilling operations.  All drillhole collars
have been surveyed with differential GPS for location and have down hole surveys
to measure hole deviation at approximately 50m intervals taken with a Reflex EZ
Shot digital survey tool.  All project coordinates are maintained in
WGS 84 UTM zone 13R.
  At the core logging facility, the core
is cleaned and the broken core pieces reassembled to a best fit.  For
logging and sample interval marking, the core is laid out on
workbenches.  A technician, under supervision of the drill geologist,
completes a hardcopy geotechnical log of the core including recovery and
RQD.  The drill geologist then logs the core and creates a hardcopy
geologic log including a graphic representation of rock type, vein orientation,
and mineralized zones and a detailed descriptive log including rock type,
alteration, structure, mineralization and vein
density/percentage.  Digital photographs are taken of all
cores.
  33
 Interpretation of Results
  Drilling has confirmed that the project
is host to a series of epithermal gold-silver veins. These veins have been
traced for lengths up to +4 km in length along surface, with deeper drilling
showing the veins consistently present up to 400 metres below surface.
Mineralization is not ubiquitous throughout the veins and structural and
geochemical parameters play an important part in the deposition of metals at
levels considered to be potentially economic. Of the rock types observed in
drill core, the andesite crystal-lithic tuff illustrates the tendency for
fracturing and thus prime target for mineralization, especially where the unit
shows dilatant flexure.
  Sampling
and Analysis
  Sample
Methods and Location
  Core is transported from the drill site
to Nayarit Gold’s secure core logging facility in Acaponeta by company
personnel.  Core box numbers are checked and core is cleaned and
re-assembled by technicians prior to measurement of total core recovery.
Technicians measure total core recovery, RQD, fracture characteristics and rock
strength as estimated using the method from as 1726 geotechnical site
investigation code 1993.  After re-assembly and geotechnical logging
geologists make a geological log of the core and mark the sample intervals
directly on the core.  Geologists are instructed to collect sample
lengths with a minimum length of 0.5m and a maximum length of 1.5m sample with a
nominal 1m interval adjusting based on rock type changes so that wall rock is
not mixed with vein material except in cases of small, isolated
veins.  Sample intervals are adjusted to vein and breccia zone
boundaries and rock type changes.  Sample intervals are marked on the
core and adjacent to the core in the box.  A cut line is drawn along
the length of the core by the geologists.  All sampled core is sawn in
half and returned to the box.  After sawing core samples were
collected by technicians always taking the left hand side of the core and
leaving the right hand side in the box.  Samples have an approximate
4kg weight.  Samples were shipped to ALS Chemex using a commercial
freight service contracted by ALS Chemex.  All core handling from
retrieval from the core tube through washing, re-assembly, geotechnical and
geologic logging and sampling is done under the supervision of Nayarit Gold’s
geologists.  Nayarit Gold has implemented a QA-QC procedure as
described below.
  Factors
Impacting Accuracy of Results
  As with all drill programs recovery
issues can impact accuracy of results. Drilling of mineralized zones, such as
the Del Norte zone, which is clay altered in places can result in loss of
heavier fractions and lower percentage core recoveries, which can affect the
obtained results. Generally, Nayarit has not observed such recovery issues that
would raise concern except for several drill holes at Lazaro where core
recoveries through what was believed to be a mineralized zone were
low.
  Quality
Controls and Quality Assurance
  Prior to May 2008, Nayarit Gold’s
Quality Assurance/Quality Control (QA/QC) sample program consisted of blank and
duplicate samples.  After this date Nayarit Gold implemented a program
that included blank, duplicate and standard samples.  Approximately
10% of all samples submitted to the primary assay laboratory are for QA/QC
purposes.
  34
  The QA/QC program includes insertion of
commercially prepared gold and silver pulp standards at a frequency of 4 per 100
samples.  Standards used cover a range of gold and silver
concentrations.  The standard samples have color-coded tags which are
placed in the core boxes and in the sample number booklets which can be used to
confirm which standard was submitted for any specific sample
number.
  Security
of Samples
  Samples
are shipped from Nayarit Gold’s core processing facility in Acaponeta, Nayarit
to ALS Laboratory Group (ALS) located in Hermosillo, Sonora
Mexico.  Sample shipment from the Orion Project to this facility is
part of the service provided by ALS and is contracted by ALS to a third party
shipping company.  At ALS Hermosillo, samples are entered into the
Laboratory Information Management System (LIMS) and prepared for
analysis.  Once sample preparation is completed, the sample pulps are
shipped on to ALS Vancouver for analysis by Fire Assay and inductively coupled
atomic emission spectrometry (ICP-AES).
  ALS Hermosillo and ALS Vancouver are in
compliance for the requirements of ISO 9001:2000 through February 12, 2011 (ALS
Laboratory Group, 2009).  ALS Vancouver is accredited through the
Standards Council of Canada (SCC) for Metallic Ores and Products Mineral
Analysis testing for several techniques including Fire Assay with an Atomic
Absorption (AA) finish, Fire Assay with a gravimetric finish and ICP-AES using a
four acid digestion.  This is under CAN-P-1579 Guidelines for the
Accreditation of Mineral Analysis Testing Laboratories and CAN-P-4E (ISO/IEC
17025) General Requirements for the Competence of Testing and Calibration
Laboratories.  This accreditation is valid through May 18, 2013
(Standards Council of Canada, 2009).
  Samples are in the custody and control
of Nayarit Gold, the shipping contractor or ALS at all times.
  On
arrival at ALS Hermosillo, samples are inventoried, weighed, assigned a barcode
and entered into the LIMS.  Once these activities are completed the
samples are prepared for as follows: 1. Samples are dried in a drying oven, 2.
The entire sample is crushed to 90% passing -2mm;  3. A 1,000g split
is pulverized to 85% -75 microns; and 4. This pulp is sent to ALS Vancouver for
analysis.
  ALS Chemex returns all pulps and coarse
rejects to Nayarit Gold.  Pulps and rejects are stored in the company
warehouse in Acaponeta, Nayarit.  It is Nayarit Gold’s intention to
discard all coarse rejects collected through the end of 2008 upon completion of
preliminary metallurgical studies and publication of the relevant technical
report.
    Mineral
Resources and Mineral Reserve Estimates
  SRK Consulting (U.S.), Inc (“SRK”) was
contracted by the Company to complete a Canadian National Instrument (“NI”)
43-101 compliant Preliminary Economic Assessment (“PEA”) for the Company's
Animas/Del Norte Deposit.
 
 This study is based extraction of
indicated and inferred resources using underground mining methods with milling
and tank leaching for processing. The Orion Resource Statement (using an
underground extraction based assessment with a 2.0 g/t gold equivalent cutoff)
as estimated by SRK is 1.107 million tonnes with a gold grade of 3.66 g/t and
silver grade of 309 g/t in the Indicated category, and an additional 0.181
million tonnes with a gold grade of 3.33 g/t and silver grade of 95 g/t in the
Inferred category.
 
 35
 The results of the PEA have identified
the underground mining of 1.182 million tonnes with a gold grade of 2.79 g/t and
silver grade of 267 g/t.
 
 Assuming 100% equity financing, the PEA
indicates a pre-tax Internal Rate of Return (“IRR”) of 38%. The estimated
payback period is approximately 2.3 years (Base Case).
 
 The
following table illustrates the Base Case data and NPVs at various discount
rates.
 
 PEA base
data:
 Base
      CaseLife-of-Mine
      Mill Recovered Equivalent Gold Ounces*
                        246k
      oz AuEqProduction
      Rate
                        750
      tpd
                        20k
      oz Au/yr
                        1.785M
      oz Ag/yrDevelopment
      Timeline
                        2
      YearsInitial
      Capital
                        US$35
      MillionCash
      Costs
                        US$320/gold
      equivalent ouncePayback
      Period (NPV 8% Case)
                        2.3
      yearsMine
      Life
                        5
      yearsGold
      Price
                        US$900/ozSilver
      Price
                        US$15/ozNPV’s
      and IRRPre-tax
      NPV 3%
                        US$55.3
      millionPre-tax
      NPV 5%
                        US$46.5
      millionPre-tax
      NPV 8%
                        US$35.4
      millionPre-tax
      IRR
                        38%
 *Gold
Equivalent Values were calculated based on 60 ounces of silver = 1 ounce of
gold. Metallurgical recoveries for mill processing are based on previous
metallurgical analysis and are 92% for gold and 88% for silver.
 
 The PEA is founded on underground
resources at the Animas/Del Norte Deposit. SRK examined different mining and
processing options, and trade-off scenarios to identify the optimum mining
scenario. This examination determined that an underground bulk mining method as
the optimized mining method for the Animas/Del Norte Deposit. The deposit has an
Indicated resource of 967,000 tonnes with a gold grade of 3.63 g/t and a silver
grade of 347 g/t (or 9.42 g/t gold equivalent) containing 113,000 ounces of gold
and 10.79M ounces of silver (or 293,000 gold equivalent ounces). An additional
Inferred resource contains 39,000 tonnes with 3.74 g/t Au and 349 g/t silver (or
9.55 g/t gold equivalent) containing 5,000 ounces of gold and 436,000 ounces of
silver (or 12,000 gold equivalent ounces). These resources are based on a 2.0
g/t gold equivalent cutoff and a gold price of US$850/oz and a silver price of
US$13/oz.
 
 The Deposit is located within and
surrounded by high-priority exploration targets, where the company believes
additional mineralization will be discovered which could enhance the project
economics. The Deposit is in a very favorable location with excellent
infrastructure with access to industrial power, roads and a skilled work
force.
 
 36
 Mining
Operations
 
 There are no current mining operations
on the Orion Project.
 
 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 an
administrative office in Caborca, Sonora, Mexico located near our El Chanate
mine as well as an exploration office in Hermosillo, Sonora,
Mexico.
 
 In connection with our acquisition of
Nayarit Gold on August 2, 2010, we assumed a lease for office space in Halifax,
Nova Scotia, Canada of approximately 1,480 square feet.
 
 
 Item
3.  Legal
Proceedings
 
 On
October 4, 2010, Walter Earl Jenkins and Jonathan Schroeder, each represented by
the same law firm, filed identical lawsuits against Capital Gold, its directors
and Gammon Gold in New York Supreme Court claiming, among other things, that the
directors of Capital Gold breached their fiduciary duties to Capital Gold in
connection with the approval of the merger agreement between Capital Gold and
Gammon Gold. The plaintiffs purport to represent a class of all stockholders of
Capital Gold stock other than stockholders who are affiliates of Capital Gold.
The plaintiffs have asked the Court to enjoin Capital Gold from consummating its
merger with Gammon Gold.
 
 On
October 7, 2010, Mel Leone filed a lawsuit against Capital Gold, its directors
and Gammon Gold in New York Supreme Court.
 
 On
October 8, 2010, W. Jeffrey Kramer filed a lawsuit against Capital Gold, its
directors, its Chief Financial Officer and Gammon Gold in New York Supreme
Court.
 
 On
October 8, 2010, Helmut Boehm filed a lawsuit against Capital Gold, its
directors, Gammon Gold and Capital Gold AcquireCo, Inc., a wholly-owned
subsidiary of Gammon Gold, in the Court of Chancery in the state of
Delaware.
 
 Each of
the above-referenced complaints state claims and seek relief substantially
identical to the claims made and relief sought in the Jenkins and Schroeder
lawsuits. Capital Gold believes all plaintiffs’ allegations are without merit
and intends to vigorously defend itself against such allegations.
 
 
 Item
4.  (Removed
and Reserved)
 
 37
  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 NYSE EURONEXT
(Symbol: “CGC”).
 
 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 and NYSE EURONEXT
(which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions).
 
 
 MARKET
PRICE OF COMMON STOCK
  Quarter
      Ending
                                                            
                                                            High and LowJuly
      31, 2010
                                                            
                                                            
                                                            4.24
                                                            
                                                            
                                                            
                                                            3.16April
      30, 2010
                                                            
                                                            
                                                            3.90
                                                            
                                                            
                                                            
                                                            3.66January
      31, 2010
                                                            
                                                            
                                                            4.24
                                                            
                                                            
                                                            
                                                            2.94October
      31, 2009
                                                            
                                                            
                                                            3.12
                                                            
                                                            
                                                            
                                                            2.36July
      31, 2009
                                                            
                                                            
                                                            2.88
                                                            
                                                            
                                                            
                                                            2.12April
      30, 2009
                                                            
                                                            
                                                            2.84
                                                            
                                                            
                                                            
                                                            2.08January
      31, 2009
                                                            
                                                            
                                                            2.52
                                                            
                                                            
                                                            
                                                            1.20October
      31, 2008
                                                            
                                                            
                                                            2.60
                                                            
                                                            
                                                            
                                                            1.08
 
 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, 2010
                                                                              
                                                                              
                                                                              4.24
      / 4.39
                                                                              
                                                                              
                                                                              
                                                                              3.12
      / 3.31Quarter
      ended April 30, 2010
                                                                              
                                                                              
                                                                              3.90
      / 4.00
                                                                              
                                                                              
                                                                              
                                                                              3.19
      / 3.38Quarter
      ended January 31, 2010
                                                                              
                                                                              
                                                                              4.19
      / 4.40
                                                                              
                                                                              
                                                                              
                                                                              2.94
      / 3.12Quarter
      ended October 31, 2009
                                                                              
                                                                              
                                                                              3.09
      / 3.32
                                                                              
                                                                              
                                                                              
                                                                              2.39
      / 2.56Quarter
      ended July 31, 2009
                                                                              
                                                                              
                                                                              2.84
      / 3.16
                                                                              
                                                                              
                                                                              
                                                                              2.12
      / 2.48Quarter
      ended April 30, 2009
                                                                              
                                                                              
                                                                              2.84
      / 3.60
                                                                              
                                                                              
                                                                              
                                                                              2.08
      / 2.52Quarter
      ended January 31, 2009
                                                                              
                                                                              
                                                                              2.48
      / 3.04
                                                                              
                                                                              
                                                                              
                                                                              1.16
      / 1.40Quarter
      ended October 31, 2008
                                                                              
                                                                              
                                                                              2.60
      / 2.72
                                                                              
                                                                              
                                                                              
                                                                              1.00
      / 1.28
 
 (b)  Holders -- The
approximate number of record holders of our Common Stock, as of October 1, 2010
amounts to 390, 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 61,202,028 as of October 1,
2010.
  38
  (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.
 
 We did
not repurchase any of our securities during the fiscal year ended July 31,
2010.
 
 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, 2010.
 
 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:
                  
                  
                  618,750
                  
                  
                  $
                  2.84
                  
                  
                  
                  2,819,766Equity
      compensation plans not approved by security holders:
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  N/ATotal
                  
                  
                  618,750
                  
                  
                  $
                  2.84
                  
                  
                  
                  2,819,766
  39
  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
                                7/31/09
                                10/31/09
                                1/31/10
                                4/30/10
                                7/31/10Capital
      Gold Corporation
                                
                                36.07
                                10.48
                                -6.61
                                -0.77
                                -55.04
                                115.52
                                -13.60
                                12.04
                                27.27
                                -4.55
                                24.49
                                1.91Russell
      3000 Index
                                
                                6.44
                                -10.83
                                1.14
                                -7.12
                                -24.31
                                -14.01
                                7.61
                                13.92
                                5.14
                                4.78
                                12.28
                                -7.22S&P
      SmallCap 600 Index
                                
                                5.12
                                -12.65
                                1.20
                                -1.48
                                -22.43
                                -18.20
                                11.89
                                13.71
                                1.43
                                7.69
                                18.99
                                -8.31Peer
      Group
                                
                                5.64
                                -18.49
                                1.12
                                14.03
                                -63.09
                                62.24
                                5.86
                                22.80
                                14.28
                                19.89
                                40.62
                                -26.66INDEXED
      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
                                7/31/09
                                10/31/09
                                1/31/10
                                4/30/10
                                7/31/10Capital
      Gold Corporation
                                100
                                136.07
                                150.32
                                140.39
                                139.31
                                62.63
                                134.99
                                116.63
                                130.67
                                166.31
                                158.75
                                197.62
                                201.40Russell
      3000 Index
                                100
                                106.44
                                94.91
                                95.99
                                89.16
                                67.48
                                58.03
                                62.44
                                71.14
                                74.79
                                78.36
                                87.98
                                81.63S&P
      SmallCap 600 Index
                                100
                                105.12
                                91.82
                                92.92
                                91.55
                                71.01
                                58.09
                                65.00
                                73.91
                                74.96
                                80.73
                                96.06
                                88.08Peer
      Group
                                100
                                105.64
                                86.10
                                87.07
                                99.28
                                36.64
                                59.45
                                62.93
                                77.28
                                88.32
                                105.89
                                148.90
                                109.20Peer
      Group Companies:ALAMOS
      GOLD INCGAMMON
      GOLD INCMINEFINDERS
      CORPNEW
      GOLD INC
  40
  
 
 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, 2010 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 312010
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2007
                                                        
                                                        
                                                        2006Statement of Operations
    data:Revenues
                                                        
                                                        $
                                                        60,645
                                                        
                                                        
                                                        $
                                                        42,757
                                                        
                                                        
                                                        $
                                                        33,104
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -Net Income
    (loss)
                                                        
                                                        $
                                                        11,994
                                                        
                                                        
                                                        $
                                                        10,407
                                                        
                                                        
                                                        $
                                                        6,364
                                                        
                                                        
                                                        $
                                                        (7,472
                                                        )
                                                        
                                                        $
                                                        (4,805
                                                        )Income (loss) per share –
      Basic*
                                                        
                                                        $
                                                        0.25
                                                        
                                                        
                                                        $
                                                        0.22
                                                        
                                                        
                                                        $
                                                        0.15
                                                        
                                                        
                                                        $
                                                        (0.20
                                                        )
                                                        
                                                        $
                                                        (0.17
                                                        )Balance Sheet data:Total Assets
                                                        
                                                        $
                                                        72,495
                                                        
                                                        
                                                        $
                                                        52,484
                                                        
                                                        
                                                        $
                                                        50,578
                                                        
                                                        
                                                        $
                                                        27,368
                                                        
                                                        
                                                        $
                                                        9,546Long-term Debt
                                                        
                                                        $
                                                        800
                                                        
                                                        
                                                        $
                                                        4,400
                                                        
                                                        
                                                        $
                                                        8,375
                                                        
                                                        
                                                        $
                                                        12,500
                                                        
                                                        
                                                        $
                                                        -Reclamation and Remediation
      Liability
                                                        
                                                        $
                                                        2,373
                                                        
                                                        
                                                        $
                                                        1,594
                                                        
                                                        
                                                        $
                                                        1,666
                                                        
                                                        
                                                        $
                                                        1,249
                                                        
                                                        
                                                        $
                                                        -
 
 *- All Income (loss) per
share – Basic amounts have been restated to reflect the impact of the 4 to 1
reverse stock split enacted during the fiscal year ended July 31,
2010.
 
 41
 
 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, 2010, 2009 and 2008.  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.
 
 Our
financial position was as follows:
 
 
 As of
                                
                                
                                As ofJuly 31,
                                  2010
                                
                                
                                July 31,
                                  2009Total debt
                                
                                $
                                4,400
                                
                                
                                $
                                8,000Total stockholders’ equity
                                
                                $
                                50,929
                                
                                
                                $
                                35,765Cash and cash equivalents
                                
                                $
                                12,125
                                
                                
                                $
                                6,448Working capital
                                
                                $
                                31,857
                                
                                
                                $
                                20,646
 
  During
our fiscal year ended July 31, 2010 our debt and liquidity positions were
affected by the following:
 
  ·
              Net
      cash provided from operations of
$14,731;
  ·
              Capital
      expenditures of $6,515;
  42
  ·
              Repayments
      on Credit Facility of $3,600;
  ·
              Proceeds
      from the issuance of common stock upon the exercising of warrants of
      $565;
 
  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 2011 gold sales of approximately 65,000 to 70,000
      ounces;
  ·
              Cash
      costs per ounce sold for fiscal 2011 are expected to be approximately $485
      per ounce;
  ·
              We
      anticipate capital expenditures of approximately $12,500 in fiscal 2011
      with approximately $7,200 being allocated to leach pad expansion,
      approximately $1,500 for the addition of agglomeration equipment, $750 in
      property interest payments; and $600 for additional
    conveyors;
  ·
              Repayments
      on Credit Facility of $3,600 during fiscal
2011.
  ·
              Our
      fiscal year 2011 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,
2010 compared to the year ended July 31, 2009
 
 Net income for the year ended July 31,
2010 and 2009 was approximately $11,994 and $10,407, respectively, representing
an increase of approximately $1,587 or 15% over the prior
period.  Income before taxes was $24,019 and $15,949 for the year
ended July 31, 2010 and 2009, respectively, which represented an increase of
51%.  Income before taxes increased primarily as a result of higher
revenues from a higher gold price being realized on ounces sold during the
current period as well as higher production results during the year ended July
31, 2010, as compared to the same period a year ago.
 
