SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


(Amendment
No. 1)


FORM
10-K/A


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


SECURITIES
EXCHANGE ACT OF 1934


FOR THE
FISCAL YEAR ENDED JULY 31, 2008


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


SECURITIES
EXCHANGE ACT OF 1934





Commission
File No. 0-13078





CAPITAL GOLD
CORPORATION


(Exact
name of registrant as specified in its charter)





State of Delaware
              
              13-31805030(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 Exchange
Act:   none


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





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


Yes
 ̈  No
x





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





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





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


 ̈ Large
accelerated
filer             x
Accelerated filer


 ̈
Non-accelerated
filer                ̈
Smaller Reporting Company





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


Yes  ̈ No
x





The
aggregate market value of the voting and non-voting common equity on January 31,
2008 held by non-affiliates computed by reference to the closing price of the
issuer’s Common Stock on that date, was $93,983,205 based upon the closing price
($0.70) multiplied by the 134,262,150 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 24, 2008: 192,974,824.


DOCUMENTS
INCORPORATED BY REFERENCE:  None.





Explanatory
Note





Capital
Gold Corporation is filing this Amendment No. 1 on Form 10-K/A to our annual
report on Form 10-K for the year ended July 31, 2008, originally filed on
October 29, 2008, to respond to a comment letter issued by the staff of the
Securities and Exchange Commission, or the SEC, in connection with its review of
our periodic disclosures.  The following sections of this Form 10-K/A
have been amended:




Cover
      page
                Filing
      status
                
                We
      have changed our filing status from “smaller reporting company” to
      “accelerated filer.”Part
      I, Item 1
                Business
                
                We
      have added a general description of our business and added disclosure
      regarding ounces of gold sold during the fiscal year ended July 31, 2008
      and average monthly production.Part
      I, Item 2
                Property
                
                We
      have added additional disclosure regarding our El Chanate property, the
      equipment used to mine gold, and a summary of cumulative activity with
      proven and probable mineral reserves.Part
      II, Item 7
                Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations
                
                We
      have added a summary of results of operations in tabular form,
      consolidated our equity based compensation expense with general and
      administrative expense, and enhanced our disclosure regarding debt
      covenants, ore on leach pads and inventory and revenue
      recognition.Part
      II, Item 8
                Financial
      Statements and Supplementary Financial Data
                
                We
      have included an audited statement of changes in shareholders’ equity for
      the year ended July 31. 2006 and expanded the disclosure in the footnotes
      to the audited financial statements to cover each of the three years ended
      July 31, 2008, 2007 and 2006.  We have also expanded our
      footnote disclosure regarding accounts receivable, marketable securities,
      ore on leach pads and inventory, long term debt, revenue recognition,
      equity based compensation, related party transactions, stockholders’
      equity, employee and consulting agreements, sales contracts and financial
      instruments.  In addition, we made certain reclassifications
      that management determined were not material.Part
      II, Item 9A
                Controls
      and Procedures
                
                We
      revised the text regarding our evaluation of disclosure controls and
      procedures.  Management of the Company has requested the
      Company’s independent registered public accounting firm to prepare an
      attestation report regarding internal controls over financial
      reporting.  When such report is available, the Company will
      further amend its Form 10-K for the fiscal year ended July 31,
      2008.Part
      III, Item 11
                Executive
      Compensation
                
                We
      have expanded our Compensation Discussion and Analysis to include
      additional disclosure regarding our compensation consultant, the role of
      the chief executive officer and other executive officers in making
      compensation decisions, the factors considered to determine executive
      bonuses, equity awards granted in fiscal 2008 to officers and directors
      and executive employment agreements.  We also combined the
      Summary Compensation Table into one table and added required footnote
      disclosures.










Part
      III, Item 13
                Certain
      Relationships and Related Transactions and Director
      Independence
                
                We
      have enhanced our disclosure to name all of the parties to the related
      party transactions.




For the
convenience of the reader, this amendment includes, in its entirety, those items
in our original filing not being amended and restated. This amendment continues
to describe conditions as of our original filing, and does not update
disclosures contained herein to reflect events that occurred at a later date.
Accordingly, this amendment should be read in conjunction with our filings made
with the Securities and Exchange Commission subsequent to the original filing of
our Form 10-K for the fiscal year ended July 31, 2008.




New
certifications of our principal executive officer and principal financial
officer are included as exhibits to this amendment.







CAPITAL
GOLD CORPORATION


Form
10-K/ A


July 31,
2008





Table of Contents
                                                                    
                                                                    PageGlossary
                                                                    
                                                                    (iii)Part IItem
      1.
                                                                    Business.
                                                                    1Item
      1A.
                                                                    Risk
      Factors.
                                                                    2Item
      1B.
                                                                    Unresolved
      Staff Comments.
                                                                    9Item
      2.
                                                                    Property.
                                                                    9Item
      3.
                                                                    Legal
      Proceedings.
                                                                    18Item
      4.
                                                                    Submission
      of Matters to a Vote ofSecurity
      Holders.
                                                                    18Part IIItem
      5.
                                                                    Market
      for Registrant’s Common Equity, RelatedStockholder
      Matters and IssuerPurchases
      of Equity Securities.
                                                                    18Item
      6.
                                                                    Selected
      Financial Data.
                                                                    22Item
      7.
                                                                    Management's
      Discussion and Analysis of FinancialCondition
      and Results of Operations.
                                                                    23Item
      7A.
                                                                    Quantitative
      and Qualitative DisclosureAbout
      Market Risk
                                                                    39Item
      8.
                                                                    Financial
      Statements and Supplementary Data.
                                                                    41Item
      9.
                                                                    Changes
      in and Disagreement with Accountantson
      Accounting and Financial Disclosure.
                                                                    41Item
      9A
                                                                    Controls
      and Procedures.
                                                                    41Item
      9B
                                                                    Other
      Information.
                                                                    42Part IIIItem
      10.
                                                                    Directors,
      Executive Officers and Corporate Governance.
                                                                    43Item
      11.
                                                                    Executive
      Compensation.
                                                                    48Item
      12.
                                                                    Security
      Ownership of Certain BeneficialOwners
      and Management and RelatedStockholder
      Matters.
                                                                    59Item
      13.
                                                                    Certain
      Relationships and Related Transactionsand
      Director Independence.
                                                                    62Item
      14.
                                                                    Principal
      Accountant Fees and Services.
                                                                    64








Part IVItem
      15.
                        Exhibits
      and Financial Statement Schedules.
                        65Signatures
                        69Supplemental
      Information
                        70Financial
      Statements
                        F-1


ii


GLOSSARY OF TECHNICAL
TERMS




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




iii





ADDITIONAL
DEFINITIONS





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




iv





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




v


PART I





Item
1.  Business





Capital Gold Corporation is engaged in
the mining, exploration and development of gold properties in
Mexico.  Our primary focus is on the operation and development of the
El Chanate project, and we also conduct gold exploration in other locations in
Sonora, Mexico.





Sonora,
Mexico Concessions





El
Chanate





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





On August
30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered
to us an updated resource block model and an updated mine plan and mine
production schedule (the “2007 Report”).  The original feasibility
study (the “2003 Study”) on the El Chanate Project was prepared by M3
Engineering of Tucson in August 2003.   M3 updated the 2003 Study
in October 2005 (the “2005 Study”).  An August 2006 technical report
from SRK Consulting, Denver, Colorado (the “2006 Update”) further updated the
feasibility study.





According
to the 2007 Report, our proven and probable reserve tonnage increased by
approximately 98 percent from 19.9 million to 39.5 million metric tonnes with a
gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
tonne of ore).  The updated pit design for the revised plan in the
2007 Report is based on a plant recovery of gold that varies by rock types, but
is expected to average 66.8%. A gold price of US$550 (three year average as of
July 31, 2007 as determined by IMC) per ounce was used to re-estimate the
reserves compared with a gold price of $450 per ounce used in the previous
estimate.





In
September 2008, we initiated a 10 hole deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters which will target the southern extremity
of the main pit.  Once this data has been compiled and analyzed, it
will be combined with results from a previous drilling campaign initiated in
December 2007 which consisted of  a 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
main pit.  All data will be combined with the intention of increasing
proven and probable reserves.





We sold
39,102 ounces of gold during the fiscal year ended July 31,
2008.  Gold production at El Chanate is currently at a level of
approximately 4,700 ounces of gold per month. We also produce a limited amount
of silver by-product.





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




1


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.





Human
Resources





As of October 24, 2008, we had 143 full
time and 16 temporary employees working at our El Chanate mine in Sonora, Mexico
as well as eight full time employees in the US.  We also utilize a
mining contractor at the El Chanate mine which had 42 personnel
onsite.





Cautionary
Statement on Forward-Looking Statements





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





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




Item
1A.  Risk
Factors





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




2


Risks related to our
business and operations





If
we are unable to sustain sufficient operating revenues, we will not be able to
generate profits and our business may fail.





Until
this past fiscal year, we had no producing properties and, historically, have
operated at a loss. We only commenced gold producing activities and started to
generate revenues in August 2007.   Our ultimate success will
depend on our ability to continue to generate profits from our
properties.   While we have commenced revenue producing mining
operations, we cannot assure that revenues will continue to cover cash flow
requirements.





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





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





Our
Credit Facility with Standard Bank plc imposes restrictive covenants on
us.





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii) a
quarterly average minimum liquidity of U.S.$500,000. In addition, the Credit
Facility restricts, among other things, our ability to incur additional debt,
create liens on our property, dispose of any assets, merge with other companies,
enter into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with the
restrictions contained in the Credit Facility could lead to an event of default
thereunder which could result in an acceleration of such
indebtedness.




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





Sinergia,
our mining contractor, is using equipmentthat is not
new.  Such equipment is subject to the risk of more frequent
breakdowns and need for repair than new equipment.  If the equipment
that we or Sinergia uses breaks down and needs to be repaired or replaced, we
will incur additional costs and operations may be delayed resulting in lower
amounts of gold recovered.  In such event, our capital and operating
cost assumptions may be inaccurate and our ability to economically and
successfully mine the project may be hampered, resulting in decreased revenues
and, possibly, a loss from operations.





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


3





The gold
deposit we have identified at our El Chanate Project is relatively
low-grade.  If the estimates of ore grade or recovery rates turn out
to be lower than the actual ore grade and recovery rates, if costs are higher
than expected, or if we experience problems related to the mining, processing,
or recovery of gold from ore at the El Chanate Project, our results of operation
and financial condition could be materially adversely
affected.  Moreover, it is possible that actual costs and economic
returns may differ materially from our best estimates.  It is not
unusual in the mining industry for new mining operations to experience
unexpected problems during the initial production phase and to require more
capital than anticipated.  There can be no assurance that our
operations at El Chanate will continue to be profitable.





We
have only one project.  As a result, our chances of conducting viable
mining operations are dependent upon the success of that project.





Our only
current properties are the El Chanate concessions.  Accordingly, we
are dependent upon the success of the El Chanate concessions.





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





The
profitability of any gold mining operations in which we have an interest will be
significantly affected by changes in the market price of gold.  Gold
prices fluctuate on a daily basis.  During the fiscal year ended July
31, 2008, the spot price for gold on the London Exchange has fluctuated between
$657.50 and $1,011.30 per ounce.  Gold prices are affected by numerous
factors beyond our control, including:





·
            the
      level of interest rates,


·
            the
      rate of inflation,


·
            central
      bank sales,


·
            world
      supply of gold and


·
            stability
      of exchange rates.





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





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





We have
entered into metals trading transactions to hedge against fluctuations in gold
prices, using call option purchases and forward sales, and have entered into
various interest rate swap agreements.  The terms of our Credit
Facility with Standard Bank require that we utilize various price hedging
techniques to hedge a portion of the gold we plan to produce at the El Chanate
Project and hedge at least 50% of our outstanding loan balance.  There
can be no assurance that we will be able to successfully hedge against gold
price and interest rate fluctuations.




4


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





To date,
rather than modifying the original Gold Price Protection agreement with Standard
Bank to satisfy these forward sale obligations, we have 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 oz. As of September 30, 2008, we have paid Standard
Bank an aggregate of approximately $1,936,000 on the settlement of 55,325
ounces.  The remaining ounces to settle with regard to this agreement
amounted to 66,602 as of September 30, 2008.  We believe we will be
able to deliver the quantity of gold required by our forward sales on a going
forward basis; however, we may continue to opt to net cash settle these forward
sale obligations if it remains the most cost effective option for
us.  If we are unable for any reason to produce the quantity of gold
required by our forward sales and generate sufficient cash flow to settle these
forward sales in gold or cash, it could have a material adverse effect on our
financial condition and cash flows.





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





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





·
            labor
      disputes,


·
            invalidity
      of governmental orders,


·
            uncertain
      or unpredictable political, legal and economic
    environments,


·
            war
      and civil disturbances,


·
            changes
      in laws or policies,


·
            taxation,


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


·
            governmental
      seizure of land or mining claims,


·
            limitations
      on ownership,


·
            limitations
      on the repatriation of earnings,


·
            increased
      financial costs,


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


·
            foreign
      exchange controls.





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





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


5





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





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





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





·
            ownership
      of assets,


·
            land
      tenure,


·
            mining
      policies,


·
            monetary
      policies,


·
            taxation,


·
            rates
      of exchange,


·
            environmental
      regulations,


·
            labor
      relations,


·
            repatriation
      of income and/or


·
            return
      of capital.





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





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





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





·
            stricter
      standards and enforcement,


·
            increased
      fines and penalties for
non-compliance,


·
            more
      stringent environmental assessments of proposed projects
    and


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





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





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


6


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





·
            environmental
      hazards,


·
            industrial
      accidents,


·
            metallurgical
      and other processing,


·
            acts
      of God, and/or


·
            mechanical
      equipment and facility performance
problems.





Such
risks could result in:





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


·
            personal
      injury or death,


·
            environmental
      damage,


·
            delays
      in mining,


·
            monetary
      losses and /or


·
            possible
      legal liability.





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





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





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





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





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


7


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





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





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





Gold properties are wasting
assets.  They eventually become depleted or uneconomical to continue
mining.  The acquisition of gold properties and their exploration and
development are subject to intense competition. Companies with greater financial
resources, larger staffs, more experience and more equipment for exploration and
development may be in a better position than us to compete for such mineral
properties.  If we are unable to find, develop and economically mine
new properties, we most likely will not be able to be profitable on a long-term
basis.





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





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





·
            the
      location of economic ore bodies,


·
            development
      of appropriate metallurgical
processes,


·
            receipt
      of necessary governmental approvals
and


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





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





·
            the
      price of gold,


·
            the
      particular attributes of the deposit, such as
  its


o
            size,


o
            grade
      and


o
            proximity
      to infrastructure,


·
            financing
      costs,


8


·
            taxation,


·
            royalties,


·
            land
      tenure,


·
            land
      use,


·
            water
      use,


·
            power
      use,


·
            importing
      and exporting gold and


·
            environmental
      protection.





The
effect of these factors cannot be accurately predicted.





Risks related to ownership
of our stock





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





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





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





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





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





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





Item
1B.  Unresolved Staff
Comments





None.





Item
2.  Property




9


El
Chanate Properties – Sonora, Mexico




Through
our wholly-owned subsidiaries, Oro de Altar S. de R. L. de C.V. (“Oro”) and
Minera Santa Rita S. de R.L. de C.V. (“MSR”), we own 100% of the following 16
mining concessions, all of which are located in the Municipality of Altar, State
of Sonora United States of Mexico.





The 16
mining concessions are as follows:





Concession Name
                
                Title No.
                
                
                Hectares1
                San
      Jose
                
                
                200718
                
                
                
                96.00002
                Las
      Dos Virgen
                
                
                214874
                
                
                
                132.23503
                Rono
      I
                
                
                206408
                
                
                
                82.19024
                Rono
      3
                
                
                214224
                
                
                
                197.21805
                La
      Cuchilla
                
                
                211987
                
                
                
                143.34816
                Elsa
                
                
                212004
                
                
                
                2,035.39977
                Elisa
                
                
                214223
                
                
                
                78.47178
                Ena
                
                
                217495
                
                
                
                190.00009
                Eva
                
                
                212395
                
                
                
                416.896310
                Mirsa
                
                
                212082
                
                
                
                20.551811
                Olga
                
                
                212081
                
                
                
                60.589012
                Edna
                
                
                212355
                
                
                
                24.043113
                La
      Tira
                
                
                219624
                
                
                
                1.797514
                La
      Tira 1
                
                
                219623
                
                
                
                18.608715
                Los
      Tres
                
                
                223634
                
                
                
                8.00016
                El
      Charro
                
                
                206404
                
                
                
                40.0000Total
                
                
                
                
                
                
                3,543.3491





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




10




Until
August 2006,  we were following an August 2003 feasibility study (the
“2003 Study”) prepared by M3 Engineering of Tucson, Arizona (“M3”) as updated by
M3 in October 2005 (The “2005 Study”).  The 2005 Study  used
a base gold price of $375 per ounce.   In view of a significant
rise in the gold price, in June 2006, we commissioned SRK Consulting, Denver,
Colorado, to prepare an updated Canadian Securities Administration National
Instrument 43-101 compliant technical report on our El Chanate
Project.  SRK completed this  technical report in August
2006 (the “2006 Update”).





In May
2007, we completed an expanded 72-hole reverse circulation drilling campaign to
identify additional proven and probable gold reserves at the El Chanate Project.
The 72 holes totaled approximately 8,300 meters, and were positioned to fill in
gaps in the ore body and test the outer limits of the currently known ore
zones.  We turned the assay data over to Independent Mining
Consultants, Inc. (“IMC”) of Tucson, AZ to update our ore reserve and our mine
plan.  On August 30, 2007, IMC delivered to us an updated resource
block model and an updated mine plan and mine production schedule (the “2007
Report”).





According
to the 2007 Report, our proven and probable reserve tonnage increased by
approximately 98 percent from 19.9 million to 39.5 million metric tonnes with a
gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
tonne of ore).  The updated pit design for the revised plan in the
2007 Report is based on a plant recovery of gold that varies by rock types, but
is expected to average 66.8%. A gold price of US$550 (three year average as of
July 31, 2007 as determined by IMC) per ounce was used to re-estimate the
reserves compared with a gold price of $450 per ounce used in the previous
estimate.





El
Chanate is an open pit heap leach mining and processing
operation.  Ore is hauled by truck from the pits to the processing
plant.  The recovery of gold from certain gold oxide 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. The equipment and facility
infrastructure that is utilized at the El Chanate mine consists of both new and
refurbished items.  Management continuously analyzes production
results and considers improvements and modernizations as deemed
necessary.


11





Equipment
and facilities include: plant, a fleet of haul trucks, loaders and mining
support equipment.  In addition, there are numerous ancillary support
facilities including warehouses, maintenance shops, roadways, administrative
offices and power and water supply systems.  The equipment and
facility infrastructure that is utilized at the El Chanate mine consists of both
new and refurbished items.  Management continuously analyzes
production results and considers improvements and modernizations as deemed
necessary.





In
September 2008, we initiated a 10 hole deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters which will target the southern extremity
of the main pit.  Once this data has been compiled and analyzed, it
will be combined with results from a previous drilling campaign initiated in
December 2007 which consisted of  a 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
main pit.  All data will be combined with the intention of increasing
proven and probable reserves.





During
fiscal 2008, we identified certain restrictions related to our ADR plant
capacity which limited the amount of solution that can be
processed.  We have addressed these issues by doubling the installed
pumping capacity to increase solution flow to the leach pad and added additional
carbon capacity to the system.  We also purchased and installed an
additional set of carbon columns and a strip vessel to process an additional two
tonnes of carbon per strip. The installation and commissioning of these ADR
plant upgrades was completed at the end of October 2008.





The
following production summary estimate has been extracted from the 2007
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 832,280 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 555,960 ounces, or approximately 66.8% of the
contained gold. The gold recovery rate is expected to average approximately
66.8% for the entire ore body.  Individual portions of the ore body
may experience varying recovery rates ranging from about 73% to
48%.  Oxidized and sandstone ore types may have recoveries of about
73%; fault zone ore type recoveries may be about 64%; siltstone ore types
recoveries may be about 48% and latite intrusive ore type recoveries may be
about 50%.


12




Metric
                                
                                U.S.MaterialsReservesProven
                                26.7
      Million Tonnes
    @   0.68   g/t*
                                
                                29.4
      Million Tons @   0.0198 opt*Probable
                                12.8 Million
      Tonnes  @  0.61
      g/t*
                                
                                14.1 Million
      Tons @   0.0179
      opt*Total
      Reserves
                                39.5
      Million
      Tonnes  @  0.66   g/t*
                                
                                43.5
      Million Tons @   0.0192 opt*Waste
                                24.1 Million Tonnes
                                
                                26.6 Million TonsTotal
                                63.6
      Million Tonnes
                                
                                70.1
      Million tonsContained
      Gold
                                25.89
      Million grams
                                
                                832,280  OzProductionOre
      Crushed**
                                2.6
      Million Tonnes /Year
                                
                                2.87
      Million Tons/Year7,500
      Mt/d
                                
                                8,267
      t/dOperating
      Days/Year
                                365
      Days per year
                                
                                365
      Days per yearGold
      Plant Average Recovery
                                66.8
      %
                                
                                66.8
      %Average
      Annual Production**
                                1.35  Million
      grams
                                
                                43,414  OzTotal
      Gold Produced
                                17.29
      Million grams
                                
                                555,960  Oz




* “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. The reserve estimates are based on
a recovered gold cutoff grade of 0.17 to 0.21 grams per metric tonne, depending
on the operating year, and as described below.


**  Based
on mining rate of 7,500 metric tonnes per day of ore.  We are
currently in excess of 10,000 metric tonnes per day.





El Chanate
Project





Production
Summary




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




·
            Blocks
      with 2 or more drill holes within a search radius of 80m x 70m x 40m and
      with a relative kriging (a geostatistical calculation technique) standard
      deviation less than or equal to 0.45 were classified as Measured
      (corresponding to Proven);




·
            Blocks
      with 1 hole within the search radius of 80m x 70m x 40m and with a
      relative kriging standard deviation of 0.60 or less, blocks with 2 holes
      and a kriging standard deviation of 0.70 or less, blocks with 3 holes and
      a kriging standard deviation of 0.80 or less, blocks with 4 holes and a
      relative kriging standard deviation of 0.90 or less and all blocks with 5
      or more holes within the search radius were classified as Indicated
      (corresponding to Probable), unless they met the above criterion for
      Proven;




13


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




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





The
proven and probable reserve estimates are based on a recovered
gold  cutoff grade of 0.17 to 0.21 grams/tonne, depending on the
operating year.  The variation is due to balancing the mine and plant
production capacities on a year by year basis for the plan.  (A
recovered gold cutoff grade was used for reserves calculation as the head gold
grade cutoff varies with the different ore types due to their variable gold
recoveries.)  The internal (in-pit) and break even cutoff grade
calculations are as follows:


Cutoff
      Grade Calculation
                        
                        Internal
      Cutoff Grade
                        
                        Break
      Even Cutoff GradeBasic
      ParametersGold
      Price
                        
                        US$550/oz
                        
                        US$550/ozShipping
      and Refining
                        
                        US$
      4.14/oz
                        
                        US$
      4.14/ozGold
      Recovery
                        
                        66.8%
                        
                        66.8%Royalty
                        
                        4%
      of NSR
                        
                        4%
      of NSROperating
      Costs per Tonne of Ore
                        
                        $
      per Tonne of Ore
                        
                        $
      per Tonne of OreMining
      *
                        
                        0.070
                        
                        1.360Processing/Leach
      Pad
                        
                        1.980
                        
                        1.980G&A
                        
                        0.800
                        
                        0.800Total
                        
                        2.850
                        
                        4.140Internal
      Cutoff Grade
                        
                        Grams
      per Tonne
                        
                        Grams
      per TonneHead
      Grade Cutoff (66.8% recov.)
                        
                        0.25
                        
                        0.37Recovered
      Gold Grade Cutoff
                        
                        0.17
                        
                        0.25




* The
calculation of an internal cutoff grade does not include the basic mining costs
(which are considered to be sunk costs for material within the designed
pit).  The $0.07 per tonne cost included is the incremental (added)
cost of hauling ore over hauling waste, and which is included in the
calculation.





We
commenced production at the El Chanate property on July 31, 2007.  In
the fiscal year ended July 31, 2008, we sold 39,102 ounces of
gold.  Gold production at El Chanate is currently at a level of
approximately 4,700 ounces of gold per month. We have implemented steps
necessary to effectively increase production rates to approximately 70,000
ounces per year in 2009.  As of August 31, 2008, we have expended
approximately $3,500,000 on the leach pad expansion and ADR plant
improvement.  Management has been and anticipates that it will
continue to fund these expansion costs with its cash on hand as well as through
revenues from gold sales.




14


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,
                    2008
                  
                  
                  July 31,
                    2007
                  
                  
                  July 31,
                    2006Ore
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Beginning
      balance (Ktonnes)
                  
                  
                  38,785
                  
                  
                  
                  19,868
                  
                  
                  
                  19,868Additions
                  
                  
                  -
                  
                  
                  
                  19,593
                  
                  
                  
                  -Reductions
                  
                  
                  (3,499
                  )
                  
                  
                  (676
                  )
                  
                  
                  -Ending
      Balance
                  
                  
                  35,286
                  
                  
                  
                  38,785
                  
                  
                  
                  19,868Contained
      goldBeginning
      balance (thousand of ounces)
                  
                  
                  814
                  
                  
                  
                  490
                  
                  
                  
                  490Additions
                  
                  
                  -
                  
                  
                  
                  342
                  
                  
                  
                  -Reductions
                  
                  
                  (95
                  )
                  
                  
                  (18
                  )
                  
                  
                  -Ending
      Balance
                  
                  
                  719
                  
                  
                  
                  814
                  
                  
                  
                  490





Surface Property
Ownership





Anglo
Gold purchased surface property ownership, consisting of 466 Hectares in Altar,
Sonora, on January 27, 1998.  The ownership was conveyed to our
subsidiary, Oro de Altar S.A. de C.V., in 2002.  MSR, one of our
wholly-owned Mexican affiliates, 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.





General Information and
Location





The El
Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
northeast of the town of Caborca.  It is accessible by paved and all
weather dirt roads typically traveled by pickup trucks and similar
vehicles.  Driving time from Caborca is approximately 40
minutes.  Access from Caborca to the village of 16 de September is
over well maintained National highways. Beyond the 16 de September village,
routes to the property are currently over well traveled gravel and sandy desert
roads suitable for alltypes ofvehicles. We acquired
rights for service road access from the village of 16 de September, 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 main body of the known surface gold
covers an irregularly shaped area of approximately 3,170 feet long by 1,590 feet
wide.  Several satellite mineral anomalies exist on surfaces which
have not been thoroughly explored.  Assays on chip samples taken from
trenches at these locations by usindicate the presence of
gold mineralization.




15


In 2005,
we acquired 15 year rights of way for the current access road, and we acquired
the right to purchase 81 hectares of land near the main highway.  We
have use of the land; however, our actual purchase of the land is conditioned
upon the Ejido (local cooperative) privatizing the land, before the acquisition
is finalized.  We subsequently purchased an extension of our
rights-of-way from 15 to 30 years.  In addition to this road, we
acquired a water concession, and our water well is located within a large
regional aquifer.   The 2005 feasibility study indicated our
average life of mine water requirements, for ore processing only, will be about
94.6 million gallons per year (11.4 liters per second).  The amount of
water we were permitted to pump for our operations was approximately 71.3
million gallons per year (8.6 liters per second).  In September 2007,
and in conjunction with the results of the 2007 Report, we acquired additional
water rights which permits us to consume up to 109.1 million gallons per
year.  Based on the anticipated water consumption for the life of
mine, we believe that we have an allocation to meet our
requirements.





In December 2005, MSR entered into a
Mining Contract with a Mexican mining contractor, Sinergia Obras Civiles y
Mineras, S.A. de C.V. (“Contractor”).  The Mining Contract, as
amended, became effective November 1, 2006 and work commenced on or about 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.  We are currently in negotiations with the
Contractor on an adjustment to these rates for the aforementioned period.
Pursuant to the Mining Contract, the Contractor, using its own equipment, is
supposed to perform all of the mining work (other than crushing) at the El
Chanate Project for the life of the mine.  MSR delivered to the
Contractor a mobilization payment of $70,000 and the advance payment of
$520,000.  The advance payments are recoverable by MSR out of 100% of
subsequent payments due to the Contractor under the Mining
Contract.  Pursuant to the Mining Contract, upon termination, the
Contractor would be obligated to repay any portion of the advance payment that
had not yet been recouped. The Contractor’s mining rates are subject to
escalation on an annual basis.  This escalation is tied to the
percentage escalation in the Contractor’s costs for various parts for its
equipment, interest rates and labor.  One of the principals of the
Contractor (“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.  In March 2007, we made a further advance to the Contractor
of $319,000 in consideration of FG’s successors transfer to us of his remaining
interest in MSR.  As of July 31, 2008, the entire advance has been
recovered.





The
general El Chanate mine area has been mined for gold since the early 19th
century.  A number of old underground workings exist characterized by
narrow shafts, to a depth of several tens of feet and connecting drifts and
cross cuts.  No information exists regarding the amount of gold taken
out; however, indications are that mining was conducted on a small
scale.





Geology





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


16





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





Alteration/Mineralization





A
predecessor exploration company has defined a 600 meter long, 300 meter wide,
120 meter thick zone of alteration that is centered about the Chanate
fault.  The strata within this zone have been silicified and pyritized
to varying degrees.  In surface outcrop the mineralized zone is
distinguished by its bleached appearance relative to unmineralized
rock.  The mineralized zone contains only single digit ppm (parts per
million) levels of gold.  Dense swarms of veinlets form thick,
mineralized lenses, within a larger area of sub-economic but anomalous gold
concentrations.  Drill hole data indicates that the mineralized lenses
are sub-horizontal to gently southwest-dipping and are grossly parallel to the
Chanate fault.  The fault zone itself is also weakly mineralized,
although strata in the near hanging wall and footwall are appreciably
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 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 Anglo Gold, in December 2001, we made a
$50,000 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
$1,000,000).  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 $18,018,355.  In accordance with the agreement, the
foregoing payments are not to be construed as royalty payments. Should the
Mexican government or other jurisdiction determine that such payments are
royalties, we could be subjected to and would be responsible for any withholding
taxes assessed on such payments.   During thefirst
part of 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
$18,018,355.  As of July 31, 2008, we have incurred approximately
$1,272,000  and  $728,000 in expense with regard to both the
net smelter return and net profits interest, respectively.


17





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, of in excess of
2,000,000 troy ounces of contained gold.  The exercise price would
equal twice our project costs on the properties during the period commencing on
December 15, 2000 and ending on the date of such notice.  In January
2008, we made a good faith determination and notified AngloGold that the drill
indicated resources at the El Chanate gold mine exceeded two million ounces of
contained gold. The term "drill indicated resources" is defined in the
agreement.  A drill indicated resource number does not rise to the
level of, and should not be considered proven and probable reserves as those
terms are defined under guidelines of the Securities Exchange Commission
(“SEC”).   On July 1, 2008, AngloGold notified us that it would
not be exercising its back-in right.





Saric
Properties – Sonora, Mexico





We
recently leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we filed and now own a claim for approximately
2,200 additional hectares adjacent to this property. These concessions and this
claim are about a sixty mile drive northeast of the El Chanate project.
Mineralization is evident throughout and is hosted by shear zones and quartz
veins in granite intrusive. A short drill program, along with geochemical work,
is currently underway.





We
continue to actively investigate other exploration projects in northern
Mexico.





Item
3.  Legal
Proceedings





We are
not presently a party to any material litigation.





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





No matter
was submitted to a vote of our stockholders during the fiscal quarter ended July
31, 2008.





PART II





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





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





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


18





MARKET
PRICE OF COMMON STOCK





Quarter Ending
                  
                  High and LowJuly
      31, 2008
                  
                  
                  0.70
                  
                  
                  
                  0.60April
      30, 2008
                  
                  
                  0.78
                  
                  
                  
                  0.62January
      31, 2008
                  
                  
                  0.81
                  
                  
                  
                  0.60October
      31, 2007
                  
                  
                  0.63
                  
                  
                  
                  0.38July
      31, 2007
                  
                  
                  0.47
                  
                  
                  
                  0.38April
      30, 2007
                  
                  
                  0.47
                  
                  
                  
                  0.37January
      31, 2007
                  
                  
                  0.41
                  
                  
                  
                  0.31October
      31, 2006
                  
                  
                  0.33
                  
                  
                  
                  0.28





Our Common Stock 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:





Period Ending
                  
                  High and LowUS$/CDN$
                  
                  
                  US$/CDN$Quarter
      ended July 31, 2008
                  
                  
                  0.70/0.71
                  
                  
                  
                  0.61/0.60Quarter
      ended April 30, 2008
                  
                  
                  0.83/0.83
                  
                  
                  
                  0.62/0.62Quarter
      ended January 31, 2008
                  
                  
                  0.77/0.76
                  
                  
                  
                  0.58/0.57Quarter
      ended October 31, 2007
                  
                  
                  0.60/0.61
                  
                  
                  
                  0.39/0.40Quarter
      ended July 31, 2007
                  
                  
                  0.50/0.54
                  
                  
                  
                  0.35/0.37Quarter
      ended April 30, 2007
                  
                  
                  0.52/0.60
                  
                  
                  
                  0.36/0.42Quarter
      ended January 31, 2007
                  
                  
                  0.42/0.49
                  
                  
                  
                  0.27/0.31Quarter
      ended October 31, 2006
                  
                  
                  0.36/0.40
                  
                  
                  
                  0.28/0.32





(b)  Holders —
The approximate number of record holders of our Common Stock, as of October 24,
2008 amounts to 2,236 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 192,974,824 as of October 24,
2008.





(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.





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





All of
the foregoing  issuances were exempt from registration pursuant to the
provisions of Section 4(2) of the Securities Act of 1933.


19




We did
not repurchase any of our securities during the fiscal year ended July 31,
2008.





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, 2008.





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:
                    
                    
                    4,665,000
                    
                    
                    $
                    0.56
                    
                    
                    
                    3,225,000Equity
      compensation plans not approved by security holders:
                    
                    
                    900,000
                    
                    
                    $
                    0.58
                    
                    
                    
                    N/ATotal
                    
                    
                    5,565,000
                    
                    
                    $
                    0.58
                    
                    
                    
                    3,225,000





*Does not
include the issuance of 2,110,000 shares of restricted stock during the fiscal
year ended July 31, 2008




20


Performance
Graph





Total
      Return To Shareholders(Includes
      reinvestment of dividends)QUARTERLY RETURN
                              PERCENTAGEQuarter
      EndingCompany
      / Index
                            
                            
                            
                            
                            10/31/07
                            
                            
                            1/31/08
                            
                            
                            4/30/08
                            
                            
                            7/31/08Capital
      Gold Corporation
                            
                            
                            
                            
                            
                            36.07
                            
                            
                            
                            10.48
                            
                            
                            
                            -6.61
                            
                            
                            
                            -0.77S&P
      SmallCap 600 Index
                            
                            
                            
                            
                            
                            5.12
                            
                            
                            
                            -12.65
                            
                            
                            
                            1.20
                            
                            
                            
                            -1.48Peer
      Group
                            
                            
                            
                            
                            
                            9.32
                            
                            
                            
                            -20.42
                            
                            
                            
                            -4.41
                            
                            
                            
                            17.42INDEXED
                              RETURNSBase
                            
                            
                            
                            
                            
                            
                            Quarter
      EndingPeriodCompany
      / Index
                            
                            8/1/07
                            
                            
                            10/31/07
                            
                            
                            1/31/08
                            
                            
                            4/30/08
                            
                            
                            7/31/08Capital
      Gold Corporation
                            
                            
                            100
                            
                            
                            
                            136.07
                            
                            
                            
                            150.32
                            
                            
                            
                            140.39
                            
                            
                            
                            139.31S&P
      SmallCap 600 Index
                            
                            
                            100
                            
                            
                            
                            105.12
                            
                            
                            
                            91.82
                            
                            
                            
                            92.92
                            
                            
                            
                            91.55Peer
      Group
                            
                            
                            100
                            
                            
                            
                            109.32
                            
                            
                            
                            87.00
                            
                            
                            
                            83.16
                            
                            
                            
                            97.64Peer
      Group Companies:ALAMOS
      GOLD INCGAMMON
      GOLD INCWESTERN
      GOLDFIELDS INC




21








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, 2008 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, 312008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004Statement of Operations
    data:Revenues
                                
                                $
                                33,104
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Net Income (loss)
                                
                                $
                                6,364
                                
                                
                                $
                                (7,472
                                )
                                
                                $
                                (4,805
                                )
                                
                                $
                                (2,006
                                )
                                
                                $
                                (2,939
                                )Income (loss) per share –
    Basic
                                
                                $
                                0.04
                                
                                
                                $
                                (0.05
                                )
                                
                                $
                                (0.04
                                )
                                
                                $
                                (0.03
                                )
                                
                                $
                                (0.06
                                )Balance Sheet data:Total Assets
                                
                                $
                                48,879
                                
                                
                                $
                                27,551
                                
                                
                                $
                                9,546
                                
                                
                                $
                                5,552
                                
                                
                                $
                                486Long-term Debt
                                
                                $
                                8,375
                                
                                
                                $
                                12,500
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Reclamation and Remediation
      Liability
                                
                                $
                                1,666
                                
                                
                                $
                                1,249
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -




22


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, 2008, 2007 and 2006.  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. (000’s, except where otherwise
specifically noted).