 As a result of management changes
during the year ended July 31, 2010, we incurred severance related charges to
executives and employees of approximately $2,710 within general and
administrative expense.  If we exclude these charges, net income for
the year ended July 31, 2010 would have been approximately $14,704 representing
an increase of approximately $4,297 or 41% over the prior period.
 
 Revenues & Costs
Applicable to Sales
 
 Gold
sales for the year ended July 31, 2010 totaled approximately $60,645 as compared
to $42,757 in the prior period representing an increase of approximately $17,888
or 42%.  We sold 54,304 ounces at an average realizable price per
ounce of approximately $1,117 in the current period.  We sold 48,418
ounces at an average realizable price per ounce of $883 during the same period
last year.
 
 43
 Costs
applicable to sales were approximately $22,017 and $13,883, respectively, for
the year ended July 31, 2010 and 2009, an increase of approximately $8,134 or
59%.  Cash costs were $391 per ounce of gold sold for the year ended
July 31, 2010 as compared to $271 for the year ended July 31,
2009.   The primary reasons for this increase in cash cost per
ounce sold in the current period were attributable to:
 
 ·
              An
      increase in mining costs of approximately $4,764 or 55% over the prior
      period.  This was primarily due to higher mining contractor
      costs of approximately $2,637 compared to the prior period primarily due
      to an increase in tonnage mined of 3,216,468 tonnes or 39%, higher diesel
      fuel consumption of $1,156 due to an increase in tonnage mined and longer
      haul distance as the pit deepens, and higher explosive costs of $750 due
      to the increase in tonnage mined as well as a change in the type of
      explosive utilized by the mine;
 
 ·
              Higher
      crushing costs of approximately of $946, an increase of 36% over the prior
      period, mainly due to an increase in maintenance and the usage of crusher
      parts and supplies.  This increase was attributable to the
      addition of our new secondary and tertiary crusher in May and December
      2009, respectively, which increased tonnage going through the circuit by
      13% or 516,000 tonnes as compared to the prior year. In addition, labor
      costs rose as a result of the hiring of additional crusher
      operators.
 
 ·
              An
      increase in leaching and ADR plant costs of approximately $1,975 or 37%
      mainly due to an increase in consumption of certain chemicals ($1,209) as
      well as consumption and price increase in cost of lime ($352) in the
      processing of ore as well as an increase in both water ($103) and
      electricity  ($137) usage  (the increased consumption
      was mainly the result of increasing the chemical concentration and
      solution flow to the leach pad as we increased the level of lifts or
      height of the leach pad as well as the surface area under leach with the
      additional leach pad.
 
 ·
              Higher
      heavy equipment maintenance costs of approximately $559 or 53% over the
      same period in the prior year.  This was primarily due to an
      increase in repair and maintenance costs associated with our three trucks
      and two loaders.  The additional tonnage moved in the current
      year as well as higher repairs and maintenance costs experienced with the
      procurement of used equipment has factored into the increase as compared
      to the prior year.
 
 Total
costs were $444 per ounce of gold sold for the year ended July 31, 2010 as
compared to $314 total cost per ounce sold in the prior period.  The
primary reason for this increase in total costs can be attributable to the
reasons detailed above as well as the increase in depreciation and amortization
resulting from capital expenditures during the current period.
 
 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 $1,400 and $1,076 for the
year ended July 31, 2010 and 2009, on silver ounces sold of 80,941 and 86,523,
respectively.
 
 44
 
 Depreciation and
Amortization
 
 Depreciation and amortization expense
during the year ended July 31, 2010 and 2009 was approximately $2,939 and
$2,041, respectively, an increase of $898 or 44%.  The primary reason
for the increase in the current period was attributable to an increase in
depreciation and amortization charges related to property, plant and equipment
additions.
 
 General and Administration
Expense
 
 General and administrative expenses
during the year ended July 31, 2010 were approximately $8,573, an increase of
approximately $3,109, or 57%, from the year ended July 31, 2009.  This
increase resulted primarily from one-time severance related charges to
executives and employees of approximately $2,710.  In addition, we
experienced higher legal and professional fees associated with merger and
acquisition activity including our acquisition with Nayarit Gold of
approximately $996.
 
 Exploration
Expense
 
 Exploration
expense during the year ended July 31, 2010 and 2009 was approximately $1,616
and $1,600, respectively, or a increase of $16, or 1%.  Both periods
presented include activity associated with on-going exploration, drilling and
geochemical work being conducted on our leased and owned concessions located
northwest of Saric, Sonora as well as on-going drilling at our El Chanate
mine.
 
 Other Income and
Expense
 
 Our loss
on the change in fair value of derivative instruments during the year ended July
31, 2010 and 2009, was approximately $0 and $1,975, respectively, and was
reflected as Other
Expense.The
primary reason for the decrease can be attributed to the close out, on February
24, 2009, with Standard Bank, Plc., of the remaining 58,233 ounces of gold
hedged under the original Gold Price Protection arrangements originally entered
into in March 2006.
 
 Interest expense was approximately
$1,365 for the year ended July 31, 2010 compared to approximately $1,575 for the
same period a year earlier.  This decrease was due to lower interest
charges incurred during the current period, based on a lower average debt
balance compared to the prior period offset by cost of interest rate
swaps.  As of July 31, 2010 and 2009, there was $4,400 and $8,000,
respectively, outstanding on our term note with Standard
Bank.  Interest expense also includes amortization of deferred
financing costs resulting from the credit arrangements entered into with
Standard Bank.  This accounted for approximately $993 and $978 of
amortization expense during the year ended July 31, 2010 and 2009,
respectively.
 
 Income Tax
Expense
  Income
tax expense was $12,025 during the fiscal year ended July 31, 2010, compared to
$5,542 in 2009 with an effective tax rate of 50% and 35%,
respectively.  The factors that most significantly impact our
effective tax rate are operating losses generated by the Company’s U.S. parent
for which no benefit has been recognized. Current year income tax expense and
deferred income tax expense amounted to $8,062 and $3,963 as of July 31, 2010,
respectively.  Prior year income tax expense and deferred income tax
expense amounted to $3,909 and $1,633 as of July 31, 2009,
respectively.
  45
 
 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 introduces certain tax reforms as well as a new minimum flat
tax system, which was effective for tax year 2008.  This flat tax
system integrates with the regular income tax system and is based on cash-basis
net income that includes only certain receipts and expenditures.  The
flat tax is set at 17.5% of cash-basis net income for tax year 2010, which
increased from 17% for tax year 2009.  If the flat tax is positive, it
is reduced by the regular income tax and any excess is paid as a supplement to
the regular income tax.  For the tax year 2010, the Mexican Government
introduced a reform where if the flat tax is negative, companies will not be
permitted to reduce the income tax, as it may only serve to reduce the regular
flat tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
 
 On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
 
 Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly
period.  There is the possibility of implementation amendments by the
Mexican Government and the estimated future income tax liability recorded at the
balance sheet date may change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. Net deferred tax assets related to the U.S.
operations have been fully reserved. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the period that such
tax rate changes are enacted.
  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 22 within the consolidated
financial statements contained herein.
  
 Changes in Foreign Exchange
Rates
 
 During the years ended July 31, 2010
and 2009, we recorded equity adjustments from foreign currency translations of
approximately $1,463 and $(8,355), 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, 2010 was 12.7012.  As of July 31, 2009, such exchange rate was
12.9933.
 
 46
  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,
                                      2010
                                    
                                    
                                    July
      31,
                                      2009
                                    
                                    
                                    July
      31,
                                      2008Revenues
                                    
                                    
                                    60,645
                                    
                                    
                                    
                                    42,757
                                    
                                    
                                    
                                    33,104Net
      Income
                                    
                                    
                                    11,994
                                    
                                    
                                    
                                    10,407
                                    
                                    
                                    
                                    6,364Basic
      net income per share
                                    
                                    
                                    0.25
                                    
                                    
                                    
                                    0.22
                                    
                                    
                                    
                                    0.15Diluted
      net income per share
                                    
                                    
                                    0.25
                                    
                                    
                                    
                                    0.21
                                    
                                    
                                    
                                    0.13Gold
      ounces sold
                                    
                                    
                                    54,304
                                    
                                    
                                    
                                    48,418
                                    
                                    
                                    
                                    39,102Average
      price received
                                    
                                    $
                                    1,117
                                    
                                    
                                    $
                                    883
                                    
                                    
                                    $
                                    847Cash
      cost per ounce sold(1)
                                    
                                    $
                                    391
                                    
                                    
                                    $
                                    271
                                    
                                    
                                    $
                                    276Total
      cost per ounce sold(1)
                                    
                                    $
                                    444
                                    
                                    
                                    $
                                    314
                                    
                                    
                                    $
                                    335
 
 (1)
              "Cash
      costs per ounce sold" is a Non-GAAP measure, which includes all direct
      mining costs, refining and transportation costs, by-product credits and
      royalties as reported in the Company's financial statements divided by
      ounces sold during the applicable period.  It also excludes
      intercompany management fees.  “Total cost per ounce sold” is a
      Non-GAAP measure which includes “cash costs per ounce sold” as well as
      depreciation and amortization as reported in the Company's financial
      statements.
 
 The
following table reconciles the Non-GAAP measure “Cash costs per ounce sold” to
the GAAP measure of “Costs applicable to sales per ounce sold”:
 
 For
      the year
                                                        
                                                        
                                                        For
      the year
                                                        
                                                        
                                                        For
      the yearended
                                                        
                                                        
                                                        ended
                                                        
                                                        
                                                        endedReconciliation
      from non-GAAP measure to US GAAP
                                                        
                                                        July
      31,
                                                          2010
                                                        
                                                        
                                                        July
      31,
                                                          2009
                                                        
                                                        
                                                        July
      31,
                                                          2008Cash
      cost per ounce sold
                                                        
                                                        $
                                                        391
                                                        
                                                        
                                                        $
                                                        271
                                                        
                                                        
                                                        $
                                                        276Intercompany
      management fee
                                                        
                                                        
                                                        12
                                                        
                                                        
                                                        
                                                        14
                                                        
                                                        
                                                        
                                                        10Other
                                                        
                                                        
                                                        2
                                                        
                                                        
                                                        
                                                        2
                                                        
                                                        
                                                        
                                                        (13
                                                        )Costs
      applicable to sales per ounce sold*
                                                        
                                                        $
                                                        405
                                                        
                                                        
                                                        $
                                                        287
                                                        
                                                        
                                                        $
                                                        273
    Summary of Results of
Operations
 
 For
      the year
                                      ended
                                    
                                    
                                    For
      the year
                                      ended
                                    
                                    
                                    For
      the year
                                      endedJuly
      31,
                                      2010
                                    
                                    
                                    July
      31,
                                      2009
                                    
                                    
                                    July
      31,
                                      2008Tonnes
      of ore mined
                                    
                                    
                                    4,586,875
                                    
                                    
                                    
                                    3,847,883
                                    
                                    
                                    
                                    3,498,612Tonnes
      of waste removed
                                    
                                    
                                    6,797,425
                                    
                                    
                                    
                                    4,319,949
                                    
                                    
                                    
                                    2,627,318Ratio
      of waste to ore
                                    
                                    
                                    1.48
                                    
                                    
                                    
                                    1.12
                                    
                                    
                                    
                                    0.75Tonnes
      of ore processed
                                    
                                    
                                    4,515,152
                                    
                                    
                                    
                                    3,999,346
                                    
                                    
                                    
                                    3,529,699Grade
      (grams/tonne)
                                    
                                    
                                    0.74
                                    
                                    
                                    
                                    0.78
                                    
                                    
                                    
                                    0.85Gold
      (ounces)-Produced(3)
                                    
                                    
                                    55,746
                                    
                                    
                                    
                                    49,921
                                    
                                    
                                    
                                    39,242-Sold
                                    
                                    
                                    54,304
                                    
                                    
                                    
                                    48,418
                                    
                                    
                                    
                                    39,102
 (3)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.
 
 47
 
 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.
 
 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 $2,041 and
$2,350, respectively.  The primary reason for the decrease of
approximately $309, or 13%, 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.
  48
  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.
 
 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
$1,575 for the year ended July 31, 2009 compared to approximately $2,295 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.  Interest expense also includes
deferred financing costs resulting from the credit arrangements entered into
with Standard Bank.  This accounted for approximately $978 and $1,088
of depreciation and amortization expense during the year ended July 31, 2009 and
2008.
 
 49
  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.
  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. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which, on a more likely than not
basis, are not expected to be realized. Net deferred tax assets related to the
U.S. operations have been fully reserved.  The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in the
period that such tax rate changes are enacted.
  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 22 within the consolidated
financial statements contained herein.
  50
  Changes in Foreign Exchange
Rates
 
 During the years ended July 31, 2009
and 2008, we recorded equity adjustments from foreign currency translations of
approximately $(8,355) and $2,504, 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 to 1.  As of July 31, 2008, such exchange rate
was 10.0483 to 1.
 
 Liquidity and Capital
Resources
  Operating
activities
  Cash provided by operating
activities during the year ended July 31, 2010 and 2009 was $14,731 and
$7,536, respectively.  Cash provided by operating activities increased
$7,195 as compared to the year ended July 31, 2009, primarily due to higher net
income resulting from an increase in the average gold price received for ounces
sold , an increase in the change in inventory balances between periods of
$5,537, and an increase in accrued expenses of $4,447 mainly due to the accruals
associated with one-time severance related charges to executives and employees
as well as an increase in our income tax accrual during the year ended July 31,
2010.
  In
addition, on January 25, 2010, we entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it was proposed that we would acquire
twenty-five percent of all of the issued and outstanding equity of MRS for
aggregate investment of $2,000.  The Collateral Agreement required us
to promptly pay $500 to MRS, with the intention to invest the remaining $1,500
set forth in a letter of intent (the “LOI”) entered into on January 25, 2010,
the material terms of which were non-binding. Our obligation to invest the
remaining $1,500 was contingent upon the execution of a definitive Investment
Agreement (the “Investment Agreement”).  Because the Investment
Agreement was not consummated, the Collateral Agreement provides that the $500
payment to MRS would be repaid with interest (the “MRS Repayment”). Such
repayment is secured by cash flows from MRS’s Consulting / Services Agreement
with a third-party gold mining company, the expected value of which is $1,275 to
MRS.
  On March
25, 2010, we elected not to pursue the implementation of the MRS technology at
the El Chanate mine.  Accordingly, we demanded repayment of the amounts
paid to MRS in accordance with the letter agreement between MRS and us. On May
12, 2010, the parties agreed to reduce the MRS Repayment to $450 and we are
currently receiving repayment based on the original Collateral
Agreement.  We recorded the remaining receivable amount of $210 as of
July 31, 2010 as an Other Current Asset.
  
 Investing
Activities
 
 Cash used in investing
activities during the year ended July 31, 2010, amounted to approximately
$6,515, primarily for the acquisition of an additional tertiary crusher and
screen plant, additional water rights, additional leach pad expansion, as well
as new platform upgrades for three of our crushers.
 
 51
 In May
2010, we initiated the planning and permitting on the construction of an
additional leach pad to the east of the existing leach pads.  The total
capacity of this additional leach pad will be approximately 8.5 million tonnes
(when stacked to six lifts) and cost approximately $7,500.  This pad will
be expanded on the south, east and possibly west sides to accommodate the
current ore reserve.  When combined with the original and west pads the
aggregate capacity will be approximately 20.1 million tonnes.  This capital
expenditure is anticipated to be expended over the next twelve months. 
Site clearing was initiated in May 2010 and construction commenced in July
2010.  The first panel is anticipated to be ready for stacking towards the
end of the calendar year with complete construction anticipated to be completed
by May 2011.
 
 In July
2010, the Company commenced the use of belt agglomeration with cement which is
added to the crushed ore at the El Chanate mine to improve the flow of leaching
solution.   We have engaged an independent consultant with respect to heap
leaching optimization, which has resulted in recommendations to increase the
barren solution flow to the leach pad, increase the pregnant solution flow to
the recovery plant, and redirect the low grade solution to the leach pads.
 When implemented, these operational changes combined with the
agglomeration with cement and barren solution may result in immediate
improvements in leaching time.  We ordered two agglomeration drums
which are expected to arrive by January 2011.  The current belt
agglomeration is a temporary measure until the drums are delivered.  The
use of agglomeration drums will allow for better mixing of cement and lime with
the crushed ore, producing a consistent quality control of the
product.  The cost of these agglomeration drums and an additional
overland conveyor is anticipated to be $2,000.
 
 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 and ADR plant equipment, including
the carbon regeneration kiln.
  Financing
Activities
  Cash used in financing
activities during the year ended July 31, 2010 amounted to approximately
$3,148, primarily from the repayment of our term loan of $3,600.  We
also received proceeds of approximately $565 in the current period from the
issuance of common stock upon the exercise of 31,250 options and 150,000
warrants.  In addition, we paid $113 in finance costs to amend our
Amended and Restated Credit Agreement with Standard Bank (See “Term loan and Revolving Credit
Facility” section below).  Cash used in financing
activities during the year ended July 31, 2009 amounted to approximately
$4,175, primarily from the repayment of the term loan of $4,500.
  Business
Combination Agreements
 
 On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) entered into a
definitive merger agreement pursuant to which Gammon Gold offered to acquire all
of the issued and outstanding common shares of Capital Gold in a cash and share
transaction (the “Gammon Transaction”). The total consideration for the purchase
of 100% of the fully diluted shares of Capital Gold is approximately US$288
million or US$4.57 per Capital Gold share based on Gammon Gold’s closing price
on September 24, 2010 on the NYSE. The Gammon Transaction has the unanimous
support of both companies’ Boards of Directors and Officers.  Under the
terms of the Gammon Transaction, each common share of Capital Gold will be
exchanged for 0.5209 common shares of Gammon Gold and a cash payment in the
amount of US$0.79 per share. Based on the September 24, 2010 closing price of
Capital Gold’s shares on the NYSE EURONEXT, the acquisition price represents a
20% premium to the close on September 24th and a 30% premium to the 20-day
volume weighted average price on the NYSE EURONEXT ending on that
date.  The consummation of the Gammon Transaction is subject to
numerous contingencies as described in the related merger agreement including,
but not limited to, Capital Gold stockholder approval.
 
 52
 On August
2, 2010, the Company acquired Nayarit Gold, Inc. (“Nayarit”). As a result of the
Business Combination, Nayarit became a wholly-owned subsidiary of the
Company.  In connection with the Business Combination, each
outstanding share of Nayarit common stock was converted into 0.134048 shares of
Capital Gold common stock, with cash paid in lieu of any fractional
share.   Capital Gold issued 12,454,354 shares of its common stock in
the Business Combination to Nayarit's current stockholders and has reserved for
issuance an additional 1,621,981 and 903,483 shares of Capital Gold common stock
upon the exercise of former Nayarit warrants and options,
respectively.  Based on the number of outstanding shares of Nayarit
common stock and Capital Gold common stock, after the consummation of the
Business Combination, the stockholders of Nayarit own approximately 20.4% of
Capital Gold on a non-diluted basis.
 
 Based on
the closing price of the Company’s common stock on August 2, 2010, the
consideration received by Nayarit shareholders had a value of approximately
$47.6 million as detailed below.
 
 Conversion
                      Calculation
                    
                    
                    Estimated
                      Fair
      Value
                    
                    Form
      of
                      Consideration(In
      thousands, except per share amounts)Number
      of Nayarit shares outstanding as of the Amalgamation date
                    
                    
                    92,910Exchange
      ratio(1)
                    
                    
                    0.134048Number
      of shares issued to Nayarit shareholders
                    
                    
                    12,454Value
      of Capital Gold common shares
                      issued(1)
                    
                    $
                    3.71
                    
                    
                    $
                    46,206
                    
                    Capital
      Gold
                      Common
      stockValue
      of Nayarit’s options and warrants to be exchanged for Capital Gold options
      and warrants (2)
                    
                    
                    
                    
                    
                    
                    1,393
                    
                    Capital
      GoldOptions
                      andWarrantsTotal
      consideration transferred
                    
                    
                    
                    
                    
                    $
                    47,599
 
 (1) In
accordance with ASC 805, the fair value of equity securities issued as part of
the consideration transferred was the closing market price of Capital Gold’s
common stock on the effective date of the Amalgamation. The pro forma shares
issued was 12,454,354 common shares, which is calculated by multiplying 0.134048
by 92,909,659, being the number of shares of Nayarit common stock outstanding on
August 2, 2010.  Nayarit shareholders own approximately 20.4% of the
issued and outstanding shares of Capital Gold common stock.
 
 (2)
Represents the fair value to acquire 1,621,981 and 903,483 shares of Capital
Gold common stock upon the exercise of former Nayarit warrants and options,
respectively. The fair value of the warrants and options were estimated using
the Black-Scholes valuation model utilizing the assumptions noted
below.
 