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:




For the year
                        
                        
                        For the yearended
                        
                        
                        endedJuly 31,
                          2008
                        
                        
                        July 31,
                          2007Total
      debt
                        
                        $
                        12,500
                        
                        
                        $
                        12,500Total
      stockholders’ equity
                        
                        $
                        28,197
                        
                        
                        $
                        11,986Cash
      and cash equivalents
                        
                        $
                        10,992
                        
                        
                        $
                        2,225Working
      capital
                        
                        $
                        15,825
                        
                        
                        $
                        6,343




During
our fiscal year ended July 31, 2008 our debt and liquidity positions were
affected by the following:




·
            Net
      cash provided from continuing operations of
  $6,318;




·
            Capital
      expenditures of $5,507;




·
            Proceeds
      from the issuance of common stock upon the exercising of warrants of
      $7,474;




Looking
Forward




Certain
key factors will affect our future financial and operating results. These
include, but are not limited to, the following (000’s except for ounces and cash
cost data):




·
            Fluctuations
      in gold prices;




·
            We
      expect  minimum fiscal 2009 gold sales of approximately
      55,000 ounces;




·
            Cash
      costs per ounce sold, excluding royalties, for fiscal 2009 are expected to
      be approximately $250 to $275 per ounce as the impact of industry-wide
      cost pressures are expected to be slightly
  higher;




·
            We
      anticipate capital expenditures of approximately $5,500 to $6,500 in
      fiscal 2009 with nearly all being allocated to our El Chanate mine in
      Sonora, Mexico;


23




·
            Our
      fiscal year 2009 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,
2008 compared to fiscal year ended July 31, 2007





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





Revenues & Costs
Applicable to Sales





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





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





Depreciation and
Amortization





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




24


General and Administration
Expense





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





Exploration
Expense





Exploration
expense during the years ended July 31, 2008 and 2007 was approximately $938 and
$1,816, respectively, or a decrease of $878 or 48%.  The primary
reason for the decrease in exploration expense was the result of higher
engineering and planning costs related to our El Chanate Project being expensed
in the prior period as well as the costs incurred from our 72-hole reverse
circulation drilling campaign to identify additional proven and probable gold
reserves at the El Chanate Project which was completed in May
2007.  The current period includes: 1) costs from our completed 26
hole reverse circulation drilling program in December 2007 amounting to 4,912
meters at El Chanate.  The drill holes were mainly positioned to test
the outer limits of the currently known ore zones, and 2) cost associated with
our recently leased 12 mining concessions totaling 1,790 hectares located
northwest of Saric, Sonora. We initiated a short drill program as well as some
geochemical work related to these claims during the current
period.  Also, a claim has been filed for approximately 2,200
additional hectares adjacent to this property. These concessions and this claim
are about a sixty mile drive northeast of the El Chanate
project.  Mineralization is evident throughout and is hosted by shear
zones and veins in granite intrusive.





Other Income and
Expense





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





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




25


Income
Tax Expense




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




Mining
operations are primarily conducted in Mexico that 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 2008 and, accordingly, have recorded a Mexican income tax
provision as of July 31, 2008.




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




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




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




For more
information concerning income taxes, please see Note 22 within the consolidated
financial statements contained herein.




Changes in Foreign Exchange
Rates





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


26


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,
                  2008
                
                
                July 31,
                  2007
                
                
                July 31,
                  2006Revenues
                
                
                33,104
                
                
                
                -
                
                
                
                -Net
      Income (loss)
                
                
                6,364
                
                
                
                (7,472
                )
                
                
                (4,805
                )Basic
      net income (loss) per share
                
                
                0.04
                
                
                
                (0.05
                )
                
                
                (0.04
                )Diluted
      net income (loss) per share
                
                
                0.03
                
                
                
                -
                
                
                
                -Gold
      ounces sold
                
                
                39,102
                
                
                
                -
                
                
                
                -Average
      price received
                
                $
                847
                
                
                
                -
                
                
                
                -Cash
      cost per ounce sold(1)
                
                $
                276
                
                
                
                -
                
                
                
                -Total
      cost per ounce sold(1)
                
                $
                335
                
                
                
                -
                
                
                
                -


(1)
            Excluding the net
      profit interest, cash and total cost per ounce sold were $257 and $316,
      respectively.





Summary of Results of
Operations





For the year
                  ended
                
                
                For the year
                  ended
                
                
                For the year
                  endedJuly 31,
                  2008
                
                
                July 31,
                  2007(1)
                
                
                July 31,
                  2006Tonnes
      of ore mined
                
                
                3,498,612
                
                
                
                545,089
                
                
                
                -Tonnes
      of waste removed
                
                
                2,627,318
                
                
                
                209,567
                
                
                
                -Ratio
      of waste to ore
                
                
                0.75
                
                
                
                0.38
                
                
                
                -Tonnes
      of ore processed
                
                
                3,529,699
                
                
                
                631,530
                
                
                
                -Grade
      (grams/tonne)
                
                
                0.85
                
                
                
                0.88
                
                
                
                -Gold
      (ounces)-     
      Produced(2)
                
                
                39,242
                
                
                
                578
                
                
                
                --     
      Sold
                
                
                39,102
                
                
                
                -
                
                
                
                -


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


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





Fiscal year ended July 31,
2007 compared to fiscal year ended July 31, 2006





Net Loss





Our net
loss for the fiscal year ended July 31, 2007 was approximately $7,472, an
increase of approximately $2,667 or 56% from the fiscal year ended July 31,
2006. As discussed below, the primary reasons for the increase in loss during
the fiscal year ended July 31, 2007 were: 1) an increase in general and
administrative expenses of approximately $668; 2) an increase in depreciation
and amortization expense of approximately $852; 3) an increase in exploration
expenditures of approximately $808; 4) an increase in losses of approximately
$644 due to the change in fair value of our derivative instruments; and 5) an
increase in interest expense of approximately $792.  These increases
in loss were slightly offset by a decrease in mine expenses of approximately
$933 due to higher planning and engineering costs being expensed in the prior
fiscal year.  Net loss per share was $.05 and $.04 for the fiscal year
ended July 31, 2007 and 2006, respectively.


27


Revenues





We generated no revenues from mining
operations during the fiscal year ended July 31, 2007 and 2006. There were de
minimis non-operating revenues during the fiscal year ended July 31, 2007 and
2006 of approximately $146 and $184, respectively. These non-operating revenues
primarily represent interest income.





General and Administration
Expense





General
and administrative expenses during the fiscal year ended July 31, 2007 were
$2,893, an increase of approximately $668 or 30% from the fiscal year ended July
31, 2006. The increase in general and administrative expenses resulted primarily
from higher salaries and wages, higher professional and consulting fees as well
as an increase in insurance costs versus the same period a year
earlier.





Exploration
Expense





Exploration
expense during the fiscal year ended July 31, 2007 and 2006 was approximately
$1,816 and $1,941, respectively.  These expenses can be attributed to
our 72-hole drilling campaign to determine additional proven and probable gold
reserves at the El Chanate Project in 2007, as well as engineering and planning
costs related to this project over both periods presented.





Depreciation and
Amortization





Depreciation
and amortization expense during the fiscal year ended July 31, 2007 and 2006 was
approximately $891 and $39, respectively.  The primary reason for the
increase was due to amortization charges on deferred financing costs resulting
from the Credit Facility entered into in August 2006 with Standard Bank
Plc.  This accounted for approximately $876 of the amortization
expense during the fiscal year ended July 31, 2007.





Other Income and
Expense





Our loss
on the change in fair value of derivative instruments during the fiscal year
ended July 31, 2007 and 2006, was approximately $1,226 and $582,
respectively.This
was primarily due to us entering 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.  We
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.  We 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.  While the period of the derivative contracts has commenced, we
do not anticipate any material adverse effect from the fact that we have not
commenced to sell gold because the price of gold is substantially above $535 per
ounce.  Under FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“FAS 133”), these contracts must be carried
on the balance sheet at their fair value, with changes to the fair value of
these contracts reflected as Other Income or
Expense.  These contracts were not designated as hedging
derivatives; and therefore, special hedge accounting does not
apply.





The first
derivative was entered into on March 1, 2006 for a premium of $550; and the
second was entered into on March 30, 2006 for a premium of $250.  The
gold price rose sharply in the second quarter 2006, and was the primary reason
for the decrease in premium on the derivative contracts.  The change
in fair value during the fiscal year ended July 31, 2007 reduced the carrying
value on these derivative contracts by approximately $1,226, and was reflected
as an other expense during the 2007 period.


28


Interest
expense was approximately $792 for the fiscal year ended July 31, 2007 compared
to $0 for the same period in 2006.  This increase was mainly due to
interest expense associated with our outstanding balances on our draw downs
associated with the Credit Facility entered into in August 2006 with Standard
Bank Plc related to project costs for our El Chanate Project.





Liquidity and Capital
Resources




Operating
activities




Cash provided by operating
activities during the year ended July 31, 2008 was approximately $6,318,
which primarily represents cash flows resulting from our realization of revenue
from operations during the year ended July 31, 2008.  Cash used in operating
activities for the same period a year ago was $3,663 as we had not yet
been realizing revenue from operations.




Investing
Activities




Cash used in investing
activities during the year ended July31, 2008, amounted to approximately
$5,479, primarily from the leach pad expansion and the acquisition of equipment,
including additional conveyors and ADR plant equipment, as well as additional
water rights related to our El Chanate Project.  Cash used in investing activitiesfor the same period a year ago was approximately $18,425 which directly
related to the development of the El Chanate mine.




Financing
Activities




Cash provided by financing
activities during the year ended July 31, 2008 amounted to approximately
$7,306, primarily from the exercising of 22,994,178 warrants for gross proceeds
of approximately $7,474. Cash
provided by financing activities for the same period a year ago was
approximately $21,367 which mostly comprised of the full draw down of our credit
facility of $12,500 and proceeds received of approximately $3,486 from the
issuance of common stock in private placements and $5,643 from the issuance of
common stock upon the exercising of 22,203,909 warrants.




Term
loan and Revolving Credit Facility




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


29





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





Debt
Covenants





Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii) a
quarterly average minimum liquidity of U.S.$500,000. In addition, the Credit
Facility restricts, among other things, our ability to incur additional debt,
create liens on our property, dispose of any assets, merge with other companies,
enter into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit.  A failure to comply with
the restrictions contained in the Credit Facility could lead to an event of
default thereunder which could result in an acceleration of such
indebtedness.





In
connection with the refinance proceedings, MSR, as a condition precedent to
closing, obtained a waiver letter from the Lender of any default or event of
default as a result of not being in compliance with regulations of Mexican
federal law with regard to certain filing and environmental bonding issues in
connection with the operation of mining the El Chanate concessions as well as
certain insurance requirements.  MSR has not yet complied with these
regulations due to the absence of professionals in the area qualified to conduct
studies to facilitate compliance. MSR believes that the Mexican government is
aware of these barriers to compliance and that it has not enforced the
Requirements against MSR or other mining companies in Sonora. MSR has agreed to
make a commercially reasonable effort to come into compliance with these
requirements.  See also “Environmental and Permitting
Issues” section below.




As of
July 31, 2008, except for the aforementioned waiver, we and our related entities
were in compliance with all debt covenants and default
provisions.  For the purposes of meeting these financial covenants,
the accounts of Caborca Industrial are not required to be included in the
calculation of these covenants.


30


Environmental
and Permitting Issues





Management
does not expect that environmental issues will have an adverse material effect
on our liquidity or earnings.  In Mexico, although we must continue to
comply with laws, rules and regulations concerning mining, environmental,
health, zoning and historical preservation issues, we are not aware of any
significant environmental concerns or existing reclamation requirements at the
El Chanate concessions.  We received the required Mexican government
permits for construction, mining and processing the El Chanate ores in January
2004.  The permits were extended in June 2005.  Pursuant to
the extensions, once we file a notice that work has commenced, we have one year
to prepare the site and construct the mine and seven years to mine and process
ores from the site. We filed the notice on June 1, 2006.  Once we
revise our new mine plan based on the 2007 Report, we will work to extend the
permits for mining and processing for the new life of mine.  See also
“Debt Covenants”
above.





We
received the renewable explosive permit from the government that expires on
December 31, 2008 and is renewable annually.





We do
include in all our internal revenue and cost projections a certain amount for
environmental and reclamation costs on an ongoing basis.  No assurance
can be given that environmental regulations will not be changed in a manner that
would adversely affect our planned operations.  We estimated the
reclamation costs for the El Chanate site to be approximately
$2,300.  Reclamation costs are allocated to expense over the life of
the related assets and are periodically adjusted to reflect changes in the
estimated present value resulting from the passage of time and revisions to the
estimates of either the timing or amount of the reclamation and closure costs.
The asset retirement obligation is based on when the spending for an existing
environmental disturbance and activity to date will occur. We review, on an
annual basis, unless otherwise deemed necessary, the asset retirement obligation
at each mine site.  We reviewed the estimated present value of the El
Chanate mine reclamation and abandonment costs as of July 31,
2008.  This review resulted in an increase in the Asset Retirement
Obligation by approximately $293.  As of July 31, 2008 and 2007,
approximately $1,666 and $1,249, respectively, was accrued for reclamation
obligations relating to mineral properties in accordance with SFAS No. 143,
“Accounting for Asset Retirement Obligations.”





We own
properties in Leadville, Colorado for which we have previously recorded an
impairment loss.  Part of the Leadville Mining District has been
declared a federal Superfund site under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, and the Superfund Amendments
and Reauthorization Act of 1986.  Several mining companies and one
individual were declared defendants in a possible lawsuit.  We were
not named a defendant or Principal Responsible Party.  We did respond
in full detail to a lengthy questionnaire prepared by the Environmental
Protection Agency ("EPA") regarding our proposed procedures and past activities
in November 1990.  To our knowledge, the EPA has initiated no further
comments or questions.  The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of our Leadville Mining properties in August 2007.  The Division
concluded that based upon 2007 equipment prices and labor costs, an additional
$46 was necessary to be bonded with the Division to reclaim the site to achieve
the approved post-mining land use.  The total amount of the bond
sufficient to perform reclamation as of July31, 2008, is approximately $82. We
have met this bonding requirement.  During our 4th fiscal
quarter ended July 31, 2008, we sold two of the Leadville Mining claims and the
mill for gross proceeds of $100 which was recorded within other income and
expense.


31


Contractual
Obligations





Our
contractual obligations as of July 31, 2008 are summarized as
follows:





Payments
      Due by PeriodContractual
      Obligations
                      
                      Total
                      
                      
                      Less
      than
                        1
      Year
                      
                      
                      1 –
      3
                        Years
                      
                      
                      3 –
      5
                        Years
                      
                      
                      More
      than
                        5
      YearsDebt
      (1)
                      
                      $
                      13,500
                      
                      
                      $
                      5,125
                      
                      
                      $
                      8,375
                      
                      
                      $
                      -
                      
                      
                      $
                      -Remediation
      and reclamation obligations(2)
                      
                      
                      3,751
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,751Operating
      leases(3)
                      
                      
                      585
                      
                      
                      
                      132
                      
                      
                      
                      440
                      
                      
                      
                      13
                      
                      
                      
                      -Derivative
      instruments(4)
                      
                      
                      2,626
                      
                      
                      
                      1,177
                      
                      
                      
                      1,449
                      
                      
                      
                      -
                      
                      
                      
                      -Minimum
      royalty payments(5)
                      
                      
                      1,000
                      
                      
                      
                      1,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -$
                      21,462
                      
                      
                      $
                      7,434
                      
                      
                      $
                      10,264
                      
                      
                      $
                      13
                      
                      
                      $
                      3,751


(1)
              Amounts
      represent principal ($12,500) and estimated interest payments ($1,000)
      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 13 to the Consolidated Financial
      Statements.


(3)
            Amount
      represent a non-cancelable operating lease for office space in NYC 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.


(4)
            Amounts
      represent the net cash settlement of 75,044 ounces of gold at $35 per
      ounce.


(5)
            Amount
      represents the payment of the 10% net profits interest on the El Chanate
      mining concessions which is capped at $1,000.  This does not
      include the net smelter return payments as this payment is linked to the
      gold price and cannot be reasonable estimated given variable market
      conditions.





While we
believe that our available funds in conjunction with anticipated revenues from
gold sales will be adequate to cover capital expenditures, debt service,
royalties, net cash settlements on our gold price protection agreement as well
as operating activities at El Chanate and corporate general and administrative
expenses for fiscal 2009, 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 intends to
raise such funds through the sale of our securities and/or joint venturing with
one or more strategic partners.  We cannot assure that adequate
additional funding, if needed, will be available.  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.





New
Accounting Pronouncements





Fair
Value Option





On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions".


32


The fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.





Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007.  We elected not to adopt the fair value
option for any eligible instruments.





Noncontrolling
Interests





On
December 4, 2007, the FASB issued FASB Statement No. 160,“Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51.”
Statement 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. Statement 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest.





Statement
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited.  We believe adoption of this standard will not have an
impact on the financial condition or the results of our operations.





Derivative
Instruments and Hedging Activities





On April
21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
133 and Statement 47, and K4, Miscellaneous: Income Statement Classification of
Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities.  We believe adoption of this standard will not have a
material impact on the financial condition or the results of our
operations.





Hierarchy
of Generally Accepted Accounting Principles





The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:





*
FASB Statements of Financial Accounting Standards and Interpretations, FASB
Statement 133  Implementation Issues, FASB Staff Positions, AICPA
Accounting Research Bulletins and Accounting Principles Board Opinions that are
not superseded by actions of the FASB, and Rules and interpretive releases of
the SEC for SEC registrants.


33


* FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position.





* AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.





Statement
162 is effective 60 days following the SEC's approval of the PCAOB amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. Since Statement 162 is only effective for nongovernmental
entities, the GAAP hierarchy will remain in AICPA Statement on Auditing
Standards (SAS) No. 69, The
Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
Principles" in the Independent Auditor's Report, for state and local
governmental entities and federal governmental entities. We believe the adoption
of this standard will not have a material impact on the financial condition or
the results of our operations.





Accounting
for Financial Guarantee Insurance Contracts





The FASB
issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts. This new standard clarifies how FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts.





Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise's risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008. Except for the required disclosures, earlier
application is not permitted. We believe the adoption of this standard will not
have an impact on the financial condition or the results of our
operations.





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 and accounting for derivative and hedging
activities.




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:


34




Ore
on Leach Pads




The recovery of gold from certain gold
oxide 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 our 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. Our 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 mill in-circuit, 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, stockpiles 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.




35




Precious
Metals Inventory




Precious metals inventories include
gold doré and/or gold bullion. Precious metals that result from our 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 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.




36




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 abandonment costs. The asset retirement obligation is based on
when the spending for an existing environmental disturbance and activity to date
will occur. We review, on an annual basis, unless otherwise deemed necessary,
the asset retirement obligation at our mine site in accordance with FASB FAS
No. 143, “Accounting for Asset Retirement Obligations.”





Deferred Financing
Costs





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





Intangible
Assets





Purchased intangible assets consisting
of rights of way, easements and net profit interests are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally five years or
using the units of production method. It is our policy to assess periodically
the carrying amount of our purchased intangible assets to determine if there has
been an impairment to their carrying value. Impairments of other intangible
assets are determined in accordance with SFAS 144. There was no impairment at
July 31, 2008.





Fair Value of Financial
Instruments





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





Revenue
Recognition





Revenue
is recognized from the sale of gold dore when persuasive evidence of an
arrangement exists, the price is determinable, the product has been delivered to
the refinery, the title and risk of loss has been transferred to the refiner and
collection of the sales price is reasonably assured from the customer. 
Sales are calculated based upon assay of the dore’s precious metal content and
its weight.  The Company receives 95% of the precious metal content
contained within the dore from the refinery based upon the preliminary assay of
the Company.  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.  Revenues from by-product
sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $707, $0 and $0 for
the fiscal years ended July 31, 2008, 2007 and 2006,
respectively.


37


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.





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





Accounting for Derivatives
and Hedging Activities





We
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.  We 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.  We 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 are not designated as hedging derivatives, they serve an economic
purpose of protecting us from the effects of a decline in gold
prices.  Because they are not designated as hedges, however, special
hedge accounting does not apply.  Derivative results are simply marked
to market through earnings, with these effects recorded in other income or other expense, as appropriate
under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“FAS 133”).





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





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


38





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





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





Item
7A.      Quantitative and Qualitative
Disclosures About Market Risk




Metal
Price




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




Foreign
Currency




Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow.  Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic conditions. Most of
our assets and operations are solely in Mexico; and therefore, we are more
susceptible to fluctuations in the Mexican peso / US 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
impact our cost structure, were not mitigated by offsetting increases in the
U.S. dollar gold price or by other factors, profitability, cash flows and the
amount of proven and probable reserves in the applicable foreign country could
be reduced. The extent of any such reduction would be dependent on a variety of
factors including the length of time of any such weakening of the U.S. dollar,
and management’s long-term view of the applicable exchange rate.  We
believe, however, that this exchange rate variability has not had a material
impact on our financial statements.





Gold
Price Protection Agreement





In March
2006, we entered into a gold price protection arrangement with Standard Bank to
protect us against future declines in the price of gold.  We agreed to
a series of gold forward sales and call option purchases in anticipation of
entering into the Credit Facility. Under the price protection agreement, we have
agreed to forward sales for a total volume of 121,927 ounces of gold forward to
Standard Bank at a price of $500 per ounce.  These forward sales were
to be settled quarterly over the period from March 2007 to September 2010. We
also purchased call options from Standard Bank enabling the right to purchase
gold on the same quarterly basis for the same total volume with a strike price
of $535 per ounce.  Together, these forward sales and call options
serve to put a floor on our gold sales price and thereby protect us from the
effects of the market price falling below $535 per ounce, while allowing us to
enjoy the upside of higher gold prices.  To date, the we have net
settled these contracts, making cash payments reflecting the difference between
the call option purchase price of $535 and the forward sale price of $500, or
$35.00 per oz on the volume prescribed by the contracts.


39


The total
contractual ounces to settle and cash payments remaining on the gold price
protection agreement are as follows (000’s):





Fiscal
      year ending:
                  
                  Ounces Remaining
                  
                  
                  Amount2009
                  
                  
                  33,638
                  
                  
                  $
                  1,1772010
                  
                  
                  33,176
                  
                  
                  $
                  1,1612011
                  
                  
                  8,230
                  
                  
                  $
                  288Total
                  
                  
                  75,044
                  
                  
                  $
                  2,626





Interest
Rate Swap Contracts





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





Market
Risk Disclosures


July
31, 2008


(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
                                        
                                        $
                                        6,938
                                        (1)
                                        
                                        
                                        
                                        5.30
                                        %
                                        3 Mo. USD LIBOR
                                        
                                        12/31/2010
                                        
                                        $
                                        (205
                                        )Gold
      Forward Sales(2)
                                        
                                        8,428
      oz./qtr.
                                        (3)
                                        
                                        $
                                        500/oz.
                                        
                                        Price
      of gold
                                        
                                        9/30/2010
                                        
                                        $
                                        (30
      ,765
                                        )Gold
      Call Options (2)
                                        
                                        8,428
      oz./qtr.
                                        (3)
                                        
                                        $
                                        535/oz.
                                        
                                        Price
      of gold
                                        
                                        9/30/2010
                                        
                                        $
                                        30,039





(1)The value shown
      reflects the notional as of July 31, 2008. Over the term of the swap, the
      notional amortizes, dropping to approximately $656.(2)These contracts
      are used for hedging purposes, but hedge accounting is not
      applied.(3)The value shown
      reflects the current notional, but these contracts amortize down to 8,230
      ounces per quarter by the contract
termination.





As of July 31, 2008, the dollar value
of a basis point for this interest rate swap was slightly less than $900,
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 slightly less
than $900.   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
percent of our variable rate exposure.


40





The combined gold forward sales and
long call options serve to synthesize a put option that protects us from the
market exposure to gold prices below $535 per ounce on the volume of sales
consistent with the notional size of these contracts.  These contracts
covered  approximately 90 percent of production during their term
ending July 31, 2008.





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 Form 10-K starting on page F-1.








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





There have been no changes in or
disagreements with accountants with respect to accounting and/or financial
disclosure.





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 ensure that information required to be
disclosed is accumulated and communicated to the Chief Executive Officer and our
Chief Financial Officer to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. They have concluded that, as of that date, our
disclosure controls and procedures were effective.





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





Management’s 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 principal executive and
principal financial officers and affected by our Board of Directors, management
and other personnel, and 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.


41


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, 2008.  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, 2008.  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, 2008, based on the criteria set forth in “Internal Control—Integrated
Framework” issued by the COSO.





This
Amendment No. 1 to Annual Report on Form 10-K/A does not include an attestation
report of the Company’s registered public accounting firm regarding internal
control over financial reporting.  Management has requested that its
registered public accounting firm provide such report and, as soon as the
attestation report is available, the Company will file an amendment to its Form
10-K for the year ended July 31, 2008 to include such report.





Item
9B.      Other
Information.





None.


42


PART III





Item
      10.
            Directors,
      Executive Officers and Corporate
  Governance.





The
following table sets forth certain information concerning our directors and
executive officers:





FirstBecameName
                                                  
                                                  Age
                                                  
                                                  
                                                  Director
                                                  
                                                  PositionGifford
      A. Dieterle
                                                  
                                                  76
                                                  
                                                  
                                                  9/82
                                                  
                                                  President,
      Treasurer&
      Chairman of the BoardJohn
      Brownlie
                                                  
                                                  59
                                                  
                                                  
                                                  2/07
                                                  
                                                  Chief
      Operating  Officer, DirectorChristopher
      Chipman
                                                  
                                                  35
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Chief
      Financial OfficerJeffrey
      W. Pritchard
                                                  
                                                  50
                                                  
                                                  
                                                  1/00
                                                  
                                                  Director,
      Executive Vice President,SecretaryRobert
      Roningen
                                                  
                                                  73
                                                  
                                                  
                                                  9/93
                                                  
                                                  Director,
      Senior Vice President,Roger
      A. Newell
                                                  
                                                  65
                                                  
                                                  
                                                  8/00
                                                  
                                                  DirectorJ.
      Scott Hazlitt
                                                  
                                                  56
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Vice
      President – Mine DevelopmentIan
      A. Shaw
                                                  
                                                  68
                                                  
                                                  
                                                  3/06
                                                  
                                                  DirectorJohn
      Postle
                                                  
                                                  67
                                                  
                                                  
                                                  3/06
                                                  
                                                  DirectorMark
      T. Nesbitt
                                                  
                                                  63
                                                  
                                                  
                                                  3/06
                                                  
                                                  Director





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





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





JOHN
BROWNLIE,Chief
Operating Officer and a Director, has worked for us since May 2006 and is in
charge of supervising the construction, start-up and operation of the
mine.  Mr. Brownlie provided team management for mining projects
requiring technical, administrative, political and cultural experience over his
28 year mining career.  From 2000 to 2006, Mr. Brownlie was a
consultant providing mining and mineral related services to various companies
including SRK, Oxus Mining plc and Cemco Inc. From 1995 to 2000, he was the
General Manager for the Zarafshan-Newmont Joint Venture in Uzbekistan, a
one-million tonne per month heap leach plant which produced over 400,000 ounces
of gold per year. From 1988 to 1995, Mr. Brownlie served as the Chief Engineer
and General Manager for Monarch Resources in Venezuela, at both the El Callao
Revemin Mill and La Camorra gold projects. Before that, was a resident of South
Africa and associated with numerous mineral projects across Africa. He is also a
mechanical engineer and fluent in Spanish.  Mr. Brownlie is also a
director of Palladon Ventures, a publicly traded  mineral-related
company.


43


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.  He is a member of the American and Pennsylvania Institute of
Certified Public Accountants.





JEFFREY
W. PRITCHARD, Executive Vice President, Secretary and Director, has worked for
us since 1996.  He has been in the marketing/public relations field
since receiving a Bachelor’s degree from the State University of New York in
1979.  Mr. Pritchard has served as the Director of Marketing for the
New Jersey Devils (1987-1990) and as the Director of Sales for the New York
Islanders (1985-1987).  He also was an Executive Vice President with
Long Island based Performance Network, a marketing and publishing concern from
1990 through 1995.





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





ROBERT
RONINGEN, Senior Vice President and Director, has been engaged in the practice
of law as a sole practitioner and is a self-employed consultant geophysicist in
Duluth, Minnesota.  Mr. Roningen served as our Secretary until
February 2007.  From 1988 to August 1993, he was an officer and
director of Franklin Consolidated Mining Company, Inc.  He graduated
from the University of Minnesota in 1957 with a B.A. in geology and in 1962 with
a degree in Law.


44


ROGER A.
NEWELL, Director, worked for us from 2000 to September 2007.  He was
our Vice President – Development until September 2007.  Since October
2007, Mr. Newell has been an Executive Vice President of Kilimanjaro Mining
Company Ltd., a private Nevada based company involved in uranium and gold
exploration in Tanzania, Africa.  Since June 2008, he has served as
the Chairman, CEO and President of Lake Victoria Mining Company, a U.S. public
company with exploration property in Tanzania, Africa.  From 1974
through 1977, he was a geologist with Kennecott Copper
Corporation.  From 1977 through 1989, he served as Exploration
Manager/Senior Geologist for the Newmont Mining Corporation and, from 1989
through 1995, was the Exploration Manager for Gold Fields Mining
Company.  He was Vice President Development, for Western Exploration
Company from 1997 through 2000.  Since 1995, he has been a senior
consultant in the Minerals Advisory Group LLC, Tucson, Arizona, a company that
provides technical and engineering advice to clients regarding mineral
projects.  He has been self-employed as a geologist since
2001.  He is a Fellow in the Society of Economic Geologists and a Past
President of that Society’s Foundation.  .  He has a M.Sc.
from the Colorado School of Mines and a Ph.D. in mining and mineral exploration
from Stanford University.





IAN A.
SHAW is a member of our Board of Directors and the Board’s Audit and
Compensation Committees.  Mr. Shaw has over 33 years of experience in the
mining industry. He has been Managing Director of Shaw & Associates since
1993.  Shaw & Associates is a corporate services consulting firm
specializing in corporate finance, regulatory reporting and compliance with
clients that are typically public companies in the resource industry. In the
course of providing consulting services he has accepted positions as an officer
or director with number of his clients. He recently held the position of
Director, since 1994, of Metallica Resources Inc., a TSX listed corporation with
a gold mine in Mexico, and exploration properties in Chile and Alaska. Positions
he currently holds include Director of Pelangio Exploration, Inc., since 2008, a
TSX listed corporation with an interest in gold exploration properties in Canada
and Ghana; Director of PDX Resources, Inc. (formerly Pelangio Mines, Inc.),
since 2008, a TSX listed company with an investment in a company which holds a
gold property in Canada; Vice President, Finance and CFO, since May 2005, of
Unor Inc., a TSX listed company with uranium exploration properties in
Canada; and Chief Financial Officer, since January 2007, of Olivut Resources
Ltd., a TSX listed corporation with diamond exploration properties in Canada.
Mr. Shaw is a Chartered Accountant and received a B. Comm. from Trinity College
at the University of Toronto in 1964.





JOHN
POSTLE is a member of our Board of Directors and the Board’s Audit and
Compensation Committees.  He is a Consulting Mining Engineer associated
with Scott Wilson Roscoe Postle Associates Inc.  In 1985 he was a
founding partner of Roscoe Postle Associates Inc. which later merged with Scott
Wilson Group Plc.  Mr. Postle provides mining consulting services to a
number of international financial institutions, corporations, utilities and law
firms.  He worked for Cominco Ltd (1965-1970), Falconbridge Ltd (1970-1975)
and D.S. Robertson and Associates (1976-1985) and has worked at a number of open
pit and underground mining operations in both operating and planning
capacities.  Mr. Postle is a Past Chairman of the Mineral Economics
Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”),
and was appointed a Distinguished Lecturer of the CIM in 1991.  In 1997, he
was awarded the CIM Robert Elver Mineral Economics Award.  He is currently
Chairman of a CIM Standing Committee on Ore Reserve Definitions. Mr. Postle is a
director of Strait Gold Corporation, a Canadian publicly traded company, and
serves as a member of that company’s audit and disclosure committees.  Mr.
Postle has a B.A.Sc. Degree in Mining Engineering from the University of British
Columbia in 1965 and a M.Sc. Degree in Earth Sciences from Stanford University
in 1968.”


45


MARK T.
NESBITT is a member of our Board of Directors and the Board’s Audit and
Compensation Committees.  Since 1988, he has been a natural resources
attorney in Denver, Colorado specializing in domestic and international mining
transactions, agreements, negotiations, title due diligence, corporate and
general business counsel.  Mr. Nesbitt has been an Adjunct Professor
at the University of Denver School of Law's since 2001, is an active member of
the Rocky Mountain Mineral Law Foundation, having served as a Trustee from 1987
to 1993, and from 2003 to 2006,  Co-chairman of the Mining Sessions at
the Foundation’s international natural resource institute in Buenos Aires,
Argentina in 2007, Co-chairman of the Foundation's Mining Law and Investment in
Latin America institute in Lima, Peru in 2003, and Chairman of the same
institute in 2003, and Chairman of the Foundation's first Land and Permitting
Special Institute in 1994.  He also has served continuously over the
years on the Foundation's Special Institutes Committee, Long Range Planning
Committee, and numerous other committees.    Mr. Nesbitt is
a member of the International, American, Colorado and Denver Bar Associations,
Rocky Mountain Mineral Law Foundation, International Mining Professionals
Society (Treasurer since 2000), and the Colorado Mining
Association.  He is also a former Director of the Colorado Mining
Association and past President of the Rocky Mountain Association of Mineral
Landmen. He received a B.S. degree in Geology from Washington State University
in 1968 and a J.D. from Gonzaga University School of Law in 1975.





Jack V. Everett, resigned as our Vice
President of Exploration and a member of our Board of Directors on June 6,
2007.  On September 10, 2007, Roger A. Newell resigned as our Vice
President of Development. He continues to serve as a member of our Board of
Directors.





Compliance with Section
16(a) of The Securities Exchange Act of 1934





To our
knowledge, during the fiscal year ended July 31, 2008, based solely on a review
of such materials as are required by the Securities and Exchange Commission, no
officer, director or beneficial holder of more than ten percent of our issued
and outstanding shares of Common Stock failed to timely file with the Securities
and Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934, except that Mr. Roningen
filed forms 4 late with regard to six transactions, Mr. Brownlie filed forms 4
late with regard to two transactions and Messrs. Dieterle, Pritchard, Chipman,
Hazlitt, Shaw, Postle and Nesbit each filed a form 4 late with regard to one
transaction.





Meetings And Committees Of
The Board





Our Board
of Directors is responsible for the management and direction of our company and
for establishing broad corporate policies. A primary responsibility of the Board
is to provide effective governance over our affairs for the benefit of our
stockholders. In all actions taken by the Board, the Directors are expected to
exercise their business judgment in what they reasonably believe to be the best
interests of our company. In discharging that obligation, Directors may rely on
the honesty and integrity of our senior executives and our outside advisors and
auditors.





The Board of Directors and the Audit
Committee of the Board meet periodically throughout the year to receive and
discuss operating and financial reports presented by our executive officers as
reports by experts and other advisors.  The Board held five meetings
during the fiscal year ended July 31, 2008 in person and telephonically, and
acted by unanimous written consent on three occasions.  All directors
attended 90% or more of the aggregate meetings.





In fiscal 2008, the Audit Committee,
consisting of all of the non-employee members of the Board of Directors, met on
four occasions.  Representatives of our auditor were in attendance at
one meeting without management present.





Our Board of Directors has no standing
nominating committee because this function is handled by the Board of
Directors.  Nominees to the Board of Directors are selected by the
Board of Directors based on current business and industry knowledge as well as
general business knowledge.


46


Audit Committee and Audit Committee
Expert.





The Audit Committee of our Board of
Directors consists of Ian A. Shaw, Committee Chairman, John Postle and Mark T.
Nesbitt. The Board of Directors has determined that all three members are
independent directors as (i) defined in Rule 10A-3(b)(1)(ii) under the
Securities Exchange Act of 1934 (the “Exchange Act”) and (ii) under Section
121B(2)(a) of the AMEX Company Guide (although our securities are not listed on
the American Stock Exchange or any other national exchange).  The
Audit Committee met four times telephonically in fiscal 2008.  All
committee members were present at the meetings.





Mr. Shaw
serves as the financial expert as defined in Securities and Exchange Commission
rules on the committee. We believe Messrs. Shaw, Postle and Nesbitt to be
independent of management and free of any relationship that would interfere with
their exercise of independent judgment as members of this
committee.  The principal functions of the Audit Committee are to (i)
assist the Board in fulfilling its oversight responsibility relating to the
annual independent audit of our consolidated financial statements, the
engagement of the independent registered public accounting firm and the
evaluation of the independent registered public accounting firm’s
qualifications, independence and performance  (ii) prepare the reports
or statements as may be required by the securities laws, (iii) assist the Board
in fulfilling its oversight responsibility relating to the integrity of our
financial statements and financial reporting process and our system of internal
accounting and financial controls, (iv) discuss the financial statements and
reports with management, including any significant adjustments, management
judgments and estimates, new accounting policies and disagreements with
management, and (vi) review disclosures by independent accountants concerning
relationships with us and the performance of our independent
accountants.





Compensation
Committee.





Our Compensation Committee consists of
Messrs. Shaw, Postle and Nesbitt, our independent directors.  The
principal functions of the Compensation Committee are to advise and makes
recommendations to our Board of Directors regarding matters relating to the
compensation of directors, officers and senior management.  The
Compensation Committee met three times telephonically in fiscal
2008.  All committee members were present at the
meetings.