 Stock
      price
                  
                  $3.71Post
      conversion strike price
                  
                  $3.28
      - $9.92Average
      expected volatility
                  
                  70%Dividend
      yield
                  
                  NoneAverage
      risk-free interest rate
                  
                  0.29%Average
      contractual term
                  
                  .79
      yearsBlack-Scholes
      average value per warrant and option
                  
                  $0.57
  53
  The
expected volatility of Capital Gold’s stock price is based on the average
historical volatility which is based on daily observations and duration
consistent with the expected life assumption and implied
volatility.  The average contractual term of the warrants and options
is based on the remaining contractual exercise term of each warrant and
option.  The risk free interest rate is based on U.S. treasury
securities with maturities equal to the expected life of the warrants and
options
 
 The
transaction has been accounted for using the acquisition method of accounting
which requires, among other things, the assets acquired and liabilities assumed
to be recognized at their fair values as of the acquisition date. The following
table summarizes the estimated fair values of major assets acquired and
liabilities assumed on August 2, 2010:
  
 Fair
      Value(in thousands)Cash
      and cash equivalents
                    
                    $
                    50Short-term
      investments
                    
                    
                    2Prepaid
      expenses and sundry receivables
                    
                    
                    1,238Property,
      plant and equipment
                    
                    
                    196Mineral
      interests – indicated and inferred
                    
                    
                    43,822Exploration
      interests
                    
                    
                    3,627Accounts
      payable and liabilities assumed
                    
                    
                    (1,336)Net
      assets acquired
                    
                    $
                    47,599
 
 
 A single
estimate of fair value results from a complex series of judgments about future
events and uncertainties and relies heavily on estimates and assumptions. The
Company’s judgments used to determine the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact the Company’s results from operations. The Company’s
management allocated the acquisition cost to the assets acquired and liabilities
assumed based on the estimated fair value of Nayarit’s tangible and identifiable
assets and liabilities.  The amount allocated to the mineral and
exploration interests was based on a valuation report prepared by a third party
appraisal firm.  The allocation is not considered final as of the date of
this report as management is still reviewing certain of the underlying
assumptions and calculations used in the allocation to the assets and
liabilities of Nayarit that were acquired.  However, the Company believes
the final purchase price allocation will not be materially different than
presented herein.
 
 During
the twelve months ended July 31, 2010, the Company incurred transaction costs
consisting primarily of legal, professional, investment advisory and accounting
fees of $2.4 million.  These costs are included in general and
administrative expenses on the consolidated statement of
operations.
 
  Pro
forma Information
   The
following unaudited pro forma results of operations of the Company for the
fiscal years ended July 31, 2010 and 2009 assume that the acquisition of the
operating assets of the significant businesses acquired during 2010 and 2009 had
occurred on August 1 of the respective year in which the business was acquired
and for the comparable period only (i.e., 2010 acquisitions are reflected in
2009). These unaudited pro forma results are not necessarily indicative of
either the actual results of operations that would have been achieved had the
companies been combined during these periods, or are they necessarily indicative
of future results of operations.
  54
  (in
      thousands)Year
      Ended
                    July
      31,
                    2010
                  
                  Year
      Ended
                    July
      31,
                    2009Revenues
                  
                  $
                  60,645
                  
                  
                  $
                  42,757Net
      income (loss)
                  
                  $
                  10,905
                  
                  
                  $
                  2,270Income
      (loss) per common share:Basic – net
      income (loss)
                  
                  $
                  0.18
                  
                  
                  $
                  0.04Diluted – net
      income (loss)
                  
                  $
                  0.18
                  
                  
                  $
                  0.03
 
 
 2010
Pro forma Results – Twelve Months Ended July 31, 2010
 
 The 2010
pro forma results were calculated by combining the results of Capital Gold with
the stand-alone historical results of Nayarit Gold for the year ended June 30,
2010. The elimination of $2.4 million in transaction related costs were made
which would have been incurred during the twelve months ended July 31, 2010 had
the acquisition commenced on August 1, 2009.
 
  Term
loan and Revolving Credit Facility
 
 In September 2008, we closed an Amended
And Restated Credit Agreement (the “Credit Agreement”) involving our
wholly-owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), us,
as guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender.  The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006.  Under the Credit
Agreement, MSR and Oro borrowed money in an aggregate principal amount of up to
$12,500 (the “Term Loan”) for the purpose of constructing, developing and
operating the El Chanate gold mining project in Sonora State,
Mexico.  We guaranteed the repayment of the Term Loan and the
performance of the obligations under the Credit Agreement.  As of July
31, 2010, the outstanding amount on the term note was $4,400 and accrued
interest on this agreement was approximately $11.
 
 Term Loan principal shall be repaid
quarterly and commenced on September 30, 2008 and consisted of four payments in
the amount of $1,125, followed by eight payments in the amount of $900 and two
final payments in the amount of $400. There is no prepayment
fee.  Principal under the Term Loan shall bear interest at a rate per
annum equal to the LIBO Rate, as defined in the Credit Agreement, for the
applicable Interest Period plus the Applicable Margin. An Interest Period can be
one, two, three or six months, at the option of the Borrowers. The Applicable
Margin for the Term Loan is 2.5% per annum. Pursuant to the terms of the Credit
Agreement, operating accounts remain subject to an account pledge agreement
between MSR and Standard Bank.
 
 The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro.  As
additional collateral for the Loan, the Company, together with its subsidiary,
Leadville Mining & Milling Holding Corporation, pledged all of its ownership
interest in MSR and Oro.
 
 On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period.
 
 55
 On June 30, 2010, Capital Gold
Corporation (“Capital Gold” or the “Company”) entered into the First Amendment
to the Amended and Restated Credit Agreement (the “Amendment”) by and among the
Borrowers (as defined above), the Company, as guarantor, and Standard Bank, as
the lender.  The Amendment amends the Credit Agreement the parties
entered into on September 18, 2008 with retroactive effect from July 17, 2008,
which amended and restated the Credit Agreement between the parties dated August
15, 2006.  The Credit Agreement provided for a senior secured term
credit facility in the aggregate amount of $12,500 (the “Term Facility”) and
provided for a senior secured revolving credit facility in the aggregate
principal amount of $5,000 (the “Revolving Facility”).   Capital
Gold guarantees all obligations of the Borrowers under the Term Facility and the
Revolving Facility. The material amendments to the Credit Agreement contained in
the Amendment are as follows:
 
 The
Amendment increases the Revolving Facility to $7,500.  The Revolving
Facility is available for a two-year period commencing June 30,
2010.  The Borrowers may request a borrowing of the Revolving Facility
from time to time, provided that each borrowing shall be in a minimum aggregate
amount of $500.  All amounts due under the Revolving Facility,
including all accrued interest and other amounts described in the Credit
Agreement, shall be due and payable on June 30, 2012.
 
 Amounts
borrowed under the Term Facility and the Revolving Facility bear interest at a
rate per annum equal to the LIBO Rate, as defined in the Credit Agreement, for
the applicable interest period plus the applicable margin.  The
applicable margin for the Revolving Facility was increased in the Amendment to
3.0% per annum.
 
 The
Borrowers are to use the proceeds of the Revolving Facility to fund general
corporate and working capital requirements in connection with the El Chanate
gold mining project and the Saric gold exploration project.
 
 The
Amendment increased the Tangible Net Worth (as defined in the Credit Agreement)
requirement to at least U.S.$30,000 and requires Capital Gold to maintain at all
times a Ratio of Debt to Cash Flow from Operations, as defined in the Amendment,
of no greater than 2.50:1.00.
 
 Debt
Covenants
 
 Capital
Gold’s Credit Agreement with Standard Bank requires it, among other obligations,
to meet certain financial covenants including, but not limited to, (i) a ratio
of current assets to current liabilities at all times greater than or equal to
1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least
U.S. $30,000, (iii) maintain a ratio of  debt to cash flow from
operations of no greater than 2:50:1:00, and (iv) a quarterly average minimum
liquidity of U.S. $500.  In addition, the Credit Agreement restricts, among
other things, Capital Gold’s ability to incur additional debt, create liens on
its property, dispose of any assets, merge with other companies, enter into
hedge agreements, organize or invest in subsidiaries or make any investments
above a certain dollar limit.  A failure to comply with the restrictions
contained in the Credit Agreement could lead to an event of default thereunder
which could result in an acceleration of such indebtedness. As a condition to
closing the Nayarit Business Combination, Capital Gold obtained the consent of
Standard Bank.
   As of
July 31, 2010, we were in compliance with all debt covenants and default
provisions.
 
 56
  Environmental
and Permitting Issues
 
 Management
does not expect that environmental issues will have an adverse material effect
on our liquidity or earnings.  The Company complies with all laws,
rules and regulations concerning mining, environmental, health, zoning and
historical preservation issues and we are not aware of any environmental issues
or reclamation issues at the El Chanate concessions.  We have received
the required Mexican government permits for operations.  Any revisions
to our mine plan may require us to amend the permits.
 
 We
received the annual extension to the explosive use permit from the relevant
authorities.  The permit is valid through December 2010.
 
 We
include environmental and reclamation costs on an ongoing basis, in our revenue
and cost projections.  No assurance can be given that environmental
regulations will not be revised by the Mexican authorities in the
future.  As of July 31, 2010, we have estimated the reclamation costs
for the El Chanate site to be approximately $4,094 if we had to reclaim the
property as of that date.  Reclamation costs are allocated to expense
over the life of the related assets and are periodically adjusted to reflect
changes in the estimated present value resulting from the passage of time and
revisions to the estimates of either the timing or amount of the reclamation and
closure costs. The asset retirement obligation is based on when the spending for
an existing environmental disturbance and activity to date will occur. We
review, on an annual basis, unless otherwise deemed necessary, the asset
retirement obligation for the mine site.  We reviewed the estimated
present value of the El Chanate mine reclamation and closure costs as of July
31, 2010 primarily due to the addition of the new leach pad in accordance with
ASC guidance for asset retirement and environmental obligations.  As
of July 31, 2010, our reclamation and remediation liability was
$2,373.
 
 Contractual
Obligations
 
 Our
contractual obligations as of July 31, 2010 are summarized as
follows:
 
 Payments
      Due by PeriodContractual
      Obligations(5)(6)
                                                
                                                Total
                                                
                                                
                                                Less
      than
                                                  1
      Year
                                                
                                                
                                                1 –
      3
                                                  Years
                                                
                                                
                                                3 –
      5
                                                  Years
                                                
                                                
                                                More
      than
                                                  5
      YearsDebt
      (1)
                                                
                                                $
                                                4,537
                                                
                                                
                                                $
                                                3,712
                                                
                                                
                                                $
                                                825
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -Remediation
      and reclamation   obligations(2)
                                                
                                                
                                                4,094
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                4,094Operating
      leases(3)
                                                
                                                
                                                522
                                                
                                                
                                                
                                                261
                                                
                                                
                                                
                                                261
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Derivative
      instruments(4)
                                                
                                                
                                                40
                                                
                                                
                                                
                                                40
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -$
                                                9,193
                                                
                                                
                                                $
                                                4,013
                                                
                                                
                                                $
                                                1,086
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                4,094
 (1)
              Amounts
      represent principal ($4,400) and estimated interest payments ($137)
      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, operating lease for office space in Hermosillo, 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, 2010, the amount
      remaining in net smelter return payments due to Royal Gold was
      approximately $11,451.
 (6)
              Contractual
      obligations do not include Nayarit’s contractual concession payments for
      the exploration rights of La Estrella of (i) $100 in December 8, 2010,
      (ii) $100 in June 8, 2011, (iii) $175 in December 8, 2011, (iv) $175 in
      June 8, 2012, (v) $350 in December 8, 2012 or the concession payment for
      the exploration rights of the Huajicari concessions of $250 due by October
      31, 2010.
    57
  While we
believe that our available funds in conjunction with anticipated revenues from
metal sales will be adequate to cover our cash requirements for the fiscal year
ending July 31, 2011, 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
 
 See Note
3 to the Consolidated Financial Statements contained in Item 15. Financial
Statements below.
 
 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.
  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.
  58
  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.
  59
  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 ASC guidance for
asset retirement and environmental obligations.
  Deferred Financing
Costs
 
 Deferred financing costs which were
included in other assets relate to costs incurred in connection with bank
borrowings and are amortized over the term of the related
borrowings.
 
 Intangible
Assets
 
 Purchased intangible assets consisting
of rights of way, easements, net profit interests, etc. are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of intangible assets are
determined in accordance with ASC guidance for intangibles. There was no
impairment at July 31, 2010.
 
 60
 
 Fair Value of Financial
Instruments
 
 The carrying value of our financial
instruments, including cash and cash equivalents, marketable securities, loans
receivable, accrued expenses and accounts payable approximated fair value
because of the short maturity of these instruments.  The carrying
amount of the Company’s accounts receivable balance approximates fair
value.  The carrying value of the Company’s long-term debt
approximates fair value due to the variable nature of its interest
rate.
 
 Revenue
Recognition
 
 Revenue
is recognized from the sale of gold doré when persuasive evidence of an
arrangement exists, the price is determinable, the product has been shipped to
the refinery, the title has been transferred to the customer and collection of
the sales price is reasonably assured from the customer.  The Company
sells its precious metal content to a financial institution. Revenues are
determined by selling the precious metal content at the spot price. Sales are
calculated based upon assay of the doré’s precious metal content and its
weight.  The Company sells approximately 95% of the precious metal
content contained within the doré from the refinery based upon the preliminary
assay of the Company. The residual ounces are sold upon obtaining the final
assay and settlement for the shipment. The Company forwards an irrevocable
transfer letter to the refinery to authorize the transfer of the precious metal
content to the customer.  The sale is recorded by the Company upon the
refinery pledging the precious metal content to the customer.  The
Company waits until the doré precious metal content is pledged to the customer
at the refinery to recognize the sale because collectability is not ensured
until the doré precious metal content is pledged.  The sale price is
not subject to change subsequent to the initial revenue recognition
date.
  Revenues
from by-product sales, which consist of silver, are credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $1,400, $1,076 and $707
for the years ended July 31, 2010, 2009 and 2008, on silver ounces sold of
80,941, 86,523 and 40,461, 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.
  61
  Income
Taxes
 
 On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures.  The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.
 
 On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
 
 Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
This legislation remains subject to ongoing varying interpretations.  There
is the possibility of implementation amendments by the Mexican government and
the estimated future income tax liability recorded at the balance sheet date may
change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
 
 Equity Based
Compensation
 
 In
connection with offers of employment to our executives as well as in
consideration for agreements with certain consultants, we issue options and
warrants to acquire our common stock. Employee and non-employee awards are made
in the discretion of the Board of Directors.
 
 We
account for stock compensation under ASC guidance for compensation – stock
compensation, which requires the Company to expense the cost of employees
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This expense must be recognized ratably over
the requisite service period following the date of grant.
 
 Accounting for Derivatives
and Hedging Activities
 
 On
October 11, 2006, prior to our initial draw on the Credit Agreement, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Agreement, which requires that we hedge at least 50% of our outstanding debt
under this agreement.  The agreements entered into cover $9,375 or 75%
of the outstanding debt. Both swaps covered this same notional amount of $9,375,
but over different time horizons.  The first covered the six months
that commenced on October 11, 2006 and terminated on March 31, 2007 and the
second covers the period from March 30, 2007 through December 31, 2010. We
intend to use discretion in managing this risk as market conditions vary over
time, allowing for the possibility of adjusting the degree of hedge coverage as
we deem appropriate.  However, any use of interest rate derivatives
will be restricted to use for risk management purposes.
 
 62
 We used
variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
debt obligations expose us to variability in interest payments due to changes in
interest rates.  As a result of these arrangements, we will
continuously monitor changes in interest rate exposures and evaluate hedging
opportunities. Our risk management policy permits us to use any combination of
interest rate swaps, futures, options, caps and similar instruments, for the
purpose of fixing interest rates on all or a portion of variable rate debt,
establishing caps or maximum effective interest rates, or otherwise constraining
interest expenses to minimize the variability of these effects.
 
 The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense.  No component of hedge results is excluded from the
assessment of hedge effectiveness.
 
 We are exposed to credit losses in the
event of non-performance by counterparties to these interest rate swap
agreements, but we do not expect any of the counterparties to fail to meet their
obligations. To manage credit risks, we select counterparties based on credit
ratings, limit our exposure to a single counterparty under defined guidelines,
and monitor the market position with each counterparty as required by ASC
guidance for derivatives and hedging.
 
 Use of
Estimates
 
 The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
 
 Item
7A.  Quantitative and Qualitative
Disclosures About Market Risk
   Metal Price
  Changes
in the market price of gold significantly affects our profitability and cash
flow.  Gold prices can fluctuate widely due to numerous factors, such
as demand; forward selling by producers; central bank sales, purchases and
lending; investor sentiment; the relative strength of the U.S. dollar and global
mine production levels.
  Foreign
Currency
  Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow.  Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic
conditions.  Most of our assets and operations are in Mexico;
therefore, we are more susceptible to fluctuations in the Mexican peso / U.S.
dollar exchange.  Our Mexico operations sell their metal production
based on a U.S. dollar gold price as is the general, world-wide
convention.  Fluctuations in the local currency exchange rates in
relation to the U.S. dollar can increase or decrease profit margins to the
extent costs are paid in local currency at foreign
operations.  Foreign currency exchange rates in relation to the U.S.
dollar have not had a material impact on our determination of proven and
probable reserves.  However, if a sustained weakening of the U.S.
dollar in relation to the Mexican peso that impacts our cost structure was not
mitigated by offsetting increases in the U.S. dollar gold price or by other
factors, then profitability, cash flows and the amount of proven and probable
reserves in the applicable foreign country could be reduced.  The
extent of any such reduction would be dependent on a variety of factors
including the length of time of any such weakening of the U.S. dollar, and
management’s long-term view of the applicable exchange rate.  We
believe, however, that this exchange rate variability has not had a material
impact on our financial statements.
  63
 
 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 DisclosuresJuly
      31, 2010(in
      thousands)Instruments
      entered into for hedging purposes -Type
      of Derivative
                                                    
                                                    Notional
      Size
                                                    
                                                    
                                                    Fixed
      Price or Strike Price
                                                    
                                                    Underlying
      Price
                                                    
                                                    Termination
      or Expiration
                                                    
                                                    Fair
      ValueInterest
      Rate Swaps
                                                    
                                                    $
                                                    1,969
                                                    (1)
                                                    
                                                    
                                                    5.30
                                                    %
                                                    3
      Mo. USD LIBOR
                                                    
                                                    12/31/2010
                                                    
                                                    $
                                                    (40
                                                    )
  (1)The value shown
      reflects the notional as of July 31, 2010. Over the term of the swap, the
      notional amortizes, dropping to approximately $1,313.
 
 As of July 31, 2010, the dollar value
of a basis point for this interest rate swap was approximately $35, 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
$35.  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.
 
 64
  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.
 
 As a
result of a review process undertaken by the Audit Committee of the Board of
Directors (the “Audit Committee”) of Capital Gold Corporation (the “Company”),
on January 19, 2010, the Company notified Wolinetz, Lafazan & Company,
P.C. (“Wolinetz”) that it was dismissed as the Company’s independent
registered public accounting firm.  The change in accountants did not
result from any dissatisfaction with the quality of professional services
rendered by Wolinetz.
 
 The
reports of Wolinetz on the Company’s financial statements for the fiscal years
ended July 31, 2009 and 2008 contained no adverse opinion or disclaimer of
opinion, were not qualified or modified as to uncertainty, audit scope or
accounting principles.
 
 During
the Company’s fiscal years ended July 31, 2009 and 2008, and through January 19,
2010, there have been no disagreements with Wolinetz on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedure, which disagreements, if not resolved to the satisfaction of Wolinetz,
would have caused Wolinetz to make reference thereto in its reports on the
financial statements.
 
 During
the Company’s fiscal years ended July 31, 2009 and 2008, and through January 19,
2010, there have been no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
 
 The
Company has engaged BDO USA, LLP (“BDO”, formerly known as BDO Seidman, LLP) as
its new independent registered public accounting firm as of January 22, 2010.
During the fiscal years ended July 31, 2009 and 2008, and through January 22,
2010, the Company did not consult with BDO regarding any of the matters
described in Item 304(a)(2)(i) and (ii) of Regulation S-K. In deciding to select
BDO, the Audit Committee reviewed auditor independence issues and existing
commercial relationships with BDO and concluded that BDO has no commercial
relationship with the Company that would impair its independence.
 
 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.
 
 65
 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.
 
 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, 2010.  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, 2010.  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, 2010, 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, 2010, has been audited by BDO
USA, LLP, an independent registered public accounting firm, as stated in their
report which is included on page F-2 of the Financial Statements of this Annual
Report on Form 10-K.
 
 Item
9B. Other
Information.
 
 None.
 
 66
  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 2011 Annual Meeting of Stockholders and is incorporated
herein by reference. Information concerning Capital Gold’s executive officers is
set forth below.
 
 
 Name
                          
                          Age
                          
                          PositionColin
      Sutherland
                          
                          39
                          
                          President,
      DirectorChristopher
      M. Chipman
                          
                          37
                          
                          Chief
      Financial OfficerJ.
      Scott Hazlitt
                          
                          58
                          
                          Chief
      Operating Officer,
Director
 
 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.
 