Communication
with the Board of Directors





Interested
parties wishing to contact our Board of Directors may do so by writing to the
following address: Board of Directors, 76 Beaver Street, 14th Floor, New York,
NY 10005, Attn: Jeffrey W. Pritchard, Secretary.  All letters received
will be categorized and processed by Mr. Pritchard and then forwarded to our
Board of Directors.





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.


47


Item
11.      Executive
Compensation





Compensation
Discussion and Analysis





Objectives
and Philosophy of Executive Compensation





The primary objectives of the
Compensation Committee with respect to executive compensation are to attract and
retain the most talented and dedicated executives possible, to tie annual and
long-term cash and stock incentives to achievement of measurable performance
objectives, and to align executives' incentives with stockholder value creation.
To achieve these objectives, the compensation committee expects to implement and
maintain compensation plans that tie a substantial portion of executives'
overall compensation to the experience level of the executive or employee, the
complexity and amount of responsibility of the employee’s job, key strategic
financial and operational goals such as the establishment and maintenance of key
strategic relationships, the development and operation of our mining projects,
the identification and possible development of additional mining properties and
the performance of our common stock price. The compensation committee evaluates
individual executive performance with the goal of setting compensation at levels
the compensation committee believes are comparable with executives in other
companies of similar size and stage of development operating in the mining
industry while taking into account our relative performance and our own
strategic goals.  It is our general practice to grant equity-based
awards to executives and employees.





The
Compensation Committee engaged Mosteller & Associates, Inc. (“Mosteller”),
an independent executive compensation consulting firm, to provide advice and
assistance in the area of executive and director compensation.  Mosteller
conducted a review of the total compensation of the Company’s executive officers
and prepared reports for the review of the Compensation Committee that were
subsequently used in determining the appropriate levels of compensation for each
executive officer.  Specifically, in accordance with the scope directed by
the Compensation Committee, Mosteller reviewed the compensation packages paid to
the Company’s executives in 2006 and 2007, selected peer sources against which
to compare the data and analyzed comparable compensation packages using
appropriate regression analyses.




To
evaluate the Company’s compensation packages, Mosteller identified four sources
of comparison:  (1) mining companies with revenues less than $10 million
and less than 100 employees that are headquartered in the northeastern United
States; (2) mining and natural resources divisions of utility companies with
revenues less than $50 million and less than 100 employees that are
headquartered in the States; (3) energy companies with revenues less than $50
million that are headquartered in the United States; and (4) a custom peer group
of mining companies that included Golden Star Resources, LTD, Miramar,
Northgate, Royal Gold, Inc., Coeur d’Alene Mines Corp., and Meridian Gold. 
The Company believes that the companies in this custom peer group provide a good
basis of comparison because, similar to the Company, they are operational, are
producing product and have sizable assets and revenue streams.


48


Elements
of Executive Compensation





Executive
compensation consists of the following elements:





Regular
Compensation





Regular
compensation for our executives will be established based on the scope of their
responsibilities, taking into account competitive market compensation paid by
other companies for similar positions. Generally, we believe that executive base
salaries should be targeted near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Regular compensation will
be reviewed annually, and adjusted from time to time to realign salaries with
market levels after taking into account individual responsibilities, performance
and experience. This review will occur in the fourth fiscal quarter of each
year.





Compensation
to new executives is based entirely upon similar factors to those discussed
above for regular employees and executives and timing is determined solely by
needs of our company, some of which can be completely unforeseen, such as
resignations or terminations for cause.





Post-termination
compensation is fixed in the employment agreement of each executive, and
generally, post-termination payments are not offered to non-executive
employees.





The Chief
Executive Officer attends the Compensation Committee meetings as management’s
representative.  No other executives participate in the compensation
process or attend the Compensation Committee meetings.  The CEO evaluates
and provides performance assessments and compensation recommendations for each
of the executive officers other than himself to the Compensation
Committee.  The Compensation Committee considers these recommendations in
its deliberations to set executive compensation.  The Compensation
Committee reviews the compensation package of the CEO and determines the
compensation package of the CEO in an executive session that the CEO does not
attend.The CEO does not engage in
discussions with the Compensation Committee or the Compensation Committee’s
independent compensation consulting firm regarding his compensation
package.





Annual
Bonus





Our
compensation program includes eligibility for an annual performance-based cash
and/or equity- based bonus (See “2006 Equity Incentive Plan” below) in the case
of all executives and certain non-executive employees. The amount of the cash
and/or equity-based bonus will depend on the level of achievement of the
financial and operational goals and for achieving individual annual performance
objectives. These objectives will vary depending on the individual executive,
but will relate generally to strategic factors such as establishment and
maintenance of key strategic relationships, the development and operation of our
mining projects, the identification and possible development of additional
mining properties, and to financial factors such as raising capital and
improving our results of operations. Bonuses, if awarded, will generally be
determined at the sole discretion of the Board of Directors as recommended by
the compensation committee.





The
Company did not establish corporate or individual performance targets prior to,
or at the beginning of, fiscal year 2008.  At the conclusion of fiscal
2008, the Compensation Committee reviewed the performance of the Company and
each executive during fiscal 2008.  The Compensation Committee noted
several achievements, including, but not limited to, the increase in ore mined,
the increase in ounces produced, the increase in the proceeds from sales of gold
and silver, the increase in gold reserves, and the completion of certain capital
and plant upgrades.


49


All
employees, whether executives or key employees, as well as administrative staff,
will be granted bonus compensation at the same time.  All efforts are
made by senior management, the compensation committee and the Board of Directors
to avoid issuances of stock as compensation that would create even the
appearance of being timed to the release of material non-public
information.





2006 Equity Incentive
Plan





The 2006
Equity Incentive Plan (the “Plan”) is intended to attract and retain individuals
of experience and ability, to provide incentive to our employees, consultants,
and non-employee directors, to encourage employee and director proprietary
interests in us, and to encourage employees to remain in our
employ.





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





The Plan
is administered by our Board of Directors which has delegated the administration
to our Compensation Committee.  The Plan provides for Awards to be
made to such of our employees, directors and consultants and our 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.





The
exercise price of an option must be 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 our 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 Exchange Act 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 TSX or any stock exchange upon which the common
stock is listed.


50


Although
non-cash compensation is utilized by us to prevent placing strains on liquidity,
care is taken by management to avoid materially diluting investors.





On
December 20, 2007, at the recommendation of the Compensation Committee, the
Company’s executive officers, directors and employees were granted 1,095,000
restricted shares under our 2006 Equity Incentive Plan (the “Plan”) as bonus
compensation.  The restricted shares were granted as follows:  Gifford
Dieterle – 250,000, John Brownlie – 250,000, Jeffrey Pritchard – 250,000,
Christopher Chipman – 250,000, Scott Hazlitt – 75,000 and two employees received
an aggregate of 20,000 restricted shares.The fair market value
of the restricted stock on the date of grant was $0.63.  The restricted
shares granted vest equally over three years from the date of
grant.




Also on
December 20, 2007, at the recommendation of the Compensation Committee, the
Company’s executive officers and employees were granted 3,150,000 stock options
under our Plan as bonus compensation.  The stock options were granted as
follows:  Gifford Dieterle - 500,000 options, John Brownlie – 500,000
options, Christopher Chipman – 500,000 options, Jeffrey Pritchard – 500,000
options, Scott Hazlitt – 350,000 options, Ian Shaw – 150,000 options, John
Postle – 150,000 options, Mark Nesbitt – 150,000 options, Roger Newell – 100,000
options, Robert Roningen – 100,000 stock options, and other non-executive
employees – 150,000.The stock options have a term of seven years and vest over five years as
follows: 20% vested upon issuance and the balance vest 20% annually
thereafter.The
exercise price of the stock options is $0.63 per share (per the Plan, the
closing price on the Toronto Stock Exchange on the trading day immediately prior
to the day of determination converted to U.S. Dollars).




The stock
options and restricted stock awarded on December 20, 2007 were granted as a
method to provide incentive compensation to the Company’s executive officers,
directors and employees.  The Compensation Committee believes that the
recipients are motivated by the potential appreciation of the stock price over
time and will remain committed to the Company while the grants
vest.




On July
17, 2008, at the recommendation of the Compensation Committee, the Company’s
executive officers and directors were granted 515,000 restricted shares under
our Plan as bonus compensation for the fiscal year ended July 31, 2008. 
The restricted shares were awarded as follows:  Gifford Dieterle – 100,000,
John Brownlie – 100,000, Jeffrey Pritchard – 100,000, Christopher Chipman –
100,000, Scott Hazlitt – 50,000, Ian Shaw – 15,000, John Postle – 15,000, Mark
T. Nesbitt – 15,000, Roger Newell -10,000 and Robert Roningen – 10,000. The Compensation
Committee determined that because this grant constituted compensation for
services rendered, the restricted shares granted vested immediately.  The
fair value of the Company’s stock was $0.70 on the date of grant.  These
restricted shares were awarded as part of the Company’s bonus award and were
designed to reward the recipients for services rendered.




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 end on the
earlier 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.


51


Employment
and Engagement Agreements





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





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





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





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





We have 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 our reputation. In
the event that we terminate 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 us of any of the terms of the agreement, upon 30
days’ prior written notice.  In the event of a claim of material
breach by us 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 our 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 us.  Severance payments cannot exceed 12 month’s
salary.


52


In conjunction with the employment
agreements, our 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 our 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 continue through December 31, 2011 and automatically renews for
successive one-year periods unless either party provides the other party with
written notice of its intent not to renew at least thirty (30) days prior to the
expiration of the then current term.  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 us 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 us 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 for the prior year, as well as outplacement
benefits.  Each agreement also provides that the executive is entitled
to a payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.





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





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.


53





On September 14, 2007, we entered into
a Second Amended Engagement Agreement (the “Agreement”) with Christopher
Chipman, our Chief Financial Officer, effective May 1, 2007.  The
Agreement supersedes and replaces Mr. Chipman’s prior agreement that expired on
August 31, 2007.  He receives a monthly fee of $14,583.  Mr.
Chipman can terminate the Agreement on 60 days prior notice.  We can
terminate the Agreement without cause on 30 days prior notice and for cause (as
defined in the Agreement).  The Agreement also terminates upon Mr.
Chipman’s disability (as defined in the Agreement) or death. In the event that
we terminate the Agreement without cause, Mr. Chipman will be entitled to a cash
termination payment equal to his Annual Fee in effect upon the date of
termination, payable in equal monthly installments beginning in the month
following his termination.  In the event the Agreement is terminated
by Mr. Chipman at his election or due to his death or disability, Mr. Chipman
will be entitled to the fees otherwise due and payable to him through the last
day of the month in which such termination occurs.  In conjunction
with Agreement, we entered into a change of control agreement similar to the
agreements entered into with our other executive officers.  In
connection with the original engagement agreement with Mr. Chipman in March
2006, Mr. Chipman received a two year option to purchase an aggregate of 50,000
shares of our common stock at an exercise price of $.34 per share. This option
has been exercised in full.





On May 12, 2006, we entered into an
employment agreement with John Brownlie, pursuant to which Mr. Brownlie
originally served as Vice President Operations.  Mr. Brownlie became
our Chief Operating Officer in February 2007.  Mr. Brownlie serves as
Vice President Operations. Mr. Brownlie receives a base annual salary of
$150,000 and is entitled to annual bonuses. Upon his employment, he received
options to purchase an aggregate of 200,000 shares of our common stock at an
exercise price of $.32 per share. 50,000 options vested immediately and the
balance vest upon our achieving "Economic Completion" as that term is defined in
the Standard Bank Credit Facility (when we have commenced mining operations and
has been operating at anticipated capacity for 60 to 90 days). The term of the
options is two years from the date of vesting.  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 terminates him without cause or he terminates due to our
breach, he will be entitled to certain severance payments. We utilized the
Black-Scholes method to fair value the 200,000 options received by Mr. Brownlie.
We recorded approximately $70,000 as deferred compensation expense as of the
date of the agreement and recorded the vested portion or $17,500 as stock based
compensation expense for the year ended July 31, 2006.





On August 29, 2007, at the
recommendation of the compensation committee, the Board increased the salaries
of our 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,
$250,000; John Brownlie, Chief Operating Officer, $225,000; Christopher Chipman,
Chief Financial Officer, $175,000 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $195,000; Roger A. Newell, Vice
President - Development, $135,000; and J. Scott Hazlitt, Vice President - Mine
Development, $135,000. The salary increase for Mr. Brownlie and the consulting
fee increase for Mr. Chipman were retroactive to May 1, 2007 and the salary
increase for Mr. Pritchard is retroactive to August 1, 2007.





On July 17, 2008, at the recommendation
of the compensation committee of our Board of Directors, our executive officers
were awarded salary increases effective August 1, 2008. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $287,500; John Brownlie, Chief Operating Officer, $258,750; Christopher
Chipman, Chief Financial Officer, $201,250 (consulting fee); Jeffrey W.
Pritchard, Vice President - Investor Relations and Secretary, $224,250; and J.
Scott Hazlitt, Vice President - Mine Development, $155,250.


54





On October 28, 2008, we entered into an
Engagement Agreement with John Brownlie, our Chief Operating
Officer.  The agreement supersedes a May 12, 2006 employment agreement
between us and Mr. Brownlie.  Pursuant to the Engagement Agreement,
Mr. Brownlie serves as our Chief Operating Officer and receives a base annual
fee of at least $258,750 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.





Compensation
of Directors





During the fiscal year ended July 31,
2007, our Independent Directors each received a fee of $1,000 per
month.  Robert Roningen, director, received a fee of $2,000 per month
for legal and consulting services during the fiscal year ended July 31,
2007.  Non-independent directors were not otherwise compensated for
acting in their capacity as Directors.  Directors are reimbursed for
their accountable expenses incurred in attending meetings and conducting their
duties.   On August 29, 2007, we increased directors’
compensation to our independent directors and to Robert Roningen and Roger
Newell by $1,000 per month.





On July
17, 2008, at the recommendation of the Compensation Committee, the Company’s
non-executive directors weregranted 65,000
restricted shares under our Plan as bonus compensation for the fiscal year ended
July 31, 2008.  The Compensation Committee determined that this grant
constituted compensation for services rendered, the restricted shares granted
vested immediately.  Each independent, non-executive director, Ian Shaw,
John Postle and Mark T. Nesbitt, received 15,000 restricted shares and each
non-executive director, Roger Newell and Robert Roningen, received 10,000
restricted shares. The fair value of the Company’s stock was $0.70 on the date
of grant.




On
December 20 2007, at the recommendation of the Compensation Committee, the
Company’s non-executive directors were granted 650,000 stock options under our
Plan as bonus compensation. Each independent, non-executive director, Ian Shaw,
John Postle and Mark T. Nesbitt, received 150,000 stock options and each
non-executive director, Roger Newell and Robert Roningen, received 100,000 stock
options. The stock options have a term of seven years and vest as follows: 20%
vested upon issuance and the balance vest 20% annually thereafter. The exercise
price of the stock options is $0.63 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars).  These stock option grants were
issued as incentive based compensation.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 end on the
earlier 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 stock
options awarded on December 20, 2007 were granted as a method to provide
incentive compensation to the Company’s non-executive directors.  The
Compensation Committee believes that the recipients are motivated by the
potential appreciation of the stock price over time and will remain committed to
the Company while the grants vest.


55


Conclusion





Our
compensation policies are designed to retain and motivate our senior executive
officers and to ultimately reward them for outstanding individual and corporate
performance.




Summary
Compensation Table




The
following tables set forth the total compensation paid to or earned by our named
executive officers, as that term is defined in Item 402(a)(3) of Regulation
S-K  as of our fiscal years ended July 31, 2008 and 2007, respectively
(000’s):




Name
      &
                                                              Principal
                                                              Position
                                                            
                                                            Year
                                                            
                                                            Salary
                                                              ($)
                                                            
                                                            
                                                            Bonus
                                                              ($)
                                                            
                                                            
                                                            Stock
                                                              Awards
                                                              (2)
                                                            
                                                            
                                                            Option
                                                              Awards
                                                              (1)
                                                            
                                                            
                                                            Non-Equity
                                                              Incentive
                                                              Plan
                                                              Compen-
                                                              sation
                                                            
                                                            
                                                            Non-
                                                              qualified
                                                              Deferred
                                                              Compen-
                                                              sation
                                                              Earnings
                                                            
                                                            
                                                            All
      Other
                                                              Compen-
                                                              sation
                                                              ($)
                                                            
                                                            
                                                            Total
                                                              ($)Gifford
      A. Dieterle,
                                                              Director,
      Chairman, Treasurer  and CEO
                                                            
                                                            2008
                                                            
                                                            $
                                                            244
                                                            
                                                            
                                                            $
                                                            325
                                                            
                                                            
                                                            $
                                                            102
                                                            
                                                            
                                                            $
                                                            60
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            7312007
                                                            
                                                            $
                                                            180
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            180John
      Brownlie, Director and COO
                                                            
                                                            2008
                                                            
                                                            $
                                                            275
                                                            
                                                            
                                                            $
                                                            318
                                                            
                                                            
                                                            $
                                                            102
                                                            
                                                            
                                                            $
                                                            112
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            8072007
                                                            
                                                            $
                                                            150
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            225
                                                            
                                                            
                                                            $
                                                            34
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            409Jeffrey
      Pritchard, Executive Vice President
                                                            
                                                            2008
                                                            
                                                            $
                                                            189
                                                            
                                                            
                                                            $
                                                            284
                                                            
                                                            
                                                            $
                                                            102
                                                            
                                                            
                                                            $
                                                            60
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            6352007
                                                            
                                                            $
                                                            120
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            120





(1)
            Amountsshown
      reflect amounts of option awards recognized for financial statement
      reporting purposes in accordance with Statement of Financial Accounting
      Standard No. 123R, using the Black-Scholes option-pricing model and
      include amounts from stock option awards granted in fiscal 2008. Refer to
      Note 16 to the Company’s Consolidated Financial Statements for a
      discussion of assumptions made in the valuation of option
      awards.  During fiscal 2008, option awards were comprised of: 1)
      500,000 stock options issued each to Gifford A. Dieterle, John Brownlie
      and Jeffrey Pritchard at an exercise price of $0.63,  2) 150,000
      stock options issued to John Brownlie at an exercise price of $0.34 that
      vested during the period..  During fiscal 2007, option awards
      were comprised of 250,000 stock options issued to John Brownlie at an
      exercise price of $0.36.(2)
            Amountsshown
      represent the amount of restricted stock award recognized for financial
      statement reporting purposes in accordance with Statement of Financial
      Accounting Standard No. 123R and include amounts from restricted
      stock awards granted in fiscal 2008. Refer to Note 16 to the Company’s
      Consolidated Financial Statements for a discussion of assumptions made in
      the valuation of restricted stock awards.  During fiscal 2008,
      restricted stock awards were comprised of: 1) 250,000 shares of restricted
      stock issued each to Gifford A. Dieterle, John Brownlie and Jeffrey
      Pritchard at the fair value of the Company’s stock on the date of grant of
      $0.63, 2) 100,000 shares of restricted stock issued each to Gifford A.
      Dieterle, John Brownlie and Jeffrey Pritchard at the fair value of the
      Company’s stock on the date of grant of $0.70.  During fiscal
      2007, restricted stock awards were comprised of 500,000 shares of
      restricted stock issued to John Brownlie at the fair value of the
      Company’s stock on the date of grant of
$0.45.