 COLIN
SUTHERLAND,President
and  Director, has been with the company since August 2010 and is the
former President and Chief Executive Officer of Nayarit Gold,
Inc.  Prior to joining Nayarit, Mr. Sutherland was a Director and
Chief Financial Officer of Gammon Gold Inc. ("Gammon") from 2004 to 2007, where
he was involved in Gammon's growth from an exploration stage company to a
producing mining company with a market capitalization of over Cdn $2
billion.  Mr. Sutherland also was a Director and Chief Financial
Officer of Mexgold Resources Inc. from 2004 to 2006.  Mr. Sutherland
has extensive experience in financing mineral exploration.  Mr.
Sutherland is a Chartered Accountant and a graduate of Saint Francis Xavier
University in Antigonish, Nova Scotia.
 
 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.
 
 J. SCOTT
HAZLITT, Chief Operating Officer and Director, has been in the mining business
since 1974. Since 2001, he has been focused on development of our El Chanate
concessions and  currently oversees all aspects of our
operations.  He previously worked as V.P. Mine Development and 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.  He is a certified professional geologist (CPG) by the
American Institute of Professional Geologists, and meets the requirements of a
"qualified person" under Canadian National Instrument 4-3-101.
 
 67
 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.
 
 On
March 11, 2010, the Company entered into an agreement with Gifford A.
Dieterle , the Chief Executive Officer (“CEO”) of the
Company  and Chairman of the Board, pursuant to which Dieterle
resigned his position as CEO and Chairman of the Board, effective March 18,
2010.
 
 On April 29, 2010, the Company entered
into a severance agreement and general release with John Brownlie, the Company’s
President and Chief Operating Officer (“COO”), pursuant to which Mr. Brownlie’s
employment agreement terminated and he resigned as President and COO effective
upon the consummation of the Business combination between the Company and
Nayarit Gold on August 2, 2010.
 
 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,
to be 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.
 
 68
 
 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.
 
 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).
  69
  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).
  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).
  70
  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).
  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).
  71
  10.20
              Severance
      Agreement and Release between the Company and Jeffrey Pritchard dated
      September 29, 2009.(*)(***)
  10.21
              Collateral
      Agreement between the Company and Metal Recovery Solutions, LLC, dated
      January 25, 2010 (Incorporated by reference to Exhibit 1.1 on the
      Company’s Form 8-K filed with the SEC on February 1,
  2010).
 
 10.22
              Business
      Combination Agreement, by and among the Company, Nayarit Gold Inc., John
      Brownlie, Colin Sutherland and Bradley Langille, dated February 10, 2010
      (Incorporated by reference to Exhibit 2.1 on the Company’s Form 8-K filed
      with the SEC on February 11, 2010).
 
 10.23
              First
      Amendment to Amended and Restated Credit Agreement, by and among the
      Company, Standard Bank PLC, Minera Santa Rita S. de R.L. de C.V., and Oro
      de Altar S. de R.L. de C.V., dated June 30, 2010 (Incorporated by
      reference to Exhibit 10.1 on the Company’s Form 8-K filed with the SEC on
      July 7, 2010).
 
 10.24
              Extension
      between the Company and Nayarit Gold dated July 6, 2010 (Incorporated by
      reference to Exhibit 10.2 on the Company’s Form 8-K filed with the SEC on
      July 7, 2010).
 
 10.25
              Severance
      Agreement and Release between the Company and John Brownlie dated April
      29, 2010 (Incorporated by reference to Exhibit 10.3 on the Company’s Form
      8-K with the SEC on July 7, 2010).
 
 10.26
              Business
      Combination Agreement between the Company and Nayarit Gold Inc. dated
      February 10. 2010 (Incorporated by reference to Exhibit 2.1 on the
      Company’s Form 8-K filed with the SEC on August 5,
  2010).
 
 10.27
              Amendment
      No. 1 to Business Combination Agreement between Capital Gold Corporation
      and Nayarit Gold Inc., dated April 29, 2010 (Incorporated by reference to
      Exhibit 2.2 on the Company’s Form 8-K filed with the SEC on August 5,
      2010).
 
 10.28
              Extension
      Agreement dated July 6, 2010 (Incorporated by reference to Exhibit 2.3 on
      the Company’s Form 8-K filed with the SEC on August 5,
    2010).
 
 10.29
              Executive
      Employment Agreement between the Company and Colin Sutherland
      (Incorporated by reference to Exhibit 10.1 on the Company’s Form 8-K filed
      with the SEC on August 5, 2010).
 
 10.30
              Form
      of Lock-up Agreement between the Company and certain stockholders of the
      Company (Incorporated by reference to Exhibit 10.2 on the Company’s Form
      8-K filed with the SEC on August 5,
2010).
  72
  10.31
              Agreement
      and Plan of Merger by and among the Company, Gammon Gold Inc., and Capital
      Gold AcquireCo, Inc. dated October 1, 2010 (Incorporated by reference to
      Exhibit 2.1 on the Company’s Form 8-K filed with the SEC on October 7,
      2010).
  21
              Subsidiaries
      of Capital Gold Corporation
  23.1
              Consent
      of BDO USA, LLP, independent registered public
    accountants.*
  23.2
              Consent
      of Wolinetz, Lafazan & Company, P.C., independent registered public
      accountants.*
  23.3
              Consent
      of SRK Consulting (U.S), Inc.*
  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.
  73
  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, 2010
                By:
                /s/ Colin
      SutherlandColin
      Sutherland, President and Director(Principal
      Executive Officer)
  74
  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/ Colin Sutherland
                                            Colin
      Sutherland, President and Director
                                            (Principal
      Executive Officer)
                                          October
      14, 2010/s/ Christopher M. Chipman
                                            Christopher
      M. Chipman, Chief Financial Officer and Corporate Secretary
                                            (Principal
      Financial Officer)
                                          October
      14, 2010/s/ Scott Hazlitt
                                            Scott
      Hazlitt, Chief Operating Officer and Director
                                          October
      14, 2010/s/ Steve Cooper
                                            Steve
      Cooper, Chairman of the Board, Director,
                                          October
      14, 2010/s/ John W. Cutler
                                            John
      W. Cutler, Director
                                          October
      14, 2010/s/ Gary Huber
                                            Gary Huber, Director
                                          October
      14,
2010
 
 75
  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.
 
 76
  Report
of Independent Registered Public Accounting Firm
  
  Board of
Directors and Stockholders
 Capital
Gold Corporation
 New York,
New York
  We have
audited the accompanying consolidated balance sheet of Capital Gold Corporation
and Subsidiaries as of July 31, 2010 and the related consolidated statement of
operations, stockholders’ equity, and cash flows for the year then
ended.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes 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, as well as evaluating the
overall financial statement presentation.  We believe that our audit
provide a reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Capital Gold Corporation and
Subsidiaries at July 31, 2010, and the results of its operations and its cash
flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Capital Gold Corporation and Subsidiaries’
internal control over financial reporting as of July 31, 2010, based on criteria
established in Internal
Control – Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated October 14,
2010 expressed an unqualified opinion thereon.
  
  
  New York,
New York
  October
14, 2010
 
 F-1
  Report
of Independent Registered Public Accounting Firm
  Board of
Directors and Stockholders
 Capital
Gold Corporation and Subsidiaries
 New York,
New York
  We have
audited Capital Gold Corporation and Subsidiaries internal control over
financial reporting as of July 31, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Capital Gold Corporation’s management
is responsible 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 Item 9A, Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on
our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit 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 audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  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, Capital Gold Corporation and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of July 31,
2010, based on the COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Capital Gold
Corporation and Subsidiaries as of July 31, 2010, and the related consolidated
statement of operations, stockholders’ equity, and cash flows for the year then
ended and our report dated October 14, 2010 expressed an unqualified opinion
thereon.
   
  /s/BDO
USA, LLP
 New York,
New York
 
 October
14, 2010
 
 F-2
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 To The
Board of Directors and Stockholders of
 Capital
Gold Corporation
 New York,
New York
 
  We have
audited the accompanying consolidated balance sheet of Capital Gold Corporation
and Subsidiaries ("the Company") as of July 31, 2009, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the two-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
the consolidated results of their operations and their cash flows for each of
the years in the two-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).
 
  
 
 /s/
WOLINETZ, LAFAZAN & COMPANY, P.C.
 
 
 Rockville
Centre, New York
 October
12, 2009 (Except for Note 2 as to which the date is October 14,
2010)
  F-3
  CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      BALANCE SHEET
                (in
      thousands, except for share and per share
  amounts)  ASSETSCurrent
      Assets:
                
                July
      31,
                  2010
                
                
                July
      31,
                  2009
                  (Restated)Cash
      and Cash Equivalents (Note 3)
                
                $
                12,125
                
                
                $
                6,448Accounts
      Receivable  (Note 3)
                
                
                -
                
                
                
                2,027Stockpiles
      and Ore on Leach Pads (Note 6)
                
                
                32,896
                
                
                
                20,024Material
      and Supply Inventories (Note 5)
                
                
                1,953
                
                
                
                1,381Marketable
      Securities  (Note 4)
                
                
                30
                
                
                
                35Prepaid
      Expenses
                
                
                431
                
                
                
                277Other
      Current Assets (Note 7)
                
                
                1,471
                
                
                
                1,101Total
      Current Assets
                
                
                48,906
                
                
                
                31,293Mining
      Concessions (Note 10)
                
                
                52
                
                
                
                51Property
      & Equipment – net (Note 8)
                
                
                21,390
                
                
                
                18,492Intangible
      Assets – net (Note 9)
                
                
                730
                
                
                
                318Other
      Assets:Deferred
      Financing Costs (Note 16)
                
                
                1,351
                
                
                
                2,232Deferred
      Tax Asset (Note 22)
                
                
                -
                
                
                
                32Security
      Deposits
                
                
                66
                
                
                
                66Total
      Other Assets
                
                
                1,417
                
                
                
                2,330Total
      Assets
                
                $
                72,495
                
                
                $
                52,484LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                
                $
                907
                
                
                $
                988Accrued
      Expenses (Note 21)
                
                
                5,040
                
                
                
                1,633Derivative
      Contracts (Note 20)
                
                
                40
                
                
                
                193Deferred
      Tax Liability (Note 22)
                
                
                7,462
                
                
                
                4,233Current
      Portion of Long-term Debt (Note 16)
                
                
                3,600
                
                
                
                3,600Total
      Current Liabilities
                
                
                17,049
                
                
                
                10,647Reclamation
      and Remediation Liabilities (Note 12)
                
                
                2,373
                
                
                
                1,594Other
      Liabilities
                
                
                373
                
                
                
                78Non-Current
      Deferred Tax Liability (Note 22)
                
                
                971
                
                
                
                -Long-Term
      Debt (Note 16)
                
                
                800
                
                
                
                4,400Total
      Long-term Liabilities
                
                
                4,517
                
                
                
                6,072Commitments
      and Contingencies (Notes 1 and 23)
                
                
                -
                
                
                
                -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share;Authorized
      75,000,000 shares; Issued andOutstanding
      48,768,665 and 48,463,406 shares, respectively
                
                
                5
                
                
                
                5Additional
      Paid-In Capital
                
                
                65,391
                
                
                
                64,071Accumulated
      Deficit
                
                
                (10,095
                )
                
                
                (22,089
                )Deferred
      Compensation
                
                
                (80
                )
                
                
                (319
                )Accumulated
      Other Comprehensive Income (Note 13)
                
                
                (4,292
                )
                
                
                (5,903
                )Total
      Stockholders’ Equity
                
                
                50,929
                
                
                
                35,765Total
      Liabilities and Stockholders’ Equity
                
                $
                72,495
                
                
                $
                52,484
 The
accompanying notes are an integral part of the financial
statements.
 F-4
  CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF OPERATIONS(in
      thousands, except for share and per share amounts)  For
      The Year EndedJuly
      31,2010
                                                
                                                
                                                2009
                                                
                                                
                                                2008RevenuesSales
      – Gold, net
                                                
                                                $
                                                60,645
                                                
                                                
                                                $
                                                42,757
                                                
                                                
                                                $
                                                33,104Costs
      and Expenses:Costs
      Applicable to Sales
                                                
                                                
                                                22,017
                                                
                                                
                                                
                                                13,883
                                                
                                                
                                                
                                                10,690Depreciation
      and Amortization
                                                
                                                
                                                2,939
                                                
                                                
                                                
                                                2,041
                                                
                                                
                                                
                                                2,350General
      and Administrative
                                                
                                                
                                                8,573
                                                
                                                
                                                
                                                5,464
                                                
                                                
                                                
                                                5,586Exploration
                                                
                                                
                                                1,616
                                                
                                                
                                                
                                                1,600
                                                
                                                
                                                
                                                938Total
      Costs and Expenses
                                                
                                                
                                                35,145
                                                
                                                
                                                
                                                22,988
                                                
                                                
                                                
                                                19,564Income
      from Operations
                                                
                                                
                                                25,500
                                                
                                                
                                                
                                                19,769
                                                
                                                
                                                
                                                13,540Other
      Income (Expense):Interest
      Income
                                                
                                                
                                                13
                                                
                                                
                                                
                                                43
                                                
                                                
                                                
                                                77Interest
      Expense
                                                
                                                
                                                (1,365
                                                )
                                                
                                                
                                                (1,575
                                                )
                                                
                                                
                                                (2,295
                                                )Other
      Income (Expense)
                                                
                                                
                                                (129
                                                )
                                                
                                                
                                                (313
                                                )
                                                
                                                
                                                (95
                                                )Loss
      on change in fair value of derivative
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,975
                                                )
                                                
                                                
                                                (1,356
                                                )Total
      Other Income (Expense)
                                                
                                                
                                                (1,481
                                                )
                                                
                                                
                                                (3,820
                                                )
                                                
                                                
                                                (3,669
                                                )Income
      before Income Taxes
                                                
                                                
                                                24,019
                                                
                                                
                                                
                                                15,949
                                                
                                                
                                                
                                                9,871Income
      Tax Expense (Note 21)
                                                
                                                
                                                (12,025
                                                )
                                                
                                                
                                                (5,542
                                                )
                                                
                                                
                                                (3,507
                                                )Net
      Income
                                                
                                                $
                                                11,994
                                                
                                                
                                                $
                                                10,407
                                                
                                                
                                                $
                                                6,364Income
      Per Common ShareBasic
                                                
                                                $
                                                0.25
                                                
                                                
                                                $
                                                0.22
                                                
                                                
                                                $
                                                0.15Diluted
                                                
                                                $
                                                0.25
                                                
                                                
                                                $
                                                0.21
                                                
                                                
                                                $
                                                0.13Basic
      Weighted Average Common Shares Outstanding
                                                
                                                
                                                48,512,828
                                                
                                                
                                                
                                                48,315,116
                                                
                                                
                                                
                                                43,759,999Diluted
      Weighted Average Common Shares Outstanding
                                                
                                                
                                                48,703,035
                                                
                                                
                                                
                                                49,882,770
                                                
                                                
                                                
                                                48,867,282
  The
accompanying notes are an integral part of the financial
statements.
  F-5
 CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY(in
      thousands, except for share and per share
  amounts)  AccumulatedAdditional
                  
                  
                  
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  
                  paid-in-
                  
                  
                  Accumulated
                  
                  
                  Comprehensive
                  
                  
                  Deferred
                  
                  
                  Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  Income/(Loss)
                  
                  
                  Compensation
                  
                  
                  EquityBalance
      at July 31, 2007 (Restated)
                  
                  
                  42,042,804
                  
                  
                  $
                  4
                  
                  
                  $
                  54,132
                  
                  
                  $
                  (38,860
                  )
                  
                  $
                  121
                  
                  
                  $
                  (52
                  )
                  
                  $
                  15,345Options
      and warrants issued for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  433
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  194
                  
                  
                  
                  627Private
      placement, net
                  
                  
                  5,748,545
                  
                  
                  
                  1
                  
                  
                  
                  7,472
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,473Common
      stock issued for services provided
                  
                  
                  402,500
                  
                  
                  
                  -
                  
                  
                  
                  1,051
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (691
                  )
                  
                  
                  360Net
      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
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,504
                  
                  
                  
                  -
                  
                  
                  
                  2,504Total
      comprehensive income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,702Balance
      at July 31, 2008 (Restated)
                  
                  
                  48,193,849
                  
                  
                  $
                  5
                  
                  
                  $
                  63,088
                  
                  
                  $
                  (32,496
                  )
                  
                  $
                  2,459
                  
                  
                  $
                  (549
                  )
                  
                  $
                  32,507
  The accompanying notes are an integral
part of the financial statements.
  F-6
  CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY(in
      thousands, except for share and per share
  amounts)  AccumulatedAdditional
                      
                      
                      
                      
                      
                      Other
                      
                      
                      
                      
                      
                      TotalCommon
      Stock
                      
                      
                      paid-in-
                      
                      
                      Accumulated
                      
                      
                      Comprehensive
                      
                      
                      Deferred
                      
                      
                      Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      capital
                      
                      
                      Deficit
                      
                      
                      Income/(Loss)
                      
                      
                      Compensation
                      
                      
                      EquityBalance
      at July 31, 2008
                      
                      
                      48,193,849
                      
                      
                      $
                      5
                      
                      
                      $
                      63,088
                      
                      
                      $
                      (32,496
                      )
                      
                      $
                      2,459
                      
                      
                      $
                      (549
                      )
                      
                      $
                      32,507Equity
      based compensation
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      551
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      230
                      
                      
                      
                      781Common
      stock issued upon the exercising of options and warrants
                      
                      
                      213,932
                      
                      
                      
                      -
                      
                      
                      
                      319
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      319Issuance
      of  restricted common stock
                      
                      
                      55,625
                      
                      
                      
                      -
                      
                      
                      
                      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
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (8,355
                      )
                      
                      
                      -
                      
                      
                      
                      (8,355
                      )Total
      comprehensive income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,045Balance
      at July 31, 2009 (Restated)
                      
                      
                      48,463,406
                      
                      
                      $
                      5
                      
                      
                      $
                      64,071
                      
                      
                      $
                      (22,089
                      )
                      
                      $
                      (5,903
                      )
                      
                      $
                      (319
                      )
                      
                      $
                      35,765
  The accompanying notes are an integral
part of the financial statements.
 
 F-7
 
 CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY(in
      thousands, except for share and per share
  amounts)  AccumulatedAdditional
                  
                  
                  
                  Other
                  
                  
                  
                  
                  
                  TotalCommon
      Stock
                  
                  paid-in-
                  
                  Accumulated
                  
                  Comprehensive
                  
                  
                  Deferred
                  
                  
                  Stockholders’Shares
                  
                  Amount
                  
                  capital
                  
                  Deficit
                  
                  Income/(Loss)
                  
                  
                  Compensation
                  
                  
                  EquityBalance
      at July 31, 2009
                  48,463,406
                  
                  $
      5
                  
                  $64,071
                  
                  $(22,089)
                  
                  $(5,903)
                  
                  
                  $(319)
                  
                  
                  $
      35,765Equity
      based compensation, net of forfeitures
                  (63,333)
                  
                  -
                  
                  755
                  
                  -
                  
                  -
                  
                  
                  239
                  
                  
                  994Common
      stock issued upon the exercising of options and warrants
                  368,592
                  
                  -
                  
                  565
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  
                  565Net
      income for the year ended July 31, 2010
                  -
                  
                  -
                  
                  -
                  
                  11,994
                  
                  -
                  
                  
                  -
                  
                  
                  11,994Change
      in fair value on interest rate swaps
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  153
                  
                  
                  -
                  
                  
                  153Unrealized
      loss on marketable securities
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  (5)
                  
                  
                  -
                  
                  
                  (5)Equity
      adjustment from foreign currency translation
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  1,463
                  
                  
                  -
                  
                  
                  1,463Total
      comprehensive income
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  -
                  
                  
                  -
                  
                  
                  13,605Balance
      at July 31, 2010
                  48,768,665
                  
                  $
      5
                  
                  $65,391
                  
                  $(10,095)
                  
                  $(4,292)
                  
                  
                  $(80)
                  
                  
                  $50,929
  The accompanying notes are an integral
part of the financial statements.
  F-8
  CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF CASH FLOWS(in
      thousands, except for share and per share
  amounts)
  For
      TheYear
      EndedJuly
      31,2010
                      
                      
                      2009
                      
                      
                      2008Cash
      Flow From Operating Activities:Net
      Income
                      
                      $
                      11,994
                      
                      
                      $
                      10,407
                      
                      
                      $
                      6,364Adjustments
      to Reconcile Net Loss toNet
      Cash Provided by Operating Activities:Depreciation
      and Amortization
                      
                      
                      2,939
                      
                      
                      
                      2,041
                      
                      
                      
                      2,300Amortization
      of Deferred Financing Costs
                      
                      
                      992
                      
                      
                      
                      978
                      
                      
                      
                      1,088Accretion
      of Reclamation and Remediation
                      
                      
                      145
                      
                      
                      
                      156
                      
                      
                      
                      124Loss
      on change in fair value of derivative
                      
                      
                      -
                      
                      
                      
                      1,975
                      
                      
                      
                      1,356Equity
      Based Compensation
                      
                      
                      994
                      
                      
                      
                      894
                      
                      
                      
                      987Changes
      in Operating Assets and Liabilities:Decrease
      (Increase)  in Accounts Receivable
                      
                      
                      2,027
                      
                      
                      
                      (550
                      )
                      
                      
                      (1,477
                      )Increase
      in Prepaid Expenses
                      
                      
                      (154
                      )
                      
                      
                      (58
                      )
                      
                      
                      (146
                      )Increase
      in Inventory
                      
                      
                      (12,323
                      )
                      
                      
                      (6,786
                      )
                      
                      
                      (8,913
                      )Decrease
      (Increase) in Other Current Assets
                      
                      
                      (370
                      )
                      
                      
                      (570
                      )
                      
                      
                      2,055Decrease
      (Increase) in Other Long-term Assets
                      
                      
                      32
                      
                      
                      
                      538
                      
                      
                      
                      (573
                      )Decrease
      (Increase) in Mining Reclamation Bond
                      
                      
                      -
                      
                      
                      
                      82
                      
                      
                      
                      (46
                      )Increase
      (Decrease) in Accounts Payable
                      
                      
                      (81
                      )
                      
                      
                      200
                      
                      
                      
                      171Decrease
      in Derivative Liability
                      
                      
                      -
                      
                      
                      
                      (2,689
                      )
                      
                      
                      (1,166
                      )Increase
      (Decrease) in Reclamation and Remediation
                      
                      
                      634
                      
                      
                      
                      (228
                      )
                      
                      
                      -Increase
      in Other Long-term Liabilities
                      
                      
                      295
                      
                      
                      
                      16
                      
                      
                      
                      62Increase
      in Deferred Tax Liability
                      
                      
                      4,200
                      
                      
                      
                      2,170
                      
                      
                      
                      2,063Increase
      (Decrease) in Accrued Expenses
                      
                      
                      3,407
                      
                      
                      
                      (1,040
                      )
                      
                      
                      2,069Net
      Cash Provided By Operating Activities
                      
                      
                      14,731
                      
                      
                      
                      7,536
                      
                      
                      
                      6,318Cash
      Flow From Investing Activities:Decrease
      in Other Investments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      28Purchase
      of Mining, Milling and Other Property andEquipment
                      
                      
                      (6,048
                      )
                      
                      
                      (4,994
                      )
                      
                      
                      (5,417
                      )Purchase
      of Intangibles
                      
                      
                      (467
                      )
                      
                      
                      (180
                      )
                      
                      
                      (90
                      )Net
      Cash Used in Investing Activities
                      
                      
                      (6,515
                      )
                      
                      
                      (5,174
                      )
                      
                      
                      (5,479
                      )
  The
      accompanying notes are an integral part of the financial
      statements.
  F-9
 
 CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF CASH FLOWS – CONTINUED(in
      thousands, except for share and per share amounts)
  For
      TheYear
      EndedJuly
      31,2010
                          
                          
                          2009
                          
                          
                          2008Cash
      Flow From Financing Activities:Proceeds
      from Affiliate, net
                          
                          $
                          -
                          
                          
                          $
                          6
                          
                          
                          $
                          7Repayments
      on Credit Facility
                          
                          
                          (3,600
                          )
                          
                          
                          (4,500
                          )
                          
                          
                          -Proceeds
      From Issuance of Common Stock
                          
                          
                          565
                          
                          
                          
                          319
                          
                          
                          
                          7,474Deferred
      Finance Costs
                          
                          
                          (113
                          )
                          
                          
                          -
                          
                          
                          
                          (175
                          )Net
      Cash (Used in)Provided By Financing Activities
                          
                          
                          (3,148
                          )
                          
                          
                          (4,175
                          )
                          
                          
                          7,306Effect
      of Exchange Rate Changes
                          
                          
                          609
                          
                          
                          
                          (2,731
                          )
                          
                          
                          622Increase
      (Decrease) In Cash and Cash Equivalents
                          
                          
                          5,677
                          
                          
                          
                          (4,544
                          )
                          
                          
                          8,767Cash
      and Cash Equivalents - Beginning
                          
                          
                          6,448
                          
                          
                          
                          10,992
                          
                          
                          
                          2,225Cash
      and Cash Equivalents – Ending
                          
                          $
                          12,125
                          
                          
                          $
                          6,448
                          
                          
                          $
                          10,992Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                          
                          $
                          396
                          
                          
                          $
                          647
                          
                          
                          $
                          1,235Cash
      Paid For Income Taxes
                          
                          $
                          6,669
                          
                          
                          $
                          4,213
                          
                          
                          $
                          1,373Non-Cash
      Financing Activities:Issuance
      of common stock and warrants as payment of
      financing  costs
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          103Change
      in Fair Value of Interest Rate Swaps
                          
                          $
                          153
                          
                          
                          $
                          23
                          
                          
                          $
                          141Change
      in Fair Value of Asset Retirement Obligation
                          
                          $
                          634
                          
                          
                          $
                          222
                          
                          
                          $
                          293
  The
      accompanying notes are an integral part of the financial
      statements.
 
 F-10
  CAPITAL
GOLD CORPORATION
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JULY 31,
2010
 (in
thousands, except for per share and ounce amounts)
 
 NOTE 1 -
Basis of Presentation
 
 Capital
Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
in February 1982 in the State of Nevada. During March 2003, the Company's
stockholders approved an amendment to the Articles of Incorporation to change
its name from Leadville Mining and Milling Corp. to Capital Gold Corporation. In
November 2005, the Company reincorporated in Delaware.  Capital Gold
Corporation is engaged in the mining, exploration and development of gold
properties in Mexico.  Our primary focus is on the operation and
development of the El Chanate project, as well as the development of our Orion
Project in the State of Nayarit Mexico.  All of the Company's mining
activities are being performed in Mexico.
 
 On 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.
 
 During
thefirst
part of calendar 2008, Royal Gold, Inc. acquired from Anglo Gold the right to
receive both of the net smelter returns.  As of July 31, 2010, we have
incurred approximately $5,567 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, 2010, we
have approximately $11,451 remaining to be incurred on the net smelter
return.
 
 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 the target number of 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-11
  NOTE 2 –
PRIOR YEAR RESTATEMENT
  In
connection with completing the consolidated financial statements as of July 31,
2010, the Company determined that it had previously incorrectly translated the
carrying value of its property and equipment as part of its consolidating
procedures.  This error resulted in both an overstatement of property
and equipment and accumulated other comprehensive income.  The effect
of correcting the Company’s prior year financial statements is presented as
follows:
  Financial
      Statement Caption
                
                As
      Previously Reported
                
                
                As
      CorrectedProperty
      and equipment – 7/31/09
                
                $
                22,417
                
                
                $
                18,492Accumulated
      Other Comprehensive Income (Loss) – 7/31/09
                
                $
                (1,978
                )
                
                $
                (5,903
                )Accumulated
      Other Comprehensive Income (Loss) – 7/31/08
                
                $
                760
                
                
                $
                2,459Accumulated
      Other Comprehensive Income (Loss) – 7/31/07
                
                $
                304
                
                
                $
                121Foreign
      currency translation adjustment – year ended 7/31/09
                
                $
                (2,731
                )
                
                $
                (8,355
                )Foreign
      currency translation adjustment – year ended 7/31/08
                
                $
                622
                
                
                $
                2,504
  This
restatement had no impact on the Company’s previously reported net income or
cash flows from operations;  the Company has determined that the
impact of this restatement is not material to the previously issued annual and
interim unaudited consolidated financial statements using the guidance of SEC
Staff Accounting Bulletin ("SAB”) No. 99 and
SAB 108.
 
 NOTE 3 -
Summary of Significant Accounting Policies
 
 Principles 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 a former officer and
director of the Company for mining support services. Ownership was relinquished
upon their recent resignations, and as of July 31, 2010, the Company was in the
process of transitioning ownership.  These services include, but are
not limited to, the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at slightly above
cost.  This entity is considered a variable interest entity in
accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") guidance for consolidation
accounting.  All significant intercompany accounts and transactions
are eliminated in consolidation.  Certain items in these financial
statements have been reclassified to conform to the current period
presentation.
 
 The
financial information in the accompanying consolidated financial statements as
of the fiscal year ended July 31, 2009 and all prior periods presented has been
recast so that the basis of presentation is consistent with that of the
financial information as of July 31, 2010. This recast reflects a 1-for-4
reverse stock split of the Company’s common stock that became effective on
January 25, 2010.
  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.
 
 F-12
 Accounts
Receivable
 
 Accounts
receivable represents amounts due but not yet received from customers upon sales
of precious metals.
 
 Marketable
Securities
 
 The
Company accounts for its investments in marketable securities in accordance with
ASC guidance for Investments—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:
  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.
  F-13
  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.
  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.
  F-14
  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
ASC guidance for asset retirement and environmental obligations.
 
 Deferred Financing
Costs
 
 Deferred
financing costs which were included in other assets relate to costs incurred in
connection with bank borrowings and are amortized over the term of the related
borrowings.
 
 Intangible
Assets
 
 Purchased
intangible assets consisting of rights of way, easements, net profit interests,
etc. are carried at cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic lives of the respective assets,
generally five years or using the units of production method. It is the
Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
ASC guidance for intangibles. There was no impairment at July 31,
2010.
 
 Fair Value of Financial
Instruments
 
 The
carrying value of our financial instruments, including cash and cash
equivalents, marketable securities, loans receivable, accrued expenses and
accounts payable approximated fair value because of the short maturity of these
instruments.  The carrying amount of the Company’s accounts receivable
balance approximates fair value.  The carrying value of the Company’s
long-term debt approximates fair value.
 
 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.
  F-15
 Revenues
from by-product sales, which consists of silver, are credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $1,400, $1,076 and
$707 for the fiscal years ended July 31, 2010, 2009 and 2008,
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
 
 On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures.  The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.
 
 On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
  Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
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. In accordance with ASC guidance for income taxes, the
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits, which are, on a more likely than not
basis, not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
 
 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.
  F-16
  Such options and warrants may be
exercisable at varying exercise prices currently ranging from $1.40 to $3.73per share of
common stock. Certain of these grants are exercisable immediately upon grant
while others vest. Certain grants have vested or are vesting over a period of
between three and five years. Also, certain grants contain a provision whereby
they become immediately exercisable upon a change of control.
 
 The
Company accounts for stock compensation under ASC guidance for compensation –
stock compensation, which requires the Company to expense the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. This expense must be recognized ratably over
the requisite service period following the date of grant.
 
 The Company accounts for non-employee
equity based awards in which goods or services are the consideration received
for the equity instruments issued at their fair value.
 
 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’s 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, and expected life. The
estimate of the number of forfeitures considers historical employee turnover
rates and expectations about the future.  The estimated per share
weighted average grant-date fair values of stock options and warrants granted
during the fiscal years ended July 31, 2010, 2009 and 2008 were
$2.16,  $1.16 and $1.36, respectively. The fair values of the options
and warrants granted were estimated based on the following weighted average
assumptions:
 
 Year
      ended July 31,2010
                        
                        2009
                        
                        2008Expected
      volatility
                        71.25%
      – 79.72%
                        
                        69.98
      – 79.72%
                        
                        47.60
      – 60.88%Risk-free
      interest rate
                        1.76
      – 2.48%
                        
                        0.86
      – 1.56%
                        
                        4.61%Expected
      dividend yield
                        -
                        
                        -
                        
                        -Expected
      life
                        5
      years
                        
                        2 -
      5 years
                        
                        5.5
      yearsForfeiture
      rate
                        -
                        
                        -
                        
                        -
 
 
 Stock
option and activity for employees during the fiscal years ended July 31, 2010,
2009 and 2008 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, 2007
                  
                  
                  625,000
                  
                  
                  $
                  1.36
                  
                  
                  
                  1.20
                  
                  
                  $
                  255Options
      granted*
                  
                  
                  625,000
                  
                  
                  
                  2.52
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (362,500
                  )
                  
                  
                  1.28
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2008
                  
                  
                  887,500
                  
                  
                  $
                  2.20
                  
                  
                  
                  4.00
                  
                  
                  $
                  334Options
      granted*
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (176,432
                  )
                  
                  
                  1.48
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (86,068
                  )
                  
                  
                  1.40
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at July 31, 2009
                  
                  
                  875,000
                  
                  
                  $
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  $
                  70Options
      granted*
                  
                  
                  500,000
                  
                  
                  $
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (128,638
                  )
                  
                  
                  2.39
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (1,015,112
                  )
                  
                  
                  2.93
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      outstanding at July 31, 2010
                  
                  
                  231,250
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.37
                  
                  
                  $
                  280Options
      exercisable at July 31, 2010
                  
                  
                  138,750
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.37
                  
                  
                  $
                  168
  *
Issuances under 2006 Equity Incentive Plan.
  F-17
  Unvested
      stock option balances for employees at July 31, 2010, 2009 and 2008 are as
      follows:  Number
      of Options
                  
                  
                  Weighted
                    average
                    exercise
                    price
                  
                  
                  Weighted
                    average
                    remaining
                    contracted
                      term
      (years)
                  
                  
                  Aggregate
                    Intrinsic
      valueOutstanding
      at July 31, 2007
                  
                  
                  37,500
                  
                  
                  $
                  1.28
                  
                  
                  
                  1.67
                  
                  
                  $
                  17Options
      granted
                  
                  
                  625,000
                  
                  
                  
                  2.52
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (225,000
                  )
                  
                  
                  2.32
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options
                    Outstanding
      at July 31, 2008
                  
                  
                  437,500
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.49
                  
                  
                  $
                  8Options
      granted
                  
                  
                  250,000
                  
                  
                  
                  1.96
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (250,000
                  )
                  
                  
                  2.24
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options outstanding at July 31, 2009
                  
                  
                  437,500
                  
                  
                  $
                  2.36
                  
                  
                  
                  5.18
                  
                  
                  $
                  35Options
      granted
                  
                  
                  500,000
                  
                  
                  
                  3.60
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      vested
                  
                  
                  (237,500
                  )
                  
                  
                  3.23
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (607,500
                  )
                  
                  
                  3.02
                  
                  
                  
                  -
                  
                  
                  
                  -Unvested
      Options outstanding at July 31, 2010
                  
                  
                  92,500
                  
                  
                  $
                  2.52
                  
                  
                  
                  4.37
                  
                  
                  $
                  112
  F-18
  Stock
option and warrant activity for non-employees during the years ended July 31,
2010, 2009 and 2008 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, 2007
                
                
                5,633,886
                
                
                $
                1.32
                
                
                
                1.48
                
                
                $
                2,578Options
      granted*
                
                
                428,750
                
                
                
                2.64Options
      exercised
                
                
                (5,388,886
                )
                
                
                1.32
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (170,000
                )
                
                
                1.20
                
                
                
                -
                
                
                
                -Warrants
      and options outstanding at July 31, 2008
                
                
                503,750
                
                
                $
                2.48
                
                
                
                3.54
                
                
                $
                54Options
      granted
                
                
                350,000
                
                
                
                2.00
                
                
                
                -
                
                
                
                -Options
      exercised
                
                
                (37,500
                )
                
                
                1.56
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (37,500
                )
                
                
                1.56
                
                
                
                -
                
                
                
                -Warrants
      and options outstanding at July 31, 2009
                
                
                778,750
                
                
                $
                2.36
                
                
                
                3.36
                
                
                $
                73Options
      granted
                
                
                237,500
                
                
                
                3.63
                
                
                
                -
                
                
                
                -Warrants
      and options exercised
                
                
                (239,954
                )
                
                
                2.83
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (388,796
                )
                
                
                2.16
                
                
                
                -
                
                
                
                -Options
      outstanding at July 31, 2010
                
                
                387,500
                
                
                $
                3.02
                
                
                
                3.97
                
                
                $
                250Options
      exercisable at July 31, 2010
                
                
                220,833
                
                
                $
                2.88
                
                
                
                1.24
                
                
                $
                187
  * 278,750
issued under 2006 Equity Incentive Plan.
   Unvested
      stock option balances for non-employees at July 31, 2010, 2009 and 2008
      are as follows:
 
  Number
      of Options
                
                
                Weighted
                  Average
                  Exercise
                    Price
                
                
                Weighted
                  average
                  remaining
                  contracted
                    term
      (years)
                
                
                Aggregate
                  Intrinsic
      valueOutstanding
      at July 31, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      granted
                
                
                162,500
                
                
                
                2.52
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (48,750
                )
                
                
                2.52
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2008
                
                
                113,750
                
                
                $
                2.52
                
                
                
                4.49
                
                
                $
                3Options
      granted
                
                
                318,750
                
                
                
                1.96
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (191,875
                )
                
                
                2.04
                
                
                
                -
                
                
                
                -Outstanding
      at July 31, 2009
                
                
                240,625
                
                
                $
                2.16
                
                
                
                4.88
                
                
                $
                70Options
      granted
                
                
                237,500
                
                
                
                3.63
                
                
                
                -
                
                
                
                -Options
      vested
                
                
                (154,166
                )
                
                
                3.18
                
                
                
                -
                
                
                
                -Options
      expired
                
                
                (157,292
                )
                
                
                2.25
                
                
                
                -
                
                
                
                -Unvested
      options outstanding at July 31, 2010
                
                
                166,667
                
                
                $
                3.21
                
                
                
                4.32
                
                
                $
                77
  F-19
  The impact on the Company’s results of
operations of recording equity based compensation for the fiscal years ended
July 31, 2010, 2009 and 2008, for employees and non-employees was approximately
$994, $894 and $987 and reduced earnings per share by $0.02, $0.02 and $0.02 per
basic and diluted share, respectively.  The Company has not recognized
any tax benefit or expense for the fiscal years ended July 31, 2010, 2009 and
2008, 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, 2010 and 2009, there was
approximately $217 and $792, 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.
 
 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 $250,000 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
in accordance with ASC guidance for derivatives and hedging.
 
 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.
  F-20
  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.
 
 Recently Issued Accounting
Pronouncements
 
 The
Accounting Standards Codification
 
 In
June 2009, the Financial Accounting Standards Board (“FASB”) established
the FASB Accounting Standards Codification(“ASC”) as the single source of authoritative GAAP to be applied by
nongovernmental entities. The ASC is a new structure which took existing
accounting pronouncements and organized them by accounting topic. Relevant
authoritative literature issued by the Securities and Exchange Commission
(“SEC”) and select SEC staff interpretations and administrative literature was
also included in the ASC. All other accounting guidance not included in the ASC
is non-authoritative. The ASC was effective for the Company’s interim quarterly
period beginning August 1, 2009. The adoption of the ASC did not have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.
  
 Share-Based
Payment Transactions
 
 Effective
August 1, 2009, the Company adopted a provision in accordance with ASC guidance
for earnings per share (originally issued as FASB Staff Position No. EITF
03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities”).  This guidance
establishes that unvested share-based payment awards that contain nonforfeitable
rights to dividends are participating securities and shall be included in the
computation of earnings per share under the two-class method. The adoption of
the ASC did not have a material effect on the Company’s Consolidated
Financial Statements.
 
 F-21
 Fair
Value Measurements
 
 In
January 2010, the ASC guidance for fair value measurements and disclosure was
updated to require additional disclosures related to: i) transfers in and
out of level 1 and 2 fair value measurements and ii) enhanced detail
in the level 3 reconciliation. The guidance was amended to provide clarity
about: i) the level of disaggregation required for assets and liabilities
and ii) the disclosures required for inputs and valuation techniques used
to measure fair value for both recurring and nonrecurring measurements that fall
in either level 2 or level 3. The updated guidance was effective for
the Company’s interim reporting period beginning February 1, 2010, with the
exception of the Level 3 disaggregation, which is effective for the fiscal
years beginning August 1, 2011. The Company adopted this guidance on the
Company’s consolidated financial position, results of operations and cash
flows.
 
 Variable
Interest Entities
 
 In
June 2009, the ASC guidance for consolidation accounting was updated to
require 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. The
updated guidance also requires ongoing reassessments of the primary beneficiary
of a VIE. The updated guidance is effective for the Company’s fiscal year
beginning August 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.
   Equity-linked
Financial Instruments
   In
June 2008, the ASC guidance for derivatives and hedging when accounting for
contracts in an entity’s own equity was updated to clarify the determination of
whether an instrument (or embedded feature) is indexed to an entity’s own stock
which would qualify as a scope exception from hedge accounting. The updated
guidance was effective for the Company’s fiscal year beginning August 1,
2009. The adoption had no impact on the Company’s consolidated financial
position or results of operations.
 
 Accounting
for the Useful Life of Intangibles
 
 In
April 2008, the ASC guidance for goodwill and other intangibles was updated
to amend the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this update is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset under guidance
for business combinations. The updated guidance was effective for the Company’s
fiscal year beginning August 1, 2009 and was applied prospectively to
intangible assets acquired after the effective date. The adoption had no impact
on the Company’s consolidated financial position, results of operations or cash
flows.
 