56




Outstanding
Equity Awards At Fiscal Year-End (000’s except share
data)




The
following tables provide information concerning unexercised options for each of
our named executive officers, as that term is defined in Item 402(a)(3) of
Regulation S-K as of our fiscal year ended July 31, 2008:




2008
Table




Name
      and Principal
                                    Position
                                  
                                  Number
      of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
      (#)
                                    Exercisable
                                  
                                  
                                  Number
      of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
      (#)
                                    Unexercisable
                                  
                                  
                                  Equity
      Incentive
                                    Plan
      Awards:
                                    Number
      of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Unearned Options
                                  
                                  
                                  Option
                                    Exercise
                                    Price
                                  
                                  Option
                                    Expiration
                                    DateGifford
      A. Dieterle,
                                    Director,
      Chairman, Treasurer  and CEO
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  $
                                  0.63
                                  
                                  12/20/14John
      Brownlie, Director and COO
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  $
                                  0.63
                                  
                                  12/20/14Jeffrey
      Pritchard, Executive Vice President
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  
                                  350,000
                                  
                                  
                                  $
                                  0.63
                                  
                                  12/20/14




Option
Exercises and Stock Vested




Option
      Awards
                      
                      
                      Stock
      AwardsName
                        (a)
                      
                      Number of Shares
                        Acquired on Exercise
                        (#)
                        (b)
                      
                      
                      Value Realized on
                        Exercise ($)
                        (c)
                      
                      
                      Number of Shares
                        Acquired on Vesting (#)
                        (d)
                      
                      
                      Value
      Realized on
                        Vesting ($)
                        (e)Gifford
      A. Dieterle,
                        Director,
      Chairman, Treasurer  and CEO
                      
                      
                      250,000
                      
                      
                      $
                      83
                      
                      
                      
                      151,142
                      
                      
                      $
                      103John
      Brownlie, Director and COO
                      
                      
                      200,000
                      
                      
                      $
                      72
                      
                      
                      
                      151,142
                      
                      
                      $
                      103Jeffrey
      Pritchard, Executive Vice President
                      
                      
                      250,000
                      
                      
                      $
                      88
                      
                      
                      
                      151,142
                      
                      
                      $
                      103





Please
also see “Part III, Item
13.  Certain Relationships and Related Transactions”below.


57


Compensation
Committee Interlocks and Insider Participation





Our
Compensation Committee of the Board of Directors, consisting of Ian Shaw, the
Committee Chairman, John Postle and Mark T. Nesbitt, are all independent
directors.  There are no interlocking relationships.





COMPENSATION
COMMITTEE REPORT





Our
Committee has reviewed and discussed the Compensation Discussion and Analysis
contained in this Annual Report with management.  Based on our
Committee’s review of and the discussions with management with respect to the
Compensation Discussion and Analysis, our Committee recommended to the board of
directors that the Compensation Discussion and Analysis be included in the our
Annual Report on Form 10-K for the fiscal year ended July 31, 2008 for filing
with the SEC.





COMPENSATION
      COMMITTEEIan
      Shaw, Committee ChairmanJohn
      PostleMark
      T. Nesbitt




The
foregoing Compensation Committee report shall not be deemed incorporated by
reference into any filings under the Securities Act of 1933 or the Securities
Exchange Act of 1934, and shall not otherwise be deemed filed under these acts,
except to the extent we specifically incorporate this report by reference into
such filings.


58




Director
Compensation




The
following tables sets forth the compensation paid to our directors for the
fiscal year ended July 31, 2008 (000’s).




2008
Table




Name
                    
                    Fees
                      Earned or
                      Paid in
                      Cash
                      ($)
                    
                    
                    Stock
                      Awards
                      ($) (2)
                    
                    
                    Option
                      Awards
                      ($) (1)
                    
                    
                    Non-Equity
                      Incentive Plan
                      Compensation
                      ($)
                    
                    
                    Nonqualified
                      Deferred
                      Compensation
                      Earnings
                      ($)
                    
                    
                    All Other
                      Compensation
                      ($)
                    
                    
                    Total
                      ($)Ian
      A. Shaw, Director
                    
                    $
                    24
                    
                    
                    $
                    11
                    
                    
                    $
                    3
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    38John
      Postle, Director
                    
                    $
                    24
                    
                    
                    $
                    11
                    
                    
                    $
                    3
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    38Mark
      T. Nesbitt, Director
                    
                    $
                    24
                    
                    
                    $
                    11
                    
                    
                    $
                    3
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    38Roger
      Newell, Direcotr
                    
                    $
                    12
                    
                    
                    $
                    7
                    
                    
                    $
                    2
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    21Robert
      Roningen, Director
                    
                    $
                    12
                    
                    
                    $
                    7
                    
                    
                    $
                    2
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    24
                    
                    
                    $
                    45


(1)
            Amountsshown
      reflect amounts of option awards recognized for financial statement
      reporting purposes in accordance with Statement of Financial Accounting
      Standard No. 123R, using the Black-Scholes option-pricing model and
      include amounts from stock option awards granted in fiscal 2008. Refer to
      Note 16 to the Company’s Consolidated Financial Statements for a
      discussion of assumptions made in the valuation of option
      awards.  During fiscal 2008, option awards were comprised of: 1)
      150,000 stock options issued each to Ian Shaw, John Postle and Mark T.
      Nesbitt at an exercise price of $0.63,  2) 100,000 stock options
      issued to Roger Newell and Robert Roningen at an exercise price of
      $0.63.


(2)
            Amountsshown
      represent the amount of restricted stock award recognized for financial
      statement reporting purposes in accordance with Statement of Financial
      Accounting Standard No. 123R and include amounts for awards granted
      in fiscal 2008. Refer to Note 16 to the Company’s Consolidated Financial
      Statements for a discussion of assumptions made in the valuation of
      restricted stock awards.  During fiscal 2008, restricted stock
      awards were comprised of: 1) 15,000 shares of restricted stock issued each
      to Ian Shaw, John Postle and Mark T. Nesbitt at the fair value of the
      Company’s stock on the date of grant of $0.70, 2) 10,000 shares of
      restricted stock issued each to  Roger Newell and Robert
      Roningen  at the fair value of the Company’s stock on the date
      of grant of $0.70.





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





The following table sets forth as of
October 24, 2008, the number and percentage of outstanding shares of Common
Stock beneficially owned by:





·
            Each
      person, individually or as a group, known to us to be deemed the
      beneficial owners of five percent or more of our issued and outstanding
      Common Stock;


·
            Each
      of our Directors and the Named Executives;
and


·
            All
      of our officers and Directors as a
group.





As of the foregoing date, there were
no other persons, individually or as a group, known to us to be deemed the
beneficial owners of five percent or more of the issued and outstanding Common
Stock.





This table is based upon information
supplied by Schedules 13D and 13G, if any, filed with the Securities and
Exchange Commission, and information obtained from our directors and named
executives.  For purposes of this table, a person or group of persons
is deemed to have “beneficial ownership” of any shares of Common Stock which
such person has the right to acquire within 60 days of October 3,
2008.  For purposes of computing the percentage of outstanding shares
of Common Stock held by each person or group of persons named in the table, any
security which such person or persons has or have the right to acquire within
such date is deemed to be outstanding but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other
person.  Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, we believe, based on information
supplied by such persons, that the persons named in this table have sole voting
and investment power with respect to all shares Common Stock which they
beneficially own.  Unless otherwise noted, the address of each of the
principal stockholders is care of us at 76 Beaver Street, 14th floor,
New York, NY10005.


59





Name
      and Address
                                                              
                                                              Amount
      & Natureof
      Beneficial
                                                              
                                                              of
      Beneficial
                                                              
                                                              
                                                              ApproximateOwner
                                                              
                                                              Ownership
                                                              
                                                              
                                                              Percentage(1)Gifford
      A. Dieterle*
                                                              
                                                              
                                                              3,612,455
                                                              (2)
                                                              
                                                              
                                                              1.9
                                                              %Robert
      Roningen*
                                                              
                                                              
                                                              1,828,750
                                                              (3)
                                                              
                                                              
                                                              **2955
      Strand RoadDuluth,
      MN 55804Jeffrey
      W. Pritchard*
                                                              
                                                              
                                                              1,856,354
                                                              (2)
                                                              
                                                              
                                                              1.0
                                                              %Christopher
      Chipman*
                                                              
                                                              
                                                              1,500,000
                                                              (2)
                                                              
                                                              
                                                              **4014
      Redwing LaneAudubon,
      PA 19407Roger
      A Newell*
                                                              
                                                              
                                                              1,537,273
                                                              (2)
                                                              
                                                              
                                                              **1781
      South Larkspur DriveGolden,
      CO 80401John
      Brownlie*6040
      Puma RidgeLittleton,
      CO 80124
                                                              
                                                              
                                                              1,599,500
                                                              (2)
                                                              
                                                              
                                                              **Scott
      Hazlitt*
                                                              
                                                              
                                                              1,500,000
                                                              (2)
                                                              
                                                              
                                                              **9428
      W. Highway 50Salida.
      CO 81201Ian
      A. Shaw*
                                                              
                                                              
                                                              265,000
                                                              (2)
                                                              
                                                              
                                                              **98
      Crimson MillwayToronto,
      Ontario M2LIT6CanadaJohn
      Postle*
                                                              
                                                              
                                                              265,000
                                                              (2)
                                                              
                                                              
                                                              **2169
      Constance DriveOakville
      OntarioCanada
      L6j 5l2Mark
      T. Nesbitt*
                                                              
                                                              
                                                              306,666
                                                              (2)(4)
                                                              
                                                              
                                                              **1580
      Lincoln St., Ste. 700Denver
      CO 80203-1501Strategic
      Precious Metal Fund
                                                              
                                                              
                                                              12,500,000
                                                              
                                                              
                                                              
                                                              6.5
                                                              %c/o
      Banque Cantonale VaoudoisePlace
      St-Francois 141003
      Lausanne, Switzerland


60





SPGP
                                                                                                
                                                                                                
                                                                                                11,250,000
                                                                                                (5)
                                                                                                
                                                                                                
                                                                                                5.8
                                                                                                %17,
      Avenue Matignon75008
      Paris, FranceStandard
      Bank PLC
                                                                                                
                                                                                                
                                                                                                15,750,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                8.2
                                                                                                %320
      Park AvenueNew
      York, NY 10022Van
      Eck International Investors
                                                                                                
                                                                                                
                                                                                                10,000,000
                                                                                                (6)
                                                                                                
                                                                                                
                                                                                                5.2
                                                                                                %Gold
      Fund99
      Park AvenueNew
      York, NY 10016andVan
      Eck Long/Short GoldPortfolio
      Ltd.Ogier
      Fiduciary ServicesPO
      box 1234Queensgate
      HouseSouth
      Church StreetGeorgetownGrand
      Cayman, Cayman IslandsAll
      Officers and
                                                                                                
                                                                                                
                                                                                                14,270,998
                                                                                                (2)(3)(4)
                                                                                                
                                                                                                
                                                                                                7.2
                                                                                                %Directors as aGroup
      (10 persons)*           Officer
      and/or Director of Capital Gold.**         Less
      than 1%.




(1)
            Based
      upon 192,974,824 shares issued and outstanding as of October 24,
      2008.





(2)
            For
      Messrs. Dieterle, Roningen, Pritchard, Chipman, Newell, Brownlie, Hazlitt,
      Shaw, Postle and Nesbitt includes, respectively, 500,000 shares, 100,000
      shares,  500,000 shares, 1,100,000 shares, 100,000
      shares,  750,000 share, 350,000 shares, 250,000 shares, 250,000
      shares and 250,000 shares issuable upon exercise of
    options.





(3)
            Represents
      shares owned by Mr. Roningen’s wife.  All of the foregoing
      shares are pledged as collateral for payment of a bank
    note.





(4)
            Includes
      shares owned jointly with his wife.





(5)
            We
      have been advised that Xavier Roulet, is a natural person with voting and
      investment control over shares of our common stock beneficially owned by
      SPGP.


61





(6)
            Represents
      shares owned by the listed stockholders.  Separately, the
      stockholders do not beneficially own in excess of 5% of our outstanding
      shares of Common Stock.  However, both stockholders have
      identified Joseph Foster as a natural person with voting and investment
      control over shares of our common stock beneficially owned by the
      stockholders.   Mr. Foster is the portfolio manager for Van
      Eck Associates Corporation and Van Eck Absolute Return Advisers
      Corp.,  the investment advisors for, respectively, Van Eck
      International Investors Gold Fund and Van Eck Long/Short Gold Portfolio
      Ltd.





Item
13.      Certain Relationships and
Related Transactions, and Director Independence (dollars in
thousands).





In August 2002, we purchased marketable
equity securities of a related company. We recorded approximately $6, $9 and $10
in expense reimbursements including office rent from this entity for the years
ended July 31, 2008, 2007 and 2006, respectively.





We utilize Caborca Industrial, a
Mexican corporation that is 100% owned by Gifford A. Dieterle, our Chief
Executive Officer, and Jeffrey W. Pritchard, our Executive Vice President, for
mining support services. These services include but are not limited to the
payment of mining salaries and related costs. Caborca Industrial bills us for
these services at slightly above cost. Mining expenses charged by Caborca
Industrial and eliminated upon consolidation amounted to approximately $3,775,
$702 and $122 for the years ended July 31, 2008, 2007 and 2006,
respectively.





During the years ended July 31, 2008,
2007 and 2006, we paid Jack Everett, a former officer and director, consulting
fees of $100, $0 and $69, respectively.  In addition, this individual
earned wages of $120 and $50 during the year ended July 31, 2007 and 2006,
respectively.  Also, during the years ended July 31, 2008, 2007 and
2006, we paid Robert Roningen, a director legal and consulting fees of $35, $24
and $8, respectively.





In January 2006, we  extended
the following stock options through January 3, 2007, all of which are
exercisable at $0.05 per share: Gifford A. Dieterle, Chief Executive Officer and
Director – 1,250,000 shares; Robert Roningen, Director – 500,000 shares; Jeffrey
W. Pritchard, V.P. Investor Relations and Director – 327,727 shares; Roger
Newell, V.P. Development and Director – 500,000 shares; and Scott Hazlitt, V.P.
Mine Development – 25,000 shares.   There was not a material
increase in the intrinsic value of these options at the date of modification as
compared to the intrinsic value of the original issuance of these stock options
on the applicable measurement date.  All of these options were
exercised prior to their extended expiration.





On February 7, 2007, Robert Roningen
resigned as our  Secretary and, on February 9, 2007, John Brownlie,
our Vice President of Operations, was appointed Chief Operating Officer and
Jeffrey W. Pritchard, our Vice President of Investor Relations, was appointed
Secretary.





The
Company’s V.P. Development and Director, Roger Newell, has, since 1995, been a
senior consultant in the Minerals Advisory Group, LLC, Tucson Arizona, an entity
that provided $3,000 of services to the Company for the year ended July 31,
2006.





On
December 20, 2007, at the recommendation of the Compensation Committee of the
Board of Directors, our executive officers, directors and employees were granted
1,095,000 restricted shares under our 2006 Equity Incentive
Plan.   The restricted shares granted vest equally over three
years from the date of grant.   In addition, our executive
officers were granted 3,150,000 stock options under our 2006 Equity Incentive
Plan. The stock options have a term of seven years and vest as follows: 20%
vested upon issuance and the balance vest 20% annually thereafter. The exercise
price of the stock options is $0.63 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). In the event of a termination of
continuous service (other than as a result of a change of control, as defined in
the Plan, unvested stock options shall terminate and, with regard to vested
stock options, the exercise period shall be the lesser of the original
expiration date or one year from the date continuous service terminates. Upon
the happening of a change of control, all unvested stock options and unvested
restricted stock grants immediately vest.


62


On July
17, 2008, at the recommendation of the Compensation Committee of the Board of
Directors, our executive officers and directors were granted 515,000 shares
under our 2006 Equity Incentive Plan. The restricted shares granted vested
immediately.
 
 We have employment and consulting
agreements with our executive officers.  Please see “Item 11. Executive Compensation;
Employment and Engagement Agreements.”
 
 For information about the independence
of our directors please see “Item 10.  Directors,
Executive Officers and Corporate Governance;Audit Committee and Audit Committee
Expert.”
  63
  Item
14. Principal
Accountant Fees And Services.
 
 All audit and professional services
provided by Wolinetz, Lafazan & Company, P.C. (“WL”), Certified Public
Accountants, will be approved in advance by the Audit Committee to assure such
services do not impair the auditor's independence from us. The total aggregate
fees billed by WL were $125,  $140 and $62 for the fiscal years ended
July 31, 2008, 2007 and 2006, respectively.  The following table shows
the detailed fees billed to us by WL for professional services rendered during
these fiscal years.
 
 Amount ($000’s)Description of Fees
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Audit
      Fees
                    
                    $
                    115
                    
                    
                    $
                    130
                    
                    
                    $
                    55Audit-Related
      Fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Tax
      Fees
                    
                    
                    10
                    
                    
                    
                    10
                    
                    
                    
                    7All
      Other Fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    125
                    
                    
                    $
                    140
                    
                    
                    $
                    62
 
 Audit
Fees
 
 Represents fees for professional
services provided for the audit of our annual financial statements, services
that are performed to comply with generally accepted auditing standards, and
review of our financial statements included in our quarterly reports and
services in connection with statutory and regulatory filings.
 
 Audit-Related
Fees
 
 Represents the fees for assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements.  The Board of Directors considers
WL to be well qualified to serve as our independent public
accountants.
 
 The Audit Committee will pre-approve
all auditing services and the terms thereof (which may include providing comfort
letters in connection with securities underwriting) and non-audit services
(other than non-audit services prohibited under Section 10A(g) of the Exchange
Act or the applicable rules of the SEC or the Public Company Accounting
Oversight Board) to be provided to us by the independent auditor; provided,
however, the pre-approval requirement is waived with respect to the provisions
of non-audit services for us if the "de minimus" provisions of Section
10A(i)(1)(B) of the Exchange Act are satisfied. This authority to pre-approve
non-audit services may be delegated to one or more members of the Audit
Committee, who shall present all decisions to pre-approve an activity to the
full Audit Committee at its first meeting following such
decision.  The Audit Committee may review and approve the scope and
staffing of the independent auditors' annual audit plan.
 
 Tax
Fees
 
 This
represents professional services rendered for tax compliance, tax advice and tax
planning.
  64
  All Other
Fees
 
 WL was
paid no other fees for professional services during the fiscal years ended July
31, 2008 and 2007.
 
 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
 
 3.1
                      
                      Certificate
      of Incorporation of Company.(20)3.2
                      
                      Amendments
      to Certificate of Incorporation of Company.(17)(21)3.3
                      
                      Certificate
      of Merger (Delaware) (which amends our Certificate of
      Incorporation)(20)3.4
                      
                      Amended
      and Restated By-Laws of Company(22)4.1
                      
                      Specimen
      certificate representing our Common Stock.(8)4.2
                      
                      Form
      of Warrant for Common Stock of the Company issued in February 2005 private
      placement.(7)4.3
                      
                      Form
      of Warrant for Common Stock of the Company issued to Standard Bank in
      2005.(9)4.4
                      
                      Form
      of Warrant for Common Stock of the Company issued in February and March
      2006 private placement.(13)4.5
                      
                      Form
      of Warrant for Common Stock of the Company issued in the January 2007
      private placement.(16)4.6
                      
                      Form
      of Placement Agent Warrant for Common Stock of the Company issued in the
      January 2007 private placement.(16)4.7
                      
                      Form
      of Warrant for Common Stock of the Company issued to Standard Bank in
      2008.(25)10.1
                      
                      Mining
      Claims (1)10.2
                      
                      Stock
      Purchase Option Agreement from AngloGold (2)10.3
                      
                      Letter
      of Intent with International Northair Mines Ltd. (2)10.4
                      
                      March
      30, 2002 Minera Chanate Stock Purchase and Sale and Security Agreement
      (Sale by us and Holding of all of the stock of Minera Chanate) (In
      Spanish).(3)10.5
                      
                      English
      summary of March 30, 2002 Minera Chanate Stock Purchase and Sale and
      Security Agreement.(3)10.6
                      
                      Agreement
      between Santa Rita and Grupo Minero FG.(4)10.7
                      
                      Amendment
      to Agreement between Santa Rita and Grupo Minero FG.(5)10.8
                      
                      Termination
      Agreement between Santa Rita and Grupo Minero FG.(6)10.9
                      
                      English  summary
      of El Charro agreement. (10)10.10
                      
                      Plan
      and agreement of merger (reincorporation). (11)10.11
                      
                      Contract
      between MSR and Sinergia Obras Civiles y Mineras, S.A. de
      C.V.(12)
  65
  10.12
                
                Amendment
      to Contract between MSR and Sinergia Obras Civiles y Mineras, S.A. de C.V.
      (18)10.13
                
                Chipman
      Second Amended Engagement Agreement.(25)10.14
                
                Employment
      Agreement with John Brownlie. (15)(23)10.15
                
                June
      1, 2006 EPCM  agreement between MSR and a Mexican subsidiary of
      M3 Engineering & Technology Corporation (15)10.16
                
                Credit
      Agreement dated August 15, 2006 among MSR and Oro, as the borrowers, the
      Company, as the guarantor, and Standard Bank PLC, as the lender and the
      offshore account holder. (14)10.17
                
                Employment
      Agreement with Gifford A. Dieterle. (18)10.18
                
                Employment
      Agreement with Jeffrey W. Pritchard. (18)10.19
                
                Employment
      Agreement with J. Scott Hazlitt.(25)10.20
                
                2006
      Equity Incentive Plan. (19)10.21
                
                Amendment
      to Employment Agreement with Gifford A. Dieterle. (24)10.22
                
                Amendment
      to Employment Agreement with Jeffrey W. Pritchard. (24)10.23
                
                Amendment
      to Employment Agreement with John Brownlie. (24)10.24
                
                Amendment
      to Employment Agreement with J. Scott Hazlitt. (24)10.25
                
                Amendment
      to Employment Agreement with Gifford A. Dieterle.(25)10.26
                
                Amendment
      to Employment Agreement with Jeffrey W. Pritchard.(25)10.27
                
                Amendment
      to Employment Agreement with John Brownlie.(25)10.28
                
                Amendment
      to Employment Agreement with J. Scott Hazlitt.(25)10.29
                
                Amendment
      to Engagement Agreement with Christopher Chipman.(25)10.30
                
                Engagement
      Agreement with John Brownlie.(25)10.31
                
                Amended
      And Restated Credit Agreement with Standard Bank.(25)10.32
                
                Service
      Agreement between Caborca Industrial S.A. de C.V. and Minera Santa Rita,
      S. De R.L. De C.V., dated March 23, 2005.21
                
                Subsidiaries
      of the Registrant. (8)23.1
                
                Consent
      of Wolinetz, Lafazan & Company, P.C., independent registered public
      accountants.31.1
                
                Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from
      the  Company's Chief Executive Officer31.2
                
                Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from
      the  Company's Chief Financial Officer32.1
                
                Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
      the  Company's Chief Executive Officer32.2
                
                Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from
      the  Company's Chief Financial
Officer
 
 (1)
              Previously
      filed as an exhibit to the Company's Registration Statement on Form S-18
      (SEC File No. 2-86160-NY) filed on or about November 10, 1983, and
      incorporated herein by this
reference.
  66
 
 (2)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended January 31, 2001 filed with the
      Commission on or about March 16, 2001, and incorporated herein by this
      reference.
 
 (3)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended April 30, 2002 filed with the Commission
      on or about June 20, 2002, and incorporated herein by this
      reference.
 
 (4)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended January 31, 2002 filed with the
      Commission on or about March 25, 2002, and incorporated herein by this
      reference.
 
 (5)
              Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about January 22, 2004, and incorporated herein by
      this reference.
 
 (6)
              Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about April 12, 2004, and incorporated herein by this
      reference.
 
 (7)
              Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about February 10, 2005, and incorporated herein by
      this reference.
 
 (8)
              Previously
      filed as an exhibit to the Company's Registration Statement on Form SB-2
      (SEC file no. 333-123216) filed with the Commission on or about March 9,
      2005, and incorporated herein by this
reference.
 
 (9)
              Previously
      filed as an exhibit to Amendment No. 1 to the Company's Registration
      Statement on Form SB-2 (SEC file no. 333-123216) filed with the Commission
      on or about June 27, 2005, and incorporated herein by this
      reference.
 
 (10)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended April 30, 2005 filed with the Commission
      on or about June 20, 2005, and incorporated herein by this
      reference.
 
 (11)
              Previously
      filed as Appendix B to the Company's Definitive 14A Proxy Statement filed
      with the Commission on or about October 7, 2005, and incorporated herein
      by this reference.
 
 (12)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended October 31, 2005 filed with the
      Commission on or about December 15, 2005, and incorporated herein by this
      reference.
 
 (13)
              Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about February 16, 2006, and incorporated herein by
      this reference.
  67
 
 (14)
                Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about August 16, 2006, and incorporated herein by
      this reference.
 
 (15)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended April 30, 2006 filed with the Commission
      on or about June 19, 2006, and incorporated herein by this
      reference.
 
 (16)
              Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about January 29, 2007, and incorporated herein by
      this reference.
 
 (17)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended January 31, 2007 filed with the
      Commission on or about March 19, 2007, and incorporated herein by this
      reference.
 
 (18)
              Previously
      filed as an exhibit to the Company's Annual Report on Form 10-K
      for  the fiscal year ended July 31, 2006 filed with the
      Commission on or about November 1, 2006, and incorporated herein by this
      reference.
 
 (19)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended October 31, 2006 filed with the
      Commission on or about December 19, 2006, and incorporated herein by this
      reference.
 
 (20)
              Previously
      filed as an exhibit to the Company's Registration Statement on Form SB-2
      (SEC file no. 333-129939) filed with the Commission on or about November
      23, 2005, and incorporated herein by this
  reference.
 
 (21)
                Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about January 30, 2008, and incorporated herein by
      this reference.
 
 (22)
                Previously
      filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Commission on or about April 17, 2008, and incorporated herein by this
      reference.
 
 (23)
              Previously
      filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
      for  the quarter ended October 31, 2007 filed with the
      Commission on or about December 17, 2007, and incorporated herein by this
      reference.
 
 (24)
              Previously
      filed as an exhibit to the Company's Annual Report on Form 10-K
      for  the fiscal year ended July 31, 2007 filed with the
      Commission on or about October 23, 2007, and incorporated herein by this
      reference.
 
 (25)
              Previously
      filed as an exhibit to the Company's Annual Report on Form 10-K
      for  the fiscal year ended July 31, 2008 filed with the
      Commission on or about October 23, 2008, and incorporated herein by this
      reference.
 
 Statements
contained in this 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 Report or is included in any forms indicated
above, each such statement is deemed to be qualified and amplified in all
respects by such provisions.
  68
  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:
      February 13, 2009
                      By:
                      
                      /s/ Gifford A. Dieterle,
      PresidentGifford
      A. Dieterle,
President
  69
 
 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.
  70
  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, 2008 and July 31, 2007, and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended July 31,
2008.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with 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.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 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, 2008 and July 31, 2007 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended July 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
 
 WOLINETZ,
LAFAZAN & COMPANY, P.C.
 
 Rockville
Centre, New York
 October
28, 2008 (Except for Note 26, as to which the date is February 6,
2009)
  F-1
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
BALANCE SHEET
 (in
thousands, except for share and per share amounts)
 
 July 31,
                    2008
                  
                  
                  July 31,
                    2007ASSETSCurrent
      Assets:Cash
      and Cash Equivalents (Note 2)
                  
                  $
                  10,992
                  
                  
                  $
                  2,225Accounts
      Receivable  (Note 2)
                  
                  
                  1,477
                  
                  
                  
                  -Stockpiles
      and Ore on Leach Pads (Note 5)
                  
                  
                  12,176
                  
                  
                  
                  2,997Material
      and Supply Inventories (Note 4)
                  
                  
                  937
                  
                  
                  
                  174Deposits
      (Note 6)
                  
                  
                  9
                  
                  
                  
                  879Marketable
      Securities  (Note 3)
                  
                  
                  65
                  
                  
                  
                  90Prepaid
      Expenses
                  
                  
                  219
                  
                  
                  
                  72Loans
      Receivable – Affiliate (Note 12 and 14)
                  
                  
                  39
                  
                  
                  
                  47Other
      Current Assets (Note 7)
                  
                  
                  490
                  
                  
                  
                  1,675Total
      Current Assets
                  
                  
                  26,404
                  
                  
                  
                  8,159Mining
      Concessions (Note 11)
                  
                  
                  59
                  
                  
                  
                  68Property
      & Equipment – net (Note 8)
                  
                  
                  20,918
                  
                  
                  
                  18,000Intangible
      Assets – net (Note 9)
                  
                  
                  181
                  
                  
                  
                  577Other
      Assets:Other
      Investments
                  
                  
                  -
                  
                  
                  
                  28Deferred
      Financing Costs (Note 17)
                  
                  
                  599
                  
                  
                  
                  581Mining
      Reclamation Bonds (Note 10)
                  
                  
                  82
                  
                  
                  
                  36Other
                  
                  
                  -
                  
                  
                  
                  42Deferred
      Tax Asset (Note 22)
                  
                  
                  573
                  
                  
                  
                  -Security
      Deposits
                  
                  
                  63
                  
                  
                  
                  60Total
      Other Assets
                  
                  
                  1,317
                  
                  
                  
                  747Total
      Assets
                  
                  $
                  48,879
                  
                  
                  $
                  27,551LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      Payable
                  
                  $
                  788
                  
                  
                  $
                  617Accrued
      Expenses (Note 21)
                  
                  
                  2,673
                  
                  
                  
                  603Derivative
      Contracts (Note 20)
                  
                  
                  930
                  
                  
                  
                  596Deferred
      Tax Liability (Note 22)
                  
                  
                  2,063
                  
                  
                  
                  -Current
      Portion of Long-term Debt (Note 17)
                  
                  
                  4,125
                  
                  
                  
                  -Total
      Current Liabilities
                  
                  
                  10,579
                  
                  
                  
                  1,816Reclamation
      and Remediation Liabilities (Note 13)
                  
                  
                  1,666
                  
                  
                  
                  1,249Other
      liabilities
                  
                  
                  62
                  
                  
                  
                  -Long-term
      Debt (Note 17)
                  
                  
                  8,375
                  
                  
                  
                  12,500Total
      Long-term Liabilities
                  
                  
                  10,103
                  
                  
                  
                  13,749Commitments
      and Contingencies (Note 23)
                  
                  
                  -
                  
                  
                  
                  -Stockholders’
      Equity:Common
      Stock, Par Value $.0001 Per Share; Authorized 300,000,000 shares; Issued
      and Outstanding 192,777,324 and 168,173,148 shares,
      respectively
                  
                  
                  19
                  
                  
                  
                  17Additional
      Paid-In Capital
                  
                  
                  63,074
                  
                  
                  
                  54,016Accumulated
      Deficit
                  
                  
                  (32,496
                  )
                  
                  
                  (38,861
                  )Deferred
      Financing Costs (Note 17)
                  
                  
                  (2,611
                  )
                  
                  
                  (3,438
                  )Deferred
      Compensation
                  
                  
                  (549
                  )
                  
                  
                  (52
                  )Accumulated
      Other Comprehensive Income (Note 14)
                  
                  
                  760
                  
                  
                  
                  304Total
      Stockholders’ Equity
                  
                  
                  28,197
                  
                  
                  
                  11,986Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  48,879
                  
                  
                  $
                  27,551
 
 The
accompanying notes are an integral part of the financial
statements.
  F-2
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
STATEMENT OF OPERATIONS
 (in
thousands, except for share and per share amounts)
 
 For The Year EndedJuly 31,2008
                  
                  
                  2007
                  
                  
                  2006RevenuesSales
      – Gold, net
                  
                  $
                  33,104
                  
                  
                  $
                  -
                  
                  
                  $
                  -Costs
      and Expenses:Costs
      Applicable to Sales
                  
                  
                  10,690
                  
                  
                  
                  -
                  
                  
                  
                  -Depreciation
      and Amortization
                  
                  
                  3,438
                  
                  
                  
                  891
                  
                  
                  
                  39General
      and Administrative
                  
                  
                  5,586
                  
                  
                  
                  2,893
                  
                  
                  
                  2,225Exploration
                  
                  
                  938
                  
                  
                  
                  1,816
                  
                  
                  
                  1,941Total
      Costs and Expenses
                  
                  
                  20,652
                  
                  
                  
                  5,600
                  
                  
                  
                  4,205Income
      (Loss) from Operations
                  
                  
                  12,452
                  
                  
                  
                  (5,600
                  )
                  
                  
                  (4,205
                  )Other
      Income (Expense):Interest
      Income
                  
                  
                  77
                  
                  
                  
                  146
                  
                  
                  
                  184Interest
      Expense
                  
                  
                  (1,207
                  )
                  
                  
                  (792
                  )
                  
                  
                  -Other
      Income (Expense)
                  
                  
                  (95
                  )
                  
                  
                  -
                  
                  
                  
                  (202
                  )Loss
      on change in fair value of derivative
                  
                  
                  (1,356
                  )
                  
                  
                  (1,226
                  )
                  
                  
                  (582
                  )Total
      Other Income (Expense)
                  
                  
                  (2,581
                  )
                  
                  
                  (1,872
                  )
                  
                  
                  (600
                  )Income
      (Loss) before Income Taxes
                  
                  
                  9,871
                  
                  
                  
                  (7,472
                  )
                  
                  
                  (4,805
                  )Income
      Tax Expense (Note 22)
                  
                  
                  (3,507
                  )
                  
                  
                  -
                  
                  
                  
                  -Net
      Income (Loss)
                  
                  $
                  6,364
                  
                  
                  $
                  (7,472
                  )
                  
                  $
                  (4,805
                  )Income
      (Loss) Per Common ShareBasic
                  
                  $
                  0.04
                  
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.04
                  )Diluted
                  
                  $
                  0.03
                  
                  
                  $
                  -
                  
                  
                  $
                  -Basic
      Weighted Average Common Shares Outstanding
                  
                  
                  175,039,996
                  
                  
                  
                  149,811,266
                  
                  
                  
                  112,204,471Diluted
      Weighted Average Common Shares Outstanding
                  
                  
                  195,469,129
                  
                  
                  
                  -
                  
                  
                  
                  -
  F-3
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
 
 AccumulatedAdditional
                                  
                                  
                                  
                                  
                                  
                                  Other
                                  
                                  
                                  Deferred
                                  
                                  
                                  
                                  
                                  
                                  TotalCommon Stock
                                  
                                  
                                  paid-in-
                                  
                                  
                                  Accumulated
                                  
                                  
                                  Comprehensive
                                  
                                  
                                  Financing
                                  
                                  
                                  Deferred
                                  
                                  
                                  Stockholders’Shares
                                  
                                  
                                  Amount
                                  
                                  
                                  capital
                                  
                                  
                                  Deficit
                                  
                                  
                                  Income/(Loss)
                                  
                                  
                                  Costs
                                  
                                  
                                  Compensation
                                  
                                  
                                  EquityBalance
      at July 31, 2005
                                  
                                  
                                  95,969,216
                                  
                                  
                                  
                                  96
                                  
                                  
                                  
                                  31,852
                                  
                                  
                                  
                                  (26,583
                                  )
                                  
                                  
                                  157
                                  
                                  
                                  
                                  (253
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,269Change
      in par value to $0.0001
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (86
                                  )
                                  
                                  
                                  86
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Deferred
      financing costs
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  270
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (270
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Issuance
      of common stock upon warrant and option exercises,
      net
                                  
                                  
                                  4,825,913
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  742
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  742Issuance
      of common stock upon warrant and option exercises,
      net
                                  
                                  
                                  8,600,000
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  2,373
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,374Private
      placement, net
                                  
                                  
                                  21,240,000
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  4,997
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,999Options
      and warrants issued for services
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  414
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (52
                                  )
                                  
                                  
                                  362Net
      loss for the year ended July 31, 2006
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,805
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,805
                                  )Unrealized
      loss on marketable securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (60
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (60
                                  )Equity
      adjustment from foreign currency translation
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  49Total
      comprehensive loss
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,816
                                  )Balance
      - July 31, 2006
                                  
                                  
                                  131,635,129
                                  
                                  
                                  
                                  13
                                  
                                  
                                  
                                  40,734
                                  
                                  
                                  
                                  (31,388
                                  )
                                  
                                  
                                  146
                                  
                                  
                                  
                                  (523
                                  )
                                  
                                  
                                  (52
                                  )
                                  
                                  
                                  8,930
 
 The accompanying notes are an integral
part of the financial statements.
  F-4
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY - CONTINUED
 (in
thousands, except for share and per share amounts)
 
 AccumulatedAdditional
                        
                        
                        
                        
                        
                        Other
                        
                        
                        Deferred
                        
                        
                        
                        
                        
                        TotalCommon Stock
                        
                        
                        paid-in-
                        
                        
                        Accumulated
                        
                        
                        Comprehensive
                        
                        
                        Financing
                        
                        
                        Deferred
                        
                        
                        Stockholders’Shares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        Deficit
                        
                        
                        Income/(Loss)
                        