 F-22
  NOTE 4 -
Marketable Securities
 
 Marketable
securities are classified as current assets and are summarized as
follows:
 
 (in
      thousands)July
      31,
                                  2010
                                
                                
                                July
      31,
                                  2009Marketable
      equity securities, at cost
                                
                                $
                                50
                                
                                
                                $
                                50Marketable
      equity securities, at fair value
                                  (See
      Notes 13)
                                
                                $
                                30
                                
                                
                                $
                                35
 
 
 NOTE 5 –
Material and Supplies Inventories
 
 (in
      thousands)July
      31,
                                    2010
                                  
                                  
                                  July
      31,
                                    2009Materials,
      supplies and other
                                  
                                  $
                                  1,953
                                  
                                  
                                  $
                                  1,381Total
                                  
                                  $
                                  1,953
                                  
                                  
                                  $
                                  1,381
   NOTE 6 -
Ore on Leach Pads and Inventories (“In-Process Inventory”)
  (in
      thousands)July
      31,
                                  2010
                                
                                
                                July
      31,
                                  2009Ore
      on leach pads
                                
                                $
                                32,896
                                
                                
                                $
                                20,024Total
                                
                                $
                                32,896
                                
                                
                                $
                                20,024
   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.
  F-23
  NOTE 7 –
Other Current Assets
 
 Other
current assets consist of the following:
 
 (in
      thousands)July
      31,
                                                        2010
                                                      
                                                      
                                                      July
      31,
                                                        2009Value
      added tax to be refunded
                                                      
                                                      $
                                                      891
                                                      
                                                      
                                                      $
                                                      1,032Note
      receivable – Nayarit
                                                      
                                                      
                                                      350
                                                      
                                                      
                                                      
                                                      -MRS
      receivable (Note 10)
                                                      
                                                      
                                                      210
                                                      
                                                      
                                                      
                                                      -Loans
      receivable – affiliate
                                                      
                                                      
                                                      15
                                                      
                                                      
                                                      
                                                      33Deposit
                                                      
                                                      
                                                      5
                                                      
                                                      
                                                      
                                                      26Other
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      10Total
      Other Current Assets
                                                      
                                                      $
                                                      1,471
                                                      
                                                      
                                                      $
                                                      1,101
 
 
 NOTE 8 –
Property and Equipment
 
 Property
and Equipment consist of the following:
 
 (in
      thousands)July
      31,
                                                      2010
                                                    
                                                    
                                                    July
      31,
                                                      2009Process
      equipment and facilities
                                                    
                                                    $
                                                    29,038
                                                    
                                                    
                                                    $
                                                    22,304Mining
      equipment
                                                    
                                                    
                                                    2,180
                                                    
                                                    
                                                    
                                                    1,853Mineral properties
                                                    
                                                    
                                                    152
                                                    
                                                    
                                                    
                                                    166Construction
      in progress
                                                    
                                                    
                                                    165
                                                    
                                                    
                                                    
                                                    71Computer
      and office equipment
                                                    
                                                    
                                                    366
                                                    
                                                    
                                                    
                                                    347Improvements
                                                    
                                                    
                                                    13
                                                    
                                                    
                                                    
                                                    13Furniture
                                                    
                                                    
                                                    43
                                                    
                                                    
                                                    
                                                    41Total
                                                    
                                                    
                                                    31,957
                                                    
                                                    
                                                    
                                                    24,795Less:
      accumulated depreciation
                                                    
                                                    
                                                    (10,567
                                                    )
                                                    
                                                    
                                                    (6,303
                                                    )Property
      and equipment, net
                                                    
                                                    $
                                                    21,390
                                                    
                                                    
                                                    $
                                                    18,492
 
 In May
2010, the Company initiated the planning and permitting on the construction of
an additional leach pad.  The total capacity of this additional leach
pad will be approximately 8.5 million tonnes and cost approximately
$7,500.  Construction commenced in July 2010.
 
 Depreciation
expense for the fiscal years ended July 31, 2010, 2009 and 2008 was
approximately $2,884, $1,998 and $1,820, respectively.
 
 
 NOTE 9 -
Intangible Assets
 
 Intangible
assets consist of the following:
 
 (in
      thousands)July
      31,
                                                    2010
                                                  
                                                  
                                                  July
      31,
                                                    2009Water
      Rights
                                                  
                                                  $
                                                  510
                                                  
                                                  
                                                  $
                                                  241Reforestation
      fee
                                                  
                                                  
                                                  271
                                                  
                                                  
                                                  
                                                  73Mobilization
      Payment to Mineral Contractor
                                                  
                                                  
                                                  70
                                                  
                                                  
                                                  
                                                  70Investment
      in Right of Way
                                                  
                                                  
                                                  18
                                                  
                                                  
                                                  
                                                  18Total
                                                  
                                                  
                                                  869
                                                  
                                                  
                                                  
                                                  402Accumulated
      Amortization
                                                  
                                                  
                                                  (139
                                                  )
                                                  
                                                  
                                                  (84
                                                  )Intangible
      assets, net
                                                  
                                                  $
                                                  730
                                                  
                                                  
                                                  $
                                                  318
  F-24
  Purchased
intangible assets consisting of rights of way, water rights, and easements, 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 ASC guidance for goodwill and other
intangibles. There was no impairment at July 31, 2010.
 
 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, 2010, 2009 and 2008 was approximately $55,
$43 and $530, respectively.
 
 Amortization of intangibles
anticipated for each of the next five years is as follows for the fiscal year
ended July 31, 2011 - $63, 2012 - $56, 2013 - $54, 2014 - $61, 20105 -
$55.
 
 
 NOTE 10 -
Mining Concessions
 
 Mining
concessions consists of the following:
 
 (in
      thousands)July
      31,
                                        2010
                                      
                                      
                                      July
      31,
                                        2009El
      Chanate
                                      
                                      $
                                      49
                                      
                                      
                                      $
                                      45El
      Charro
                                      
                                      
                                      25
                                      
                                      
                                      
                                      25Total
                                      
                                      
                                      74
                                      
                                      
                                      
                                      70Less:
      accumulated amortization
                                      
                                      
                                      (22
                                      )
                                      
                                      
                                      (19
                                      )Total
                                      
                                      $
                                      52
                                      
                                      
                                      $
                                      51
 
 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, 2010, 2009 and 2008 was approximately $3, $8 and $8,
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 –
Note Receivable
 
 On
January 25, 2010, the Company entered into a Collateral Agreement (the
“Collateral Agreement”) with Metal Recovery Solutions, LLC (“MRS”), a
privately-held Nevada company, in which it was proposed that the Company would
acquire twenty-five percent of all of the issued and outstanding equity of MRS
for an aggregate investment of $2,000.
 
 The
Collateral Agreement required the Company to promptly pay $500 to MRS, with the
Company’s intention to invest the remaining $1,500 being set forth in a letter
of intent (the “LOI”) entered into on January 25, 2010, the material terms of
which are non-binding. The Company’s obligation to invest the remaining $1,500
would only arise if the Company and MRS signed a definitive Investment Agreement
(the “Investment Agreement”) pursuant to which it is contemplated that such
remaining funds will be invested in stages, according to milestones that
MRS was expected to reach in the deployment of a gold recovery technology pilot
program at the Company’s El Chanate mine.
  F-25
  The
consummation of the Investment Agreement was contingent upon MRS meeting certain
requirements, including requirements with respect to its budget, business plan,
securing the employment of its founders and securing rights to certain
technology. In the event that the Investment Agreement would not be consummated,
the Collateral Agreement provides that the $500 payment to MRS be repaid with
interest (the “MRS Repayment”). Such repayment was secured by cash flows from
MRS’s Consulting / Services Agreement with a third-party gold mining company,
the expected value of which was $1,275 to MRS.  The Investment
Agreement was also subject to final approval by the Board of Directors of the
Company and the managers of MRS.
  On March
25, 2010, the Company elected not to pursue the implementation of the MRS
technology at its El Chanate mine.  Accordingly, the Company demanded
repayment of the amounts paid to MRS in accordance with the letter agreement
between MRS and the Company.  On May 12, 2010, the parties agreed to
reduce the MRS Repayment to $450 and the Company is currently receiving
repayment based on the original Collateral Agreement. The Company recorded the
remaining receivable amount of $210 as of July 31, 2010 as an Other Current
Asset (See Note 7).
  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, 2010, we estimated the reclamation
costs for the El Chanate site to be approximately $4,094.  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, 2010.  As of July 31, 2010 and 2009, approximately $2,373 and
$1,594, respectively, was accrued for reclamation obligations relating to
mineral properties in accordance with ASC guidance for asset retirement and
environmental obligations.
  The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the years ended July 31, 2010 and 2009:
 
  (in
      thousands)Balance
      as of July 31, 2008
                    
                    $
                    1,666Additions,
      changes in estimates and other
                    
                    
                    (184
                    )Liabilities
      settled
                    
                    
                    (44
                    )Accretion
      expense
                    
                    
                    156Balance
      as of July 31, 2009
                    
                    $
                    1,594Additions,
      changes in estimates and other
                    
                    
                    634Accretion
      expense
                    
                    
                    145Balance
      as of July 31, 2010
                    
                    $
                    2,373
 
 F-26
 
 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, 2007
                  
                  $
                  (124
                  )
                  
                  $
                  40
                  
                  
                  $
                  205
                  
                  
                  $
                  121Income
      (loss)
                  
                  
                  2,504
                  
                  
                  
                  (25
                  )
                  
                  
                  (141
                  )
                  
                  
                  2,338Balance
      as of July 31, 2008
                  
                  
                  2,380
                  
                  
                  
                  15
                  
                  
                  
                  64
                  
                  
                  
                  2,459Income
      (loss)
                  
                  
                  (8,355
                  )
                  
                  
                  (30
                  )
                  
                  
                  23
                  
                  
                  
                  (8,362
                  )Balance
      as of July 31, 2009
                  
                  $
                  (5,975
                  )
                  
                  $
                  (15
                  )
                  
                  $
                  87
                  
                  
                  $
                  (5,903
                  )Income
      (loss)
                  
                  
                  1,463
                  
                  
                  
                  (5
                  )
                  
                  
                  153
                  
                  
                  
                  1,611Balance
      as of July 31, 2010
                  
                  $
                  (4,512
                  )
                  
                  $
                  (20
                  )
                  
                  $
                  240
                  
                  
                  $
                  (4,292
                  )
 
 The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the years ended July 31, 2010, 2009 and 2008.
 
 
 NOTE 14 -
Related Party Transactions
 
 In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $7, $6 and $6 in expense reimbursements including office rent from
this entity for the years ended July 31, 2010, 2009 and 2008,
respectively.
 
 The Company utilizes a Mexican
Corporation, Caborca Industrial, for mining services. Caborca Industrial was
100% owned by the Company’s former Chief Executive Officer and another former
officer of the Company. Ownership was relinquished upon their recent
resignations, and as of July 31, 2010, the Company was in the process of
transitioning ownership. These services include but are not limited to the
payment of mining salaries and related costs. Caborca Industrial bills the
Company for these services at slightly above cost. Mining expenses charged by
Caborca Industrial and eliminated upon consolidation amounted to approximately
$5,807, $4,767 and $3,775 for the year ended July 31, 2010, 2009 and 2008,
respectively.
 
 The
Company incurred approximately $7, $15 and $7 for the years ended July 31,
2010, 2009 and 2008, respectively, for services provided related to marketing
materials. The firm providing the services is owned and operated by relatives of
the Company’s former President and COO, John Brownlie.
 
 During the years ended July 31, 2010,
2009 and 2008, the Company paid Jack Everett, its former Vice President
Exploration and Director, consulting fees of $0, $0 and $100,
respectively.  During the years ended July 31, 2010, 2009 and 2008,
the Company paid Robert Roningen, a former director, legal and consulting fees
of $28, $8 and $35, respectively.
 
 F-27
 
 NOTE 15 -
Stockholders' Equity
 
 Common
Stock
 
 At various stages in the Company’s
development, shares of the Company’s common stock have 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 287,500 shares of
common stock and 3,150,000 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 287,500 shares of common stock and 3,150,000
warrants as deferred financing costs of approximately $351 and $3,314,
respectively, on the Company's balance sheet. The issuance of 287,500 shares was
recorded at the fair market value of the Company's common stock at the closing
date or $1.22 per share.  The warrants were valued at approximately
$3,314 using the Black-Scholes option pricing model and were reflected as
deferred financing costs on the Company’s balance sheet.
 
 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 150,000 shares of
our common stock at an exercise price of $3.40 per share.  The
warrants were valued at approximately $103 using the Black-Scholes option
pricing model and were reflected as deferred financing costs on the Company’s
balance sheet as of July 31, 2008 .  The grant date fair value of each
stock warrant was $0.68.
 
 The balance of deferred financing costs
related to these warrants, net of amortization, as of July 31, 2010 and 2009 was
approximately $1,004 and $1,808.  Amortization expense for the years
ended July 31, 2010, 2009 and 2008, was approximately $803, $803, and $930,
respectively.
 
 Recapitalization
 
 In February 2007, the Company's
Certificate of Incorporation was amended to increase the Company's authorized
shares of capital stock from 50,000,000 to 62,500,000 shares.  In
January 2008, the Company amended its Certificate of Incorporation to increase
the Company’s authorized shares of capital stock from 62,500,000 to 75,000,000
shares.
 
 Reverse 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 deemed 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
approved and recommended 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.
 
 On
January 25, 2010, the Company announced that, to meet minimum share price
requirements in connection with its NYSE Euronext listing, it effected a reverse
stock split, with every four (4) shares of common stock of the Company issued
and outstanding being converted into one (1) share of common stock. As noted
above, the reverse split was originally approved by shareholders at the Annual
Shareholders Meeting held on October 31, 2008 and subsequently ratified by
shareholders at the recent Annual Shareholders Meeting held on January 19,
2010.    No fractional common shares were issued in connection with
the reverse split. A holder of common shares, who otherwise would have been
entitled to receive a fractional share as a result of the reverse split,
received an amount in cash equal to the dollar amount multiplied by such
fractional entitlement.
 
 F-28
 On February 1, 2010, the securities
of Capital Gold Corporation were approved by the NYSE EURONEXT LLC (the
“Exchange”) for listing and registration.
 
 Restricted
Shares
 
 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 273,750 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 $2.52 on the date of grant resulting in the Company recording approximately
$691 in deferred compensation cost.  For the years ended July 31,
2010, 2009 and 2008, the Company has recorded approximately $112, $230, and $194
in equity compensation expense upon the vesting of a portion of restricted
shares each period, respectively.
 
 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 128,750
shares under our 2006 Equity Incentive Plan. The restricted shares granted
vested immediately.  The fair value of the Company’s stock was $2.80
on the date of grant resulting in the Company recording approximately $360 in
stock based compensation expense.
 
 During the year ended July 31, 2009,
the Company issued 55,625 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 $1.36
to $2.08 on the date of grant resulting in the Company recording approximately
$113 in stock based compensation expense.
 
 In 2010,
as part of the settlement agreement with the Company’s former Executive
Vice-President, upon his termination without cause, the unvested portion of a
previous restricted share grant of 41,667 shares was forfeited. As part of the
severance agreement with the Company’s former Chief Executive Officer, the
unvested portion of a previous restricted share grant of 20,833 shares was
forfeited. An additional 833 shares, the unvested portion of a previous
restricted share grant, was forfeited by a former employee of the Company. For
the year ended July 31, 2010, the Company recorded adjustments to additional
paid in capital and deferred compensation costs totaling approximately $127
related to these forfeitures.
 
 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 August 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price
ranging from $1.72 to $2.00 per share to outside parties for services
provided.  These options are for the purchase of 116,250 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 stock based compensation expense.  The average
grant date fair value of each stock option was $0.48 with an exercise price of
no less than fair market value of the underlying stock at the date of
grant.
 
 F-29
 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 125,000, 125,000, 125,000, 125,000, 87,500, 37,500,
37,500, 37,500, 25,000, 25,000 and 37,500 stock options, respectively,
aggregating 787,500 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 $2.52 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
787,500 options received by these individuals totaling $1,060.  For
the fiscal years ended July 31, 2010, 2009 and 2008, the Company recorded
approximately $113, $205 and $375 in stock based compensation expense on the
vested portion of these stock options, respectively. The grant date fair value
of each stock option was $1.36.
 
 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 $2.60 per share to an investor relations firm for services
provided.  These options were for the purchase of 25,000
shares.  The Company utilized the Black-Scholes Method to fair value
the 25,000 options received by this firm and recorded approximately $6 as stock
based compensation expense.  The grant date fair value of each stock
option was $0.24.
 
 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 $1.40 per share to its then securities
counsel.  These options were for the purchase of 6,250
shares.  The Company utilized the Black-Scholes Method to fair value
the 6,250 options received by these individuals and recorded approximately $4 as
equity based compensation expense.  The grant date fair value of each
stock option was $0.64.
 
 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 568,750
stock options under our 2006 Equity Incentive Plan as incentive compensation.
The stock options were awarded as follows:  Gifford Dieterle – 125,000,
John Brownlie – 125,000, Jeffrey Pritchard – 125,000, Christopher Chipman –
62,500, Scott Hazlitt – 62,500, Ian Shaw – 18,750, John Postle – 12,500, Mark T.
Nesbitt – 12,500, Roger Newell -12,500 and Robert Roningen – 12,500. 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 $1.96 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 568,750 options received by these individuals totaling
$647.  For the fiscal years ended July 31, 2010, 2009 and 2008, the
Company recorded approximately $124, $335 and $0 in equity compensation expense
on the vested portion of these stock options, respectively.  The grant
date fair value of each stock option was $1.16.
 
 F-30
 On January 19, 2010, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 500,000, 50,000, 50,000,
50,000 and 37,500 options to John Brownlie, Leonard J. Sojka, John Cutler,
Stephen Cooper and Trey Wasser, respectively, aggregating 687,500 stock options
under our 2006 Equity Incentive Plan. The stock options for John Brownlie and
Trey Wasser have a term of five years and vest as follows: one-third vested upon
issuance and the balance vests on a one-third basis annually thereafter. The
stock options for Leonard J. Sojka, John Cutler, and Stephen Cooper have a term
of five years and vest 25,000 on January 19, 2010, 12,500 on January 19, 2011
and 12,500 on January 19, 2012.  The exercise price of the stock options is
$3.60 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 687,500 options received by
these individuals totaling $1,486.  For the year ended July 31, 2010 the
Company recorded approximately $592 in equity compensation expense on the vested
portion of these stock options, respectively. The grant date fair value of each
stock option was $2.16.
 
 On July 26, 2010, at the recommendation
of the Compensation Committee of the Board of Directors, the Company’s Board of
Directors approved the issuance of 25,000 and 25,000 options to Christopher
Chipman and Scott Hazlitt, respectively, aggregating 50,000 stock options under
our 2006 Equity Incentive Plan. The stock options have a term of five years and
vest as follows: 50% vested upon issuance and the balance vests 25% annually
thereafter. The exercise price of the stock options is $3.73 per share (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 50,000 options received by these
individuals totaling $105.  For the year ended July 31, 2010 the Company
recorded approximately $53 in equity compensation expense on the vested portion
of these stock options, respectively. The grant date fair value of each stock
option was $2.10.
 
 The Company received proceeds of
approximately $565, $319 and $7,474 during the years ended July 31, 2010, 2009
and 2008, from the exercising of an aggregate of 181,250, 213,932 and 5,748,544
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.  The Company also issued 187,342 shares upon the cashless
exercising of options during the year ended July 31, 2010.
 
 
 2006 Equity Incentive
Plan
 
 The 2006 Equity Incentive Plan (the
“Plan”), approved by stockholders on February 21, 2007, is intended to attract
and retain individuals of experience and ability, to provide incentive to the
Company’s employees, consultants, and non-employee directors, to encourage
employee and director proprietary interests in the Company, and to encourage
employees to remain in the Company’s employ.
 
 The Plan authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights and
restricted stock awards (each, an “Award”). A maximum of 4,375,000 shares of
common stock are reserved for potential issuance pursuant to Awards under the
Plan.  Unless sooner terminated, the Plan will continue in effect for
a period of 10 years from its effective date.
 
 F-31
 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 employee and non-employee options approved by the
Compensation Committee under the Equity Incentive Plan for the fiscal years
ended July 31, 2010, 2009 and 2008 is summarized below:
 2010
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2008Shares
                                                                          
                                                                          
                                                                          Option
      Price
                                                                          
                                                                          
                                                                          Weighted
                                                                            Average
                                                                            Exercise
                                                                            Price
                                                                          
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Option
      Price
                                                                          
                                                                          
                                                                          Weighted
                                                                            Average
                                                                            Exercise
                                                                            Price
                                                                          
                                                                          
                                                                          Shares
                                                                          
                                                                          
                                                                          Option
      Price
                                                                          
                                                                          
                                                                          Weighted
                                                                            Average
                                                                            Exercise
                                                                            PriceOutstanding
      beginning at year
                                                                          
                                                                          
                                                                          1,503,750
                                                                          
                                                                          
                                                                          $
                                                                          1.40-2.60
                                                                          
                                                                          
                                                                          $
                                                                          2.24
                                                                          
                                                                          
                                                                          
                                                                          1,166,250
                                                                          
                                                                          
                                                                          $
                                                                          1.44-1.80
                                                                          
                                                                          
                                                                          $
                                                                          1.52
                                                                          
                                                                          
                                                                          
                                                                          262,500
                                                                          
                                                                          
                                                                          $
                                                                          1.44-1.80
                                                                          
                                                                          
                                                                          $
                                                                          1.52Granted
                                                                          
                                                                          
                                                                          737,500
                                                                          
                                                                          
                                                                          
                                                                          3.60-3.73
                                                                          
                                                                          
                                                                          $
                                                                          3.61
                                                                          
                                                                          
                                                                          
                                                                          600,000
                                                                          
                                                                          
                                                                          
                                                                          1.40-2.60
                                                                          
                                                                          
                                                                          $
                                                                          2.00
                                                                          
                                                                          
                                                                          
                                                                          903,750
                                                                          
                                                                          
                                                                          
                                                                          1.52-2.52
                                                                          
                                                                          
                                                                          $
                                                                          2.44Canceled
                                                                          
                                                                          
                                                                          (1,403,908
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (86,068
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Exercised
                                                                          
                                                                          
                                                                          (218,592
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (176,432
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Outstanding
      end of year
                                                                          
                                                                          
                                                                          618,750
                                                                          
                                                                          
                                                                          $
                                                                          1.96-3.73
                                                                          
                                                                          
                                                                          $
                                                                          2.84
                                                                          
                                                                          
                                                                          
                                                                          1,503,750
                                                                          
                                                                          
                                                                          $
                                                                          1.40-2.60
                                                                          
                                                                          
                                                                          $
                                                                          2.24
                                                                          
                                                                          
                                                                          
                                                                          1,166,250
                                                                          
                                                                          
                                                                          $
                                                                          1.44-2.52
                                                                          
                                                                          
                                                                          $
                                                                          2.24Exercisable
                                                                          
                                                                          
                                                                          359,583
                                                                          
                                                                          
                                                                          $
                                                                          1.96-3.73
                                                                          
                                                                          
                                                                          $
                                                                          2.74
                                                                          
                                                                          
                                                                          
                                                                          975,625
                                                                          
                                                                          
                                                                          $
                                                                          1.40-2.60
                                                                          
                                                                          
                                                                          $
                                                                          2.40
                                                                          
                                                                          
                                                                          
                                                                          840,000
                                                                          
                                                                          
                                                                          $
                                                                          1.44-2.52
                                                                          
                                                                          
                                                                          $
                                                                          2.16Weighted  average
      remaining contractual life (years)
                                                                          
                                                                          4-5 years
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          4-5 years
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          5-6 years
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Available
      for future grants
                                                                          
                                                                          
                                                                          2,819,766
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          150,625
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          806,250
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
 
 
 NOTE 16 -
Debt
 
 Long
      term debt consists of the following:
                                            
                                            (in
      thousands)July
      31,
                                              2010
                                            
                                            
                                            July
      31,
                                              2009Total
      long-term debt
                                            
                                            $
                                            4,400
                                            
                                            
                                            $
                                            8,000Less
      current portion
                                            
                                            
                                            (3,600
                                            )
                                            
                                            
                                            (3,600
                                            )Long-term
      debt
                                            
                                            $
                                            800
                                            
                                            
                                            $
                                            4,400
 
 
 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, 2010 and 2009, the accrued interest on this facility was approximately $11
and $21, 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,
2010.  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.
 
 F-33
 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. $30,000, (iii) maintain a ratio of  debt to cash flow from
operations of no greater than 2.50:1.00, and (iv) a quarterly average minimum
liquidity of U.S. $500.  In addition, the Credit Agreement restricts,
among other things, the Company’s ability to incur additional debt, create liens
on its property, dispose of any assets, merge with other companies, enter into
hedge agreements, organize or invest in subsidiaries or make any investments
above a certain dollar limit.  A failure to comply with the
restrictions contained in the Credit Agreement could lead to an event of default
thereunder which could result in an acceleration of such indebtedness. As a
condition to closing the Nayarit Business Combination, the Company obtained the
consent of Standard Bank.
 
 The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro.  As
additional collateral for the Loan, the Company, together with its subsidiary,
Leadville Mining & Milling Holding Corporation, pledged all of its ownership
interest in MSR and Oro.
 
 On September 17, 2009, our $5,000
revolving loan contained within the Credit Agreement expired. The Company had
not drawn on this facility during the term period.
 
 On June 30, 2010, Capital Gold
Corporation (“Capital Gold” or the “Company”) entered into the First Amendment
to the Amended and Restated Credit Agreement (the “Amendment”) by and among our
wholly-owned Mexican subsidiaries Minera Santa Rita S. de R.L. de C.V. and Oro
de Altar S. de R.L. de C.V., as borrowers (“Borrowers”), the Company, as
guarantor, and Standard Bank PLC (“Standard Bank”), as the
lender.  The Amendment amends the Amended and Restated Credit
Agreement between the parties entered into on September 18, 2008 with
retroactive effect from July 17, 2008 (the “Credit Agreement”), which amended
and restated the Credit Agreement between the parties dated August 15,
2006.  The Credit Agreement provided for a senior secured term credit
facility in the aggregate amount of $12,500 (the “Term Facility”) and provided
for a senior secured revolving credit facility in the aggregate principal amount
of $5,000 (the “Revolving Facility”).   Capital Gold guarantees
all obligations of the Borrowers under the Term Facility and the Revolving
Facility. The material amendments to the Credit Agreement contained in the
Amendment are as follows:
 
 The
Amendment increases the Revolving Facility to $7,500.  The Revolving
Facility is available for a two-year period commencing June 30,
2010.  The Borrowers may request a borrowing of the Revolving Facility
from time to time, provided that each borrowing shall be in a minimum aggregate
amount of $500.  All amounts due under the Revolving Facility,
including all accrued interest and other amounts described in the Credit
Agreement, shall be due and payable on June 30, 3012.
 
 Amounts
borrowed under the Term Facility and the Revolving Facility bear interest at a
rate per annum equal to the LIBO Rate, as defined in the Credit Agreement, for
the applicable interest period plus the applicable margin.  The
applicable margin for the Revolving Facility was increased in the Amendment to
3.0% per annum.
  F-34
  As of
July 31, 2010, the Company was in compliance with all debt covenants and default
provisions.  The accounts of Caborca Industrial are not subject to the
debt covenants and default provisions.
 
 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 20 for more details on these transactions).
 
 Future
principal payments on the term loan are as follows (in thousands):
 
 Fiscal
      Years Ending July 31,2011
                      
                      $
                      3,6002012
                      
                      
                      800$
                      4,400
  
 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").
 
 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.  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.
 
 
 NOTE 18 -
Employee and Consulting Agreements
 
 Employment
Agreements
 
 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, the Company’s 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-35
 On
October 28, 2008, the Company 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 Amended and Restated Engagement
Agreement with J. Scott Hazlitt, our Vice President Mine
Development.  The agreement supersedes a January 1, 2007 employment
agreement between us and Mr. Hazlitt.  Pursuant to the Engagement
Agreement, as amended, Mr. Hazlitt serves as our Vice President 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 J. Scott Hazlitt, Vice President of Mine Development (collectively,
the “Amended Agreements”).
 
 On
January 19, 2010, the Compensation Committee of the Board of Directors of
the Company approved a new employment agreement (the “Agreement”) for John
Brownlie, the Company’s President, Chief Operating Officer and a Director
of the Company. The term of the agreement is for three years commencing
January 19, 2010, and will automatically extend for consecutive one-year terms
unless Mr. Brownlie or the Company notifies the other party that it does not
wish to extend the Agreement. The Agreement provided for an initial base
salary to Mr. Brownlie of $275 plus an immediate payment of $375 for
reaching certain milestones. The Agreement provided for an additional payment
upon the accomplishment of other goals. The Agreement also granted Mr. Brownlie
500,000 stock options.  The exercise price of the stock options is
$3.60 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 500,000 options.  For
the year ended July 31, 2010, the Company recorded approximately $360 in equity
compensation expense on the vested portion of these stock
options.  The grant date fair value of each stock option was
$2.16.  The stock options have a term of five years and vest as
follows: one-third vested upon issuance and the balance vests on a one-third
basis annually thereafter.
  F-36
 On March 18, 2010, at the
recommendation of the Compensation Committee and upon approval by the Board of
Directors, effective January 19, 2010, the Company entered into amended and
restated engagement agreements with Christopher Chipman, Chief Financial
Officer, and J. Scott Hazlitt, Vice President of Mine Development. The new
salaries were as follows: Christopher Chipman, Chief Financial Officer, $225 and
J. Scott Hazlitt, Vice President of Mine Development, $175.
 
 On July 1, 2010, at the recommendation
of the Compensation Committee and upon approval by the Board of Directors, the
Company entered into an amended and restated engagement agreement with J. Scott
Hazlitt, in connection with his promotion from Vice President of Mine
Development to Chief Operating Officer. Mr. Hazlitt’s salary was increased to
$200 in connection with his promotion.
 
 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.
 
 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, 2011 and 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.
 
 F-37
 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.
 
 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.
 
 Severance
Agreements
 
 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 received a lump sum
payment of approximately $426.
 
 F-38
 On March
11, 2010, the Company entered into an agreement with Gifford A.
Dieterle , the Chief Executive Officer (“CEO”) of the
Company  and Chairman of the Board, pursuant to which Mr. Dieterle
resigned his position as CEO and Chairman of the Board, effective March 18,
2010. Pursuant to the agreement, Mr. Dieterle received lump sum
payments totaling approximately $376 in September 2010, and additional
payments totaling approximately $288 will be due in 2011. In addition, Mr.
Dieterle is due an issuance of $100 in shares of the Company's common
stock, initially proposed to be received in September 2010.  The
number of common shares to be issued was determined by dividing $100 by the
volume weighted average closing sale price for the 10 trading days prior to
September 18, 2010 on NYSE EURONEXT.  The Toronto Stock Exchange
(“TSX”) provided conditional approval for this issuance provided no more than
27,000 common shares were to be issued without additional written consent of
TSX.  TSX provided this additional written consent on October 4, 2010
to allow the issuance of an additional 1,571 shares, for a total of 28,571
shares pursuant to the severance agreement.  The shares were issued,
accordingly, on October 4, 2010.
 
 On April
29, 2010, the Company entered into a severance agreement and general release
with John Brownlie, the Company’s President and Chief Operating Officer (“COO”),
pursuant to which Mr. Brownlie’s employment agreement terminated and he resigned
as President and COO effective upon the consummation of the Business combination
between the Company and Nayarit Gold on August 2, 2010.  Pursuant to
the Severance Agreement, Mr. Brownlie is entitled to severance payments in the
aggregate amount of approximately $1,388, payable over a six month period
beginning June 2010; along with an additional $375 associated with the closing
of the business combination agreement with Nayarit.  As of July 31,
2010, we have paid approximately $753.
 
 
 NOTE 19 -
Fair Value Measurements
 
 ASC
guidance for fair value measurements and disclosures establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value hierarchy are described
below:
  Level 1
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities;Level 2
              Quoted
      prices in markets that are not active, or inputs that are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability; 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
ASC guidance, assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.
 
 Fair
      Value at July 31, 2010
                                                        (in
      thousands)Assets:
                                                      
                                                      Total
                                                      
                                                      
                                                      Level
      1
                                                      
                                                      
                                                      Level
      2
                                                      
                                                      
                                                      Level
      3Cash
      equivalents
                                                      
                                                      $
                                                      2,798
                                                      
                                                      
                                                      $
                                                      2,798
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Marketable
      securities
                                                      
                                                      
                                                      30
                                                      
                                                      
                                                      
                                                      30
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -$
                                                      2,828
                                                      
                                                      
                                                      $
                                                      2,828
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -Liabilities:Interest
      rate swap
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      -$
                                                      40
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      40
                                                      
                                                      
                                                      $
                                                      -
 F-39
 
 The
Company’s cash equivalent instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted market prices. The
cash instruments that are valued based on quoted market prices in active markets
are primarily money market securities.
  The
Company’s marketable equity securities are valued using quoted market prices in
active markets and as such are classified within Level 1 of the fair value
hierarchy. The fair value of the marketable equity securities is calculated as
the quoted market price of the marketable equity security multiplied by the
quantity of shares held by the Company.
 
 The
Company has an interest rate swap contract to hedge a portion of the interest
rate risk exposure on its outstanding loan balance. The hedged portion of the
Company’s debt is valued using pricing models which require inputs, including
risk-free interest rates and credit spreads. Because the inputs are derived from
observable market data, the hedged portion of the debt is classified within
Level 2 of the fair value hierarchy.
 
 
 NOTE 20 -
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 years 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.
 
 In accordance with ASC guidance for
derivatives and hedging, 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.
 
 F-40
 The following is a reconciliation of
the derivative contracts regarding the Company’s Gold Price Protection
agreement:
 
 (in
      thousands)Liability
      balance as of July 31, 2008
                                    
                                    $
                                    738Loss
      on change in fair value of derivative
                                    
                                    
                                    1,975Net
      cash settlements
                                    
                                    
                                    (2,713
                                    )Liability
      balance as of July 31, 2009
                                    
                                    $
                                    -Loss
      on change in fair value of derivative
                                    
                                    
                                    -Net
      cash settlements
                                    
                                    
                                    -Liability
      balance as of July 31, 2010
                                    
                                    $
                                    -
 
 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)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
                                        
                                        $
                                        193Change
      in fair value of swap agreement
                                        
                                        
                                        27Interest
      expense (income)
                                        
                                        
                                        -Net
      cash settlements
                                        
                                        
                                        (180
                                        )Liability
      balance as of July 31, 2010
                                        
                                        $
                                        40
  F-41
  The Company is exposed to credit losses
in the event of non-performance by counterparties to these interest rate swap
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position with
each counterparty as required by ASC guidance for derivatives and
hedging.
  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 Results7/31/08
                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/A10/31/09
                Interest
      Rate contracts
                $          (16)
                Interest
      Income (Expense)
                (53)
                -
                N/A1/31/10
                Interest
      Rate contracts
                $            (8)
                Interest
      Income (Expense)
                (48)
                -
                N/A4/30/10
                Interest
      Rate contracts
                $            (1)
                Interest
      Income (Expense)
                (38)
                -
                N/A7/31/10
                Interest
      Rate contracts
                $            (2)
                Interest
      Income (Expense)
                (30)
                -
                N/A
   Quarter
      Ended
                Derivatives
      Not Designated in Hedging Relationships
                Location
      of Results
                Amount
      of Gain (Loss)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)
                $                -10/31/09
                Gold
      contracts
                Other
      Income (Expense)
                $                -1/31/10
                Gold
      contracts
                Other
      Income (Expense)
                $                -4/30/10
                Gold
      contracts
                Other
      Income (Expense)
                $                -7/31/10
                Gold
      contracts
                Other
      Income (Expense)
                $                -
  F-42
  Fair
Value of Derivative Instruments in a Statement of Financial Position and the
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):
  Liability
      DerivativesJuly
      31, 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
                    
                    $
                    193Liability
      DerivativesOctober
      31, 2009
                    
                    Balance
      Sheet Location
                    
                    Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                    
                    Current
      Liabilities
                    
                    $
                    154Derivatives
      designated as non- hedging instrumentsLiability
      DerivativesJanuary
      31, 2010
                    
                    Balance
      Sheet Location
                    
                    Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                    
                    Current
      Liabilities
                    
                    $
                    112Derivatives
      designated as non-hedging instrumentsLiability
      DerivativesApril
      30, 2010
                    
                    Balance
      Sheet Location
                    
                    Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                    
                    Current
      Liabilities
                    
                    $
                    72Liability
      DerivativesJuly
      31, 2010
                    
                    Balance
      Sheet Location
                    
                    Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                    
                    Current
      Liabilities
                    
                    $
                    40
 
 F-43
  NOTE 21 –
Accrued Expenses
 
 Accrued
      expenses consist of the
following:
  July
      31,
                                      2010
                                    
                                    
                                    July
      31,
                                      2009Net
      smelter return
                                    
                                    $
                                    388
                                    
                                    
                                    $
                                    212Mining
      contract
                                    
                                    
                                    497
                                    
                                    
                                    
                                    30Income
      tax payable
                                    
                                    
                                    1,900
                                    
                                    
                                    
                                    507Utilities
                                    
                                    
                                    126
                                    
                                    
                                    
                                    128Interest
                                    
                                    
                                    11
                                    
                                    
                                    
                                    21Legal
      and professional
                                    
                                    
                                    70
                                    
                                    
                                    
                                    125Salaries,
      wages and related benefits
                                    
                                    
                                    662
                                    
                                    
                                    
                                    533Severance
                                    
                                    
                                    1,279
                                    
                                    
                                    
                                    -Other
      liabilities
                                    
                                    
                                    107
                                    
                                    
                                    
                                    77$
                                    5,040
                                    
                                    
                                    $
                                    1,633
 
 F-44
 NOTE 22 -
Income Taxes
 
 The
Company’s income tax expense consisted of:
 
 July
      31,
                    2010
                  
                  
                  July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Current:United
      States
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  (8,062
                  )
                  
                  
                  (3,909
                  )
                  
                  
                  (2,111
                  )(8,062
                  )
                  
                  
                  (3,909
                  )
                  
                  
                  (2,111
                  )Deferred:United
      States
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Foreign
                  
                  
                  (3,963
                  )
                  
                  
                  (1,633
                  )
                  
                  
                  (1,396
                  )(3,963
                  )
                  
                  
                  (1,633
                  )
                  
                  
                  (1,396
                  )Total
                  
                  $
                  (12,025
                  )
                  
                  $
                  (5,542
                  )
                  
                  $
                  (3,507
                  )
 
 
 The
Company’s income (loss) from operations before income taxconsisted
of:
 
 July
      31,
                      2010
                    
                    
                    July
      31,
                      2009
                    
                    
                    July
      31,
                      2008United
      States
                    
                    $
                    (9,817
                    )
                    
                    $
                    (6,631
                    )
                    
                    $
                    (6,556
                    )Foreign
                    
                    
                    33,836
                    
                    
                    
                    22,580
                    
                    
                    
                    16,427Total
                    
                    $
                    24,019
                    
                    
                    $
                    15,949
                    
                    
                    $
                    9,871
 
 
 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,
                    2010
                  
                  
                  July
      31,
                    2009
                  
                  
                  July
      31,
                    2008Income
      before income tax
                  
                  $
                  24,019
                  
                  
                  $
                  15,949
                  
                  
                  $
                  9,871US
      statutory corporate income tax rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %
                  
                  
                  34
                  %Income
      tax expense computed at US statutory corporate income tax
    rate
                  
                  
                  (8,166
                  )
                  
                  
                  (5,423
                  )
                  
                  
                  (3,356
                  )Reconciling
      items:Change
      in valuation allowance on deferred tax assets
                  
                  
                  (2,843
                  )
                  
                  
                  (1,474
                  )
                  
                  
                  (1,137
                  )Royalty
      payments non-deductible
                  
                  
                  (844
                  )
                  
                  
                  -
                  
                  
                  
                  -Prior
      year true-ups
                  
                  
                  (722
                  )
                  
                  
                  -
                  
                  
                  
                  -Other
                  
                  
                  (521
                  )
                  
                  
                  -
                  
                  
                  
                  -Difference
      in foreign tax
                  
                  
                  1,071
                  
                  
                  
                  1,355
                  
                  
                  
                  986Income
      tax expense
                  
                  $
                  (12,025
                  )
                  
                  $
                  (5,542
                  )
                  
                  $
                  (3,507
                  )
 
 F-45
  Components
of the Company’s deferred income tax assets (liabilities) are as
follows:
 
 July
      31,
                      2010
                    
                    
                    July
      31,
                      2009
                    
                    
                    July
      31,
                      2008Net
      deferred income tax assets
      (liabilities),  non-current:Remediation
      and reclamation costs
                    
                    $
                    -
                    
                    
                    $
                    (44
                    )
                    
                    $
                    (29
                    )Net
      operating losses
                    
                    
                    15,592
                    
                    
                    
                    12,004
                    
                    
                    
                    9,334Depreciation
      and amortization
                    
                    
                    (971
                    )
                    
                    
                    76
                    
                    
                    
                    602$
                    14,621
                    
                    
                    $
                    12,036
                    
                    
                    $
                    9,907Valuation
      allowances
                    
                    
                    (15,592
                    )
                    
                    
                    (12,004
                    )
                    
                    
                    (9,334
                    )$
                    (971
                    )
                    
                    $
                    32
                    
                    
                    $
                    573Net
      deferred income tax liabilities, current:Inventory
      valuation
                    
                    $
                    (7,679
                    )
                    
                    $
                    (3,846
                    )
                    
                    $
                    (1,925
                    )Accounts
      receivable
                    
                    
                    -
                    
                    
                    
                    (567
                    )
                    
                    
                    (413
                    )Other
                    
                    
                    217
                    
                    
                    
                    180
                    
                    
                    
                    275$
                    (7,462
                    )
                    
                    $
                    (4,233
                    )
                    
                    $
                    (2,063
                    )
 
 
 The Company has not provided for U.S.
Federal and foreign withholding taxes on $44,607 of foreign subsidiary
undistributed earnings as of July 31, 2010. Such earnings are intended to be
reinvested indefinitely.
 
 On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system, which was
effective for tax year 2008.  This new flat tax system integrates with
the regular income tax system and is based on cash-basis net income that
includes only certain receipts and expenditures.  The flat tax is set
at 17.5% of cash-basis net income for tax year 2010, which increased from 17%
for tax year 2009.  If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax.  For the tax year 2010, the Mexican Government introduced a
reform where if the flat tax is negative, companies will not be permitted to
reduce the income tax, as it may only serve to reduce the regular flat tax
payable in that year or can be carried forward for a period of up to ten years
to reduce any future flat tax.
 
 On
January 1, 2010, the Mexican government enacted legislation, which increases the
regular income tax rate from 28% to 30%.  The regular income tax rate
will decrease to 29% in 2013 and then back to 28% in 2014, according to
legislation.
 
 Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly
period.  There is the possibility of implementation amendments by the
Mexican Government and the estimated future income tax liability recorded at the
balance sheet date may change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are,
on a more likely than not basis, not expected to be realized; in accordance with
ASC guidance for income taxes. Net deferred tax benefits related to the U.S.
operations have been fully reserved at July 31, 2010 and 2009. 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-46
  For income tax purposes in the United
States, the Company had available net operating loss carryforwards ("NOL") as of
July 31, 2010, 2009 and 2008 of $35,833, $27,912 and $22,179, 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 23 -
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 occupies space in Hermosillo, Sonora, Mexico that
commenced on March 1, 2010 and terminates on February 28, 2011.
 
 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 31,2011
                      
                      
                      2612012
                      
                      
                      2312013
                      
                      
                      30$
                      522
  
 Rent expense was approximately $184,
$155 and $107 for the years ended July 31, 2010, 2009 and 2008,
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-47
 
 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 occurrence and is surrounded entirely by the
Company’s other concessions.
 
 
 NOTE 24 –
Unaudited Supplementary Data
 
  The
following is a summary of selected fiscal quarterly financial information
(unaudited and in thousands except per share data and price):
   2010Three
      Months EndedOctober 31
                                
                                
                                January 31
                                
                                
                                April 30
                                
                                
                                July 31Revenues
                                
                                $
                                11,727
                                
                                
                                $
                                13,228
                                
                                
                                $
                                17,525
                                
                                
                                $
                                18,164Costs
      applicable to sales
                                
                                $
                                4,110
                                
                                
                                $
                                4,625
                                
                                
                                $
                                6,601
                                
                                
                                $
                                6,680Net
      income applicable to common shares
                                
                                $
                                2,939
                                
                                
                                $
                                2,944
                                
                                
                                $
                                2,779
                                
                                
                                $
                                3,332Net
      income per common share, basic
                                
                                $
                                0.06
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.07Net
      income per common share, diluted
                                
                                $
                                0.06
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.06
                                
                                
                                $
                                0.07Basic
      weighted-average shares outstanding
                                
                                
                                48,482
                                
                                
                                
                                48,494
                                
                                
                                
                                48,487
                                
                                
                                
                                48,577Diluted
      weighted-average shares outstanding
                                
                                
                                49,997
                                
                                
                                
                                49,977
                                
                                
                                
                                50,265
                                
                                
                                
                                49,913Closing
      price of common stock
                                
                                $
                                3.08
                                
                                
                                $
                                2.94
                                
                                
                                $
                                3.66
                                
                                
                                $
                                3.73
  
 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
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.06
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.06Net
      income per common share, diluted
                                  
                                  $
                                  0.04
                                  
                                  
                                  $
                                  0.06
                                  
                                  
                                  $
                                  0.05
                                  
                                  
                                  $
                                  0.05Basic
      weighted-average shares outstanding
                                  
                                  
                                  48,211
                                  
                                  
                                  
                                  48,299
                                  
                                  
                                  
                                  48,341
                                  
                                  
                                  
                                  48,394Diluted
      weighted-average shares outstanding
                                  
                                  
                                  49,586
                                  
                                  
                                  
                                  49,,677
                                  
                                  
                                  
                                  50,207
                                  
                                  
                                  
                                  50,204Closing
      price of common stock
                                  
                                  $
                                  1.16
                                  
                                  
                                  $
                                  2.52
                                  
                                  
                                  $
                                  2.16
                                  
                                  
                                  $
                                  2.44
 
 F-48
 
 NOTE 25 –
SEGMENTED INFORMATION
 
 Information is reported on a geographic
basis, and therefore the Company’s operating segments are represented by
operations in the U.S. and Mexico.  Revenue is derived from the sale
of gold.
 
 The following are the operating results
by segment:
  Mexico
                        
                        
                        U.S.
                        
                        
                        July
      31, 2010Revenues
      from mining operations (El Chanate Mine)
                        
                        $
                        60,645
                        
                        
                        $
                        -
                        
                        
                        $
                        60,645Property
      & Equipment – Net
                        
                        $
                        21,349
                        
                        
                        $
                        41
                        
                        
                        $
                        21,390
 
 
 
 NOTE 26 –
Business Combination
 
 On
February 10, 2010, Capital Gold Corporation (the “Company”) entered into a
business combination agreement (the “Business Combination Agreement”) with
Nayarit Gold Inc., (“Nayarit”), a corporation organized under the Ontario
Business Corporation Act (“OBCA”).  Pursuant to the terms of the
Business Combination Agreement, the Company and Nayarit intend to effect an
amalgamation (the “Amalgamation”) of Nayarit and a corporation, to be organized
under the OBCA as a wholly-owned subsidiary of the Company (“Merger Sub”), to
form a combined entity (“AmalgSub” or “Surviving Company”), with AmalgSub
continuing as the surviving entity following the Amalgamation.  By
virtue of the Amalgamation, the separate existence of each of Nayarit and Merger
Sub shall thereupon cease, and AmalgSub, as the surviving company in the
Amalgamation, shall continue its corporate existence under the OBCA as a
wholly-owned subsidiary of the Company. Pursuant to the terms of the Business
Combination Agreement, by virtue of the Amalgamation and without any action on
the part of Nayarit or the holders of any securities of Nayarit, all of the
Nayarit shares of common stock (the “Nayarit Common Shares”) issued and
outstanding immediately prior to the consummation of the Business Combination
Agreement (other than Nayarit Common Shares held by dissenting stockholders of
Nayarit) shall become exchangeable into the Company’s common stock on the
basis of 0.134048 shares of Company common stock for each one (1) Nayarit
Common Share (the “Amalgamation Consideration”).  The Business
Combination was consummated on August 2, 2010 (See Note 27).
 
 
 NOTE 27 –
Subsequent Events
 
 On August
4, 2010, Mr. Leonard Sojka resigned as a member of the Board of Directors of the
Company.   Mr. Sojka did not resign from the Company’s Board of
Directors as a result of any disagreements with the Company on any matter
relating to the Company’s operations, policies or practices.
 
 On August
27, 2010, the Board of Directors of the Company appointed Mr. Gary Huber to the
Board. Mr. Huber was also appointed as a member of the Audit Committee, the
Compensation Committee, the Nominating and the Corporate Governance Committee of
the Board.
 
 In August
2010, the Company committed to the purchase of agglomeration equipment for the
El Chanate Mine.  The total cost of this equipment is approximately
$2,000.  We paid $533 as a deposit toward the acquisition of this
equipment.
 
 F-49
 In
connection with the consummation of the Business Combination, the Company
entered into a separate employment agreement with Colin Sutherland, the former
CEO and President of Nayarit, to become the President of the Company. The
agreement has an initial one year term, which automatically renews unless either
party gives 60 days written notice prior to the expiration of the term. Either
party may terminate the employment relationship at any time, subject to possible
severance payments as set forth below.  Pursuant to the agreement, Mr.
Sutherland is entitled to receive an annual base salary of $226. The agreement
also provides for the award of an annual discretionary bonus. Also, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s Board of Directors approved the issuance of 25,000 options to Mr.
Sutherland under our 2006 Equity Incentive Plan. The stock options have a term
of five years and vest as follows: 50% vested upon issuance and the balance
vests 25% annually thereafter. The exercise price of the stock options is $3.73
per share
 
 Pursuant
to the employment agreement, the Company will be obligated to make severance
payments to Mr. Sutherland if the employment relationship is terminated by the
Company without Cause (as defined in the Employment Agreement) or by the
employee for a material breach by the Company of any of the terms of the
Employment Agreement.  The Employment Agreement provides for the
payment of severance to Mr. Sutherland in the following amounts: (a) a lump sum
equal to one year of base salary if the Company terminates without cause or
employee terminates for material breach by the Company, provided at least one
year has elapsed since the date of employee’s original employment; (b) a lump
sum equal to eighteen months of base salary if the Company terminates without
cause, provided at least five years has elapsed since the date of employee’s
original employment; (c) a lump sum equal to three months of base salary in the
event the Company does not renew the Employment Agreement pursuant to notice
prior to the expiration of the term.
 
 
 ACQUISITION
OF NAYARIT GOLD, INC.
 
 Capital
Gold Corporation (“Capital Gold”) is a party to that certain Business
Combination Agreement (the “Agreement”), dated as of February 10, 2010, as
amended by Amendment No. 1 to the Agreement, dated as of April 29,
2010 and the Extension Agreement dated as of July 6, 2010, by and among Capital
Gold, Nayarit Gold Inc. (“Nayarit”), John Brownlie, Colin Sutherland and Brad
Langille.  The Business Combination was consummated on August 2, 2010.
As a result of the Business Combination, Nayarit became a wholly-owned
subsidiary of the Company.  In connection with the Business
Combination, each outstanding share of Nayarit common stock was converted into
0.134048 shares of Capital Gold common stock, with cash paid in lieu of any
fractional share.   Capital Gold issued 12,454,354 shares of its
common stock in the Business Combination to Nayarit's current stockholders and
has reserved for issuance an additional 1,621,981 and 903,483 shares of Capital
Gold common stock upon the exercise of former Nayarit warrants and options,
respectively.  Based on the number of outstanding shares of Nayarit
common stock and Capital Gold common stock, after the consummation of the
Business Combination, the stockholders of Nayarit own approximately 20.4% of
Capital Gold on a non-diluted basis.
 
 Based on
the closing price of the Company’s common stock on August 2, 2010, the
consideration received by Nayarit shareholders had a value of approximately
$47.6 million as detailed below.
 
 Conversion
                      Calculation
                    
                    
                    Estimated
                      Fair
      Value
                    
                    Form
      of
                      Consideration(In
      thousands, except per share amounts)Number
      of Nayarit shares outstanding as of the Amalgamation date
                    
                    
                    92,910Exchange
      ratio(1)
                    
                    
                    0.134048Number
      of shares issued to Nayarit shareholders
                    
                    
                    12,454Value
      of Capital Gold common shares
                      issued(1)
                    
                    $
                    3.71
                    
                    
                    $
                    46,206
                    
                    Capital
      Gold
                      Common
      stockValue
      of Nayarit’s options and warrants to be exchanged for Capital Gold options
      and warrants (2)
                    
                    
                    
                    
                    
                    
                    1,393
                    
                    Capital
      GoldOptions
                      andWarrantsTotal
      consideration transferred
                    
                    
                    
                    
                    
                    $
                    47,599
 
 (1) In
accordance with ASC 805, the fair value of equity securities issued as part of
the consideration transferred was the closing market price of Capital Gold’s
common stock on the effective date of the Amalgamation. The pro forma shares
issued was 12,454,354 common shares, which is calculated by multiplying 0.134048
by 92,909,659, being the number of shares of Nayarit common stock outstanding on
August 2, 2010.  Nayarit shareholders own approximately 20.4% of the
issued and outstanding shares of Capital Gold common stock.
 
 (2)
Represents the fair value to acquire 1,621,981 and 903,483 shares of Capital
Gold common stock upon the exercise of former Nayarit warrants and options,
respectively. The fair value of the warrants and options were estimated using
the Black-Scholes valuation model utilizing the assumptions noted
below.
  F-50
  Stock
      price
                      
                      $
                      3.71Post
      conversion strike price
                      
                      $
                      3.28
      - $9.92Average
      expected volatility
                      
                      
                      70
                      %Dividend
      yield
                      
                      NoneAverage
      risk-free interest rate
                      
                      
                      0.29
                      %Average
      contractual term
                      
                      .79
      yearsBlack-Scholes
      average value per warrant and option
                      
                      $
                      0.57
 
 
 The
expected volatility of Capital Gold’s stock price is based on the average
historical volatility which is based on daily observations and duration
consistent with the expected life assumption and implied
volatility.  The average contractual term of the warrants and options
is based on the remaining contractual exercise term of each warrant and
option.  The risk free interest rate is based on U.S. treasury
securities with maturities equal to the expected life of the warrants and
options.
 
 The
transaction has been accounted for using the acquisition method of accounting
which requires, among other things, the assets acquired and liabilities assumed
to be recognized at their fair values as of the acquisition date. The following
table summarizes the estimated fair values of major assets acquired and
liabilities assumed on August 2, 2010:
  
 Fair
      Value (in thousands)Cash
      and cash equivalents
                    
                    $
                    50Short-term
      investments
                    
                    
                    2Prepaid
      expenses and sundry receivables
                    
                    
                    1,238Property,
      plant and equipment
                    
                    
                    196Mineral
      interests – indicated and inferred
                    
                    
                    43,822Exploration
      interests
                    
                    
                    3,627Accounts
      payable and liabilities assumed
                    
                    
                    (1,336)Net
      assets acquired
                    
                    $
                    47,599
 
 F-51
 
 A single
estimate of fair value results from a complex series of judgments about future
events and uncertainties and relies heavily on estimates and assumptions. The
Company’s judgments used to determine the estimated fair value assigned to each
class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact the Company’s results from operations. The Company’s
management allocated the acquisition cost to the assets acquired and liabilities
assumed based on the estimated fair value of Nayarit’s tangible and identifiable
assets and liabilities.  The amount allocated to the mineral and
exploration interests was based on a valuation report prepared by a third party
appraisal firm.  The allocation is not considered final as of the date of
this report as management is still reviewing certain of the underlying
assumptions and calculations used in the allocation to the assets and
liabilities of Nayarit that were acquired.  However, the Company believes
the final purchase price allocation will not be materially different than
presented herein.
 
 During
the twelve months ended July 31, 2010, the Company incurred transaction costs
consisting primarily of legal, professional, investment advisory and accounting
fees of $2.4 million.  These costs are included in general and
administrative expenses on the consolidated statement of
operations.
 
  Pro
forma Information
   The
following unaudited pro forma results of operations of the Company for the
fiscal years ended July 31, 2010 and 2009 assume that the acquisition of the
operating assets of the significant business acquired during 2010 and 2009 had
occurred on August 1 of the respective year in which the business was acquired
and for the comparable period only. These unaudited pro forma results are not
necessarily indicative of either the actual results of operations that would
have been achieved had the companies been combined during these periods, or are
they necessarily indicative of future results of operations.
 
 
 (in
      thousands)Year
      Ended
                            July
      31,
                            2010
                          
                          Year
      Ended
                            July
      31,
                            2009Revenues
                          
                          $
                          60,645
                          
                          
                          $
                          42,757Net
      income
                          
                          $
                          10,905
                          
                          
                          $
                          2,270Income
      per common share:Basic – net
      income
                          
                          $
                          0.18
                          
                          
                          $
                          0.04Diluted – net
      income
                          
                          $
                          0.18
                          
                          
                          $
                          0.03
 
 
 2010
Pro forma Results – Twelve Months Ended July 31, 2010
 
 The 2010
pro forma results were calculated by combining the results of Capital Gold with
the stand-alone historical results of Nayarit Gold for the twelve months ended
June 30, 2010. The elimination of $2.4 million in transaction related costs were
made which would have been incurred during the twelve months ended July 31, 2010
had the acquisition commenced on August 1, 2009.
 
 F-52
 
 NAYARIT
COMMITMENTS
 
 Nayarit through its wholly-owned
subsidiary, Nayarit Gold de Mexico, S.A. de C.V. (“Nayarit Mexico”), has the
exclusive right to explore and, as the case may be, exploit the “La Estrella”
(title 196009) mining concession.  For the exploration rights of La
Estrella, Nayarit Mexico has paid as of October 1, 2010 the amount of $550 plus
applicable Value Added Tax, and shall pay the following amounts in the dates
indicated below, after which payment, Nayarit Mexico will acquire 100% interest
to La Estrella concession:
   (i)
              $100
      plus applicable Value Added Tax, in December 8,
  2010;
  (ii)
              $100
      plus applicable Value Added Tax, in June 8,
  2011;
  (iii)
              $175
      plus applicable Value Added Tax, in December
      8;  2011
  (iv)
              $175
      plus applicable Value Added Tax, in June 8, 2012;
  and
  (v)
              $350
      plus applicable Value Added Tax, in December 8,
  2012.
   Nayarit
Mexico has the unlimited right to explore the following mining concessions
(“Huajicari Concessions”), in accordance with the terms of and Exploration and
Assignment Option Agreement of Mining Concessions (the “Option Agreement”) dated
May 8, 2008, which was entered into by and between Compañía Minera Huajicari,
S.A. de C.V. (“Huajicari”) and Nayarit Mexico and amendment thereto, dated
December 10, 2009:
  CLAIM
                      
                      TITLE NUMBER“San
      Juan Fracc. I”
                      
                      205392“San
      Juan Fracc. II”
                      
                      205393“San
      Francisco Tres”
                      
                      203136“San
      Juan I”
                      
                      221365“Isis”
                      
                      214395“San
      Miguel”
                      
                      224392
  For the exploration rights of the
Huajicari Concessions as described above, Nayarit Mexico has paid through
October 1, 2010 the amount of $2,250, and shall pay $250 by October 31, 2010,
after which payment, Nayarit Mexico will acquire 100% interest to Huajicari
Concessions.
 
 
 DEFINITIVE
AGREEMENT – GAMMON GOLD, INC.
 
 On
October 1, 2010, the Company and Gammon Gold Inc. (“Gammon Gold”) have entered
into a definitive merger agreement pursuant to which Gammon Gold will offer to
acquire all of the issued and outstanding common shares of Capital Gold in a
cash and share transaction (the “Acquisition”). The total consideration for the
purchase of 100% of the fully diluted in-the-money shares of Capital Gold is
approximately US $288 million or US $4.57 per Capital Gold share based on Gammon
Gold’s closing price on September 24, 2010 on the NYSE. The Acquisition has the
unanimous support of both companies’ Boards of Directors and
Officers.  Under the terms of the Acquisition, each common share of
Capital Gold will be exchanged for 0.5209 common shares of Gammon Gold and a
cash payment in the amount of US$0.79 per share. Based on the September 24, 2010
closing price of Capital Gold’s shares on the NYSE EURONEXT, the acquisition
price represents a 20% premium to the close on September 24th and a 30% premium
to the 20-day volume weighted average price on the NYSE EURONEXT ending on that
date.  This transaction is subject to approval by shareholders of
Capital Gold and no assurance can be given to a successful consummation of this
transaction.
 
 F-53
 
 LEGAL
PROCEEDINGS
 
 On
October 4, 2010, Walter Earl Jenkins and Jonathan Schroeder, each represented by
the same law firm, filed identical lawsuits against Capital Gold, its directors
and Gammon Gold in New York Supreme Court claiming, among other things, that the
directors of Capital Gold breached their fiduciary duties to Capital Gold in
connection with the approval of the merger agreement between Capital Gold and
Gammon Gold. The plaintiffs purport to represent a class of all stockholders of
Capital Gold stock other than stockholders who are affiliates of Capital Gold.
The plaintiffs have asked the Court to enjoin Capital Gold from consummating its
merger with Gammon Gold.
 
 On
October 7, 2010, Mel Leone filed a lawsuit against Capital Gold, its directors
and Gammon Gold in New York Supreme Court.
 
 On
October 8, 2010, W. Jeffrey Kramer filed a lawsuit against Capital Gold, its
directors, its Chief Financial Officer and Gammon Gold in New York Supreme
Court.
 
 On
October 8, 2010, Helmut Boehm filed a lawsuit against Capital Gold, its
directors, Gammon Gold and Capital Gold AcquireCo, Inc., a wholly-owned
subsidiary of Gammon Gold, in the Court of Chancery in the state of
Delaware.
 
 Each of
the above-referenced complaints state claims and seek relief substantially
identical to the claims made and relief sought in the Jenkins and Schroeder
lawsuits. Capital Gold believes all plaintiffs’ allegations are without merit
and intends to vigorously defend itself against such allegations.
 
 F-54