                        
                        Costs
                        
                        
                        Compensation
                        
                        
                        EquityBalance
      at July 31, 2006
                        
                        
                        131,635,129
                        
                        
                        
                        13
                        
                        
                        
                        40,734
                        
                        
                        
                        (31,388
                        )
                        
                        
                        146
                        
                        
                        
                        (523
                        )
                        
                        
                        (52
                        )
                        
                        
                        8,930Deferred
      financing costs
                        
                        
                        1,150,000
                        
                        
                        
                        -
                        
                        
                        
                        351
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (351
                        )
                        
                        
                        -
                        
                        
                        
                        -Deferred
      financing costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,314
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (3,314
                        )
                        
                        
                        -
                        
                        
                        
                        -Amortization
      of deferred finance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        750
                        
                        
                        
                        -
                        
                        
                        
                        750Options
      and warrants issued for services
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        216
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        216Private
      placement, net
                        
                        
                        12,561,667
                        
                        
                        
                        2
                        
                        
                        
                        3,484
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,486Common
      stock issued for services provided
                        
                        
                        622,443
                        
                        
                        
                        -
                        
                        
                        
                        276
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        276Common
      stock issued upon the exercising of options and warrants
                        
                        
                        22,203,909
                        
                        
                        
                        2
                        
                        
                        
                        5,641
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        5,643Net
      loss for the year ended July 31, 2007
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,472
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,472
                        )Change
      in fair value on interest rate swaps
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47
                        )Equity
      adjustment from foreign currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        205
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        205Total
      comprehensive loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,314
                        )Balance
      at July 31, 2007
                        
                        
                        168,173,148
                        
                        
                        $
                        17
                        
                        
                        $
                        54,016
                        
                        
                        $
                        (38,860
                        )
                        
                        $
                        304
                        
                        
                        $
                        (3,438
                        )
                        
                        $
                        (52
                        )
                        
                        $
                        11,987
 
 The accompanying notes are an integral
part of the financial statements.
  F-5
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY – CONTINUED
 (in
thousands, except for share and per share amounts)
 
 AccumulatedAdditional
                        
                        
                        
                        
                        
                        Other
                        
                        
                        Deferred
                        
                        
                        
                        
                        
                        TotalCommon Stock
                        
                        
                        paid-in-
                        
                        
                        Accumulated
                        
                        
                        Comprehensive
                        
                        
                        Financing
                        
                        
                        Deferred
                        
                        
                        Stockholders’Shares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        Deficit
                        
                        
                        Income/(Loss)
                        
                        
                        Costs
                        
                        
                        Compensation
                        
                        
                        EquityBalance
      at July 31, 2007
                        
                        
                        168,173,148
                        
                        
                        $
                        17
                        
                        
                        $
                        54,016
                        
                        
                        $
                        (38,860
                        )
                        
                        $
                        304
                        
                        
                        $
                        (3,438
                        )
                        
                        $
                        (52
                        )
                        
                        $
                        11,987Amortization
      of deferred finance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        930
                        
                        
                        
                        -
                        
                        
                        
                        930Equity
      based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        433
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        194
                        
                        
                        
                        627Common
      stock issued upon the exercising of options and warrants
                        
                        
                        22,994,178
                        
                        
                        
                        2
                        
                        
                        
                        7,471
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,473Issuance
      of  restricted common stock
                        
                        
                        1,610,000
                        
                        
                        
                        -
                        
                        
                        
                        1,051
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (691
                        )
                        
                        
                        360Deferred
      finance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        103
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (103
                        )
                        
                        
                        -
                        
                        
                        
                        -Net
      income for the year ended July 31, 2008
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,364
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,364Change
      in fair value on interest rate swaps
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (141
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (141
                        )Unrealized
      loss on marketable securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (25
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (25
                        )Equity
      adjustment from foreign currency translation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        622
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        622Total
      comprehensive income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,820Balance
      at July 31, 2008
                        
                        
                        192,777,236
                        
                        
                        $
                        19
                        
                        
                        $
                        63,074
                        
                        
                        $
                        (32,496
                        )
                        
                        $
                        760
                        
                        
                        $
                        (2,611
                        )
                        
                        $
                        (549
                        )
                        
                        $
                        28,197
 
 The accompanying notes are an integral
part of the financial statements.
  F-6
 
 CAPITAL
GOLD CORPORATION
 CONSOLIDATED
STATEMENT OF CASH FLOWS
 (in
thousands, except for share and per share amounts)
 
 For TheYear EndedJuly 31,2008
                            
                            
                            2007
                            
                            
                            2006Cash
      Flow From Operating Activities:Net
      Income (Loss)
                            
                            $
                            6,364
                            
                            
                            $
                            (7,472
                            )
                            
                            $
                            (4,805
                            )Adjustments
      to Reconcile Net Loss to Net Cash Provided by (Used in) Operating
      Activities:Depreciation
      and Amortization
                            
                            
                            3,388
                            
                            
                            
                            891
                            
                            
                            
                            39Accretion
      of Reclamation and Remediation
                            
                            
                            124
                            
                            
                            
                            31
                            
                            
                            
                            -Loss
      on sale of property and equipment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            201Loss
      on change in fair value of derivative
                            
                            
                            1,356
                            
                            
                            
                            1,226
                            
                            
                            
                            582Equity
      Based Compensation
                            
                            
                            987
                            
                            
                            
                            492
                            
                            
                            
                            362Changes
      in Operating Assets and Liabilities:Increase  in
      Accounts Receivable
                            
                            
                            (1,477
                            )
                            
                            
                            -
                            
                            
                            
                            -Increase
      in Prepaid Expenses
                            
                            
                            (146
                            )
                            
                            
                            (32
                            )
                            
                            
                            (21
                            )Increase
      in Inventory
                            
                            
                            (8,913
                            )
                            
                            
                            (2,458
                            )
                            
                            
                            -Increase
      (Decrease) in Other Current Assets
                            
                            
                            1,185
                            
                            
                            
                            2,975
                            
                            
                            
                            (5,243
                            )Decrease
      (Increase) in Other Deposits
                            
                            
                            870
                            
                            
                            
                            (629
                            )
                            
                            
                            (170
                            )Decrease
      (Increase) in Other Assets
                            
                            
                            -
                            
                            
                            
                            (50
                            )
                            
                            
                            1Increase
      in Mining Reclamation Bond
                            
                            
                            (46
                            )
                            
                            
                            -
                            
                            
                            
                            -Increase
      in Deferred Tax Asset
                            
                            
                            (573
                            )
                            
                            
                            -
                            
                            
                            
                            -Increase
      in Accounts Payable
                            
                            
                            171
                            
                            
                            
                            358
                            
                            
                            
                            167Decrease
      in Derivative Liability
                            
                            
                            (1,166
                            )
                            
                            
                            (460
                            )
                            
                            
                            -Increase
      in Reclamation and Remediation
                            
                            
                            -
                            
                            
                            
                            1,218
                            
                            
                            
                            -Increase
      in Other Liability
                            
                            
                            62
                            
                            
                            
                            
                            
                            
                            
                            -Increase
      in Deferred Tax Liability
                            
                            
                            2,063
                            
                            
                            
                            
                            
                            
                            
                            -Increase
      in Accrued Expenses
                            
                            
                            2,069
                            
                            
                            
                            247
                            
                            
                            
                            166Net
      Cash Provided By (Used in) Operating Activities
                            
                            
                            6,318
                            
                            
                            
                            (3,663
                            )
                            
                            
                            (8,721
                            )Cash
      Flow From Investing Activities:Decrease
      (Increase) in Other Investments
                            
                            
                            28
                            
                            
                            
                            (4
                            )
                            
                            
                            -Purchase
      of Mining, Milling and Other Property and Equipment
                            
                            
                            (5,417
                            )
                            
                            
                            (17,851
                            )
                            
                            
                            (811
                            )Purchase
      of Intangibles
                            
                            
                            (90
                            )
                            
                            
                            (570
                            )
                            
                            
                            -Proceeds
      on Sale of Mining, Milling and Other Property and
Equipment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            192Net
      Cash Used in Investing Activities
                            
                            
                            (5,479
                            )
                            
                            
                            (18,425
                            )
                            
                            
                            (619
                            )
 
 The
accompanying notes are an integral part of the financial
statements.
  F-7
 
 CAPITAL
      GOLD CORPORATIONCONSOLIDATED
      STATEMENT OF CASH FLOWS – CONTINUED(in
      thousands, except for share and per share
  amounts)
 
 For TheYear EndedJuly 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash
      Flow From Financing Activities:Advances
      to Affiliate
                  
                  $
                  7
                  
                  
                  $
                  (5
                  )
                  
                  $
                  (10
                  )Proceeds
      from Borrowing on Credit Facility
                  
                  
                  -
                  
                  
                  
                  12,500
                  
                  
                  
                  -Proceeds
      From Issuance of Common Stock
                  
                  
                  7,474
                  
                  
                  
                  9,129
                  
                  
                  
                  8,115Deferred
      Finance Costs
                  
                  
                  (175
                  )
                  
                  
                  (257
                  )
                  
                  
                  (351
                  )Net
      Cash Provided By Financing Activities
                  
                  
                  7,306
                  
                  
                  
                  21,367
                  
                  
                  
                  7,754Effect
      of Exchange Rate Changes
                  
                  
                  622
                  
                  
                  
                  205
                  
                  
                  
                  46Increase
      (Decrease) In Cash and Cash Equivalents
                  
                  
                  8,767
                  
                  
                  
                  (516
                  )
                  
                  
                  (1,540
                  )Cash
      and Cash Equivalents - Beginning
                  
                  
                  2,225
                  
                  
                  
                  2,741
                  
                  
                  
                  4,281Cash
      and Cash Equivalents – Ending
                  
                  $
                  10,992
                  
                  
                  $
                  2,225
                  
                  
                  $
                  2,741Supplemental
      Cash Flow Information:Cash
      Paid For Interest
                  
                  $
                  1,235
                  
                  
                  $
                  879
                  
                  
                  $
                  -Cash
      Paid For Income Taxes
                  
                  $
                  1,373
                  
                  
                  $
                  23
                  
                  
                  $
                  15Non-Cash
      Financing Activities:Issuance
      of common stock and warrants as payment of
      financing  costs
                  
                  $
                  103
                  
                  
                  $
                  3,665
                  
                  
                  $
                  270Change
      in Fair Value of Derivative Instrument
                  
                  $
                  141
                  
                  
                  $
                  47
                  
                  
                  $
                  -Change
      in Fair Value of Asset Retirement Obligation
                  
                  $
                  293
                  
                  
                  $
                  -
                  
                  
                  $
                  -
 
 The
accompanying notes are an integral part of the financial
statements.
  F-8
 
 CAPITAL
GOLD CORPORATION
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 JULY 31,
2008
 (in
thousands, except for per share and ounce amounts)
 
 NOTE 1 -
Basis of Presentation
 
 Capital
Gold Corporation ("Capital Gold", "the Company", "we" or "us") was incorporated
in February 1982 in the State of Nevada. During March 2003 the Company's
stockholders approved an amendment to the Articles of Incorporation to change
its name from Leadville Mining and Milling Corp. to Capital Gold Corporation. In
November 2005, the Company reincorporated in Delaware.  The Company
owns rights to property located in the State of Sonora, Mexico and the
California Mining District, Lake County, Colorado. The Company is engaged in the
exploration, development and production for gold and other minerals from its
properties in Mexico. All of the Company's mining activities are being performed
in Mexico.
 
 On June
29, 2001, the Company exercised an option and purchased from AngloGold North
America Inc. and AngloGold (Jerritt Canyon) Corp. (“AngloGold”) 100% of the
issued and outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of
those two companies (“Minera Chanate”). Minera Chanate's assets consisted of
certain exploitation and exploration concessions in the States of Sonora,
Chihuahua and Guerrero, Mexico. These concessions are sometimes referred to as
the El Chanate Concessions.
 
 Pursuant
to the terms of the agreement, on December 15, 2001, the Company made a $50
payment to AngloGold. AngloGold is entitled to receive the remainder of the
purchase price by way of an ongoing percentage of net smelter returns of between
2% and 4% plus 10% net profits interest (until the total net profits interest
payment received by AngloGold equals $1,000). AngloGold's right to a payment of
a percentage of net smelter returns and the net profits interest will terminate
at such point as they aggregate $18,018. In accordance with the agreement, the
foregoing payments are not to be construed as royalty payments. Should the
Mexican government or other jurisdiction determine that such payments are
royalties, the Company could be subject to and would be responsible for any
withholding taxes assessed on such payments.
 
 Under the
terms of the agreement, the Company has 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 is 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 2,000,000 troy ounces of
contained gold. The exercise price would equal twice the Company's project costs
on the properties during the period commencing on December 15, 2000 and ending
on the date of such notice.
 
 In January 2008, pursuant to the terms
of the agreement, the Company made a good faith determination and notified
AngloGold that the drill indicated resources at the El Chanate gold mine
exceeded two million ounces of contained gold. The term "drill indicated
resources" is defined in the agreement.  A drill indicated resource
number does not rise to the level of, and should not be considered proven and
probable reserves as those terms are defined under SEC
guidelines.   AngloGold had 180 days from the date of
notification, or July 28, 2008, to determine whether or not it would choose to
exercise the Option for the Back-In Right. On July 1, 2008, AngloGold notified
the Company that it would not be exercising the Back-In Right.
  F-9
  During
the fiscal year ended July 31, 2007, The Company exited the development stage
since principal operations have commenced.
 
 NOTE 2 -
Summary of Significant Accounting Policies
 
 Principals of
Consolidation
 
 The consolidated financial statements
include the accounts of Capital Gold Corporation and its wholly owned and
majority owned subsidiaries, Leadville Mining and Milling Holding Corporation,
Minera Santa Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de
C.V. (“Oro”) as well as the accounts within Caborca Industrial S.A. de C.V.
(“Caborca Industrial”), a Mexican corporation 100% owned by two of the Company’s
officers and directors for mining support services. These services include, but
are not limited to, the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at cost.  This entity
is considered a variable interest entity under accounting rules provided under
FIN 46, “Consolidation of Variable Interest Entities”.  All
significant intercompany accounts and transactions are eliminated in
consolidation.
 
 Cash and Cash
Equivalents
 
 The
Company considers highly liquid investments with original maturities of three
months or less from the date of purchase to be cash equivalents. Cash and cash
equivalents include money market accounts.
 
 Accounts
Receivable
 
 Accounts
receivable represents amounts due but not yet received from customers upon sales
of precious metals.  The carrying amount of the Company’s accounts
receivable balances approximate fair value.
 
 Marketable
Securities
 
 The
Company accounts for its investments in marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
 
 Management
determines the appropriate classification of all securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. The
Company has classified its marketable equity securities as available for sale
securities and has recorded such securities at fair value using the closing
quoted market price on the exchange the securities are traded as of the balance
sheet date. The Company uses the specific identification method to determine
realized gains and losses. Unrealized holding gains and losses are excluded from
earnings and, until realized, are reported as a separate component of
stockholders' equity.
  Ore on Leach Pads and
Inventories (“In-Process Inventory”)
  Costs that are incurred in or benefit
the productive process are accumulated as ore on leach pads and inventories. Ore
on leach pads and inventories are carried at the lower of average cost or
market. The current portion of ore on leach pads and inventories is determined
based on the amounts to be processed within the next 12 months. The major
classifications are as follows:
  F-10
  Ore
on Leach Pads
  The recovery of gold from certain gold
oxide 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 mill in-circuit, 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, stockpiles and/or leach pads plus the
in-process conversion costs, including applicable depreciation relating to the
process facilities incurred to that point in the process.
  Precious
Metals Inventory
  Precious metals inventories include
gold doré and/or gold bullion. Precious metals that result from the Company’s
mining and processing activities are valued at the average cost of the
respective in-process inventories incurred prior to the refining process, plus
applicable refining costs.
  Materials
and Supplies
  Materials and supplies are valued at
the lower of average cost or net realizable value. Cost includes applicable
taxes and freight.
  Property, Plant and Mine
Development
  Expenditures for new facilities or
equipment and expenditures that extend the useful lives of existing facilities
or equipment are capitalized and depreciated using the straight-line method at
rates sufficient to depreciate such costs over the estimated productive lives,
which do not exceed the related estimated mine lives, of such facilities based
on proven and probable reserves.
  F-11
  Mineral exploration costs are expensed
as incurred. When it has been determined that a mineral property can be
economically developed as a result of establishing proven and probable reserves,
costs incurred prospectively to develop the property are capitalized as incurred
and are amortized using the units-of-production (“UOP”) method over the
estimated life of the ore body based on estimated recoverable ounces or pounds
in proven and probable reserves.
  Impairment of Long-Lived
Assets
  The Company reviews and evaluates its
long-lived assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. An impairment
is considered to exist if the total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the assets, including
goodwill, if any. An impairment loss is measured and recorded based on
discounted estimated future cash flows. Future cash flows are estimated based on
quantities of recoverable minerals, expected gold and other commodity prices
(considering current and historical prices, price trends and related factors),
production levels and operating costs of production and capital, all based on
life-of-mine plans. Existing proven and probable reserves and value beyond
proven and probable reserves, including mineralization other than proven and
probable reserves and other material that is not part of the resource base, are
included when determining the fair value of mine site reporting units at
acquisition and, subsequently, in determining whether the assets are impaired.
The term “recoverable minerals” refers to the estimated amount of gold or other
commodities that will be obtained after taking into account losses during ore
processing and treatment. Estimates of recoverable minerals from exploration
stage mineral interests are risk adjusted based on management’s relative
confidence in such materials. In estimating future cash flows, assets are
grouped at the lowest level for which there are identifiable cash flows that are
largely independent of future cash flows from other asset groups. The Company’s
estimates of future cash flows are based on numerous assumptions and it is
possible that actual future cash flows will be significantly different than the
estimates, as actual future quantities of recoverable minerals, gold and other
commodity prices, production levels and operating costs of production and
capital are each subject to significant risks and uncertainties.
  Reclamation and Remediation
Costs (“Asset Retirement Obligations”)
  Reclamation costs are allocated to
expense over the life of the related assets and are periodically adjusted to
reflect changes in the estimated present value resulting from the passage of
time and revisions to the estimates of either the timing or amount of the
reclamation and 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 its mine site in accordance with
Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations” (“SFAS 143”)
 
 Deferred Financing
Costs
 
 Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.
 
 Intangible
Assets
 
 Purchased
intangible assets consisting of rights of way, easements and net profit
interests are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the units of production method.
It is the Company’s policy to assess periodically the carrying amount of its
purchased intangible assets to determine if there has been an impairment to
their carrying value. Impairments of other intangible assets are determined in
accordance with SFAS 144. There was no impairment at July 31,
2008.
  F-12
 
 Fair Value of Financial
Instruments
 
 The
carrying value of the Company's financial instruments, including cash and cash
equivalents and accounts payable approximated fair value because of the short
maturity of these instruments.
 
 Long-term
Debt
 
 The carrying value of the Company’s
long-term debt approximates fair value.
 
 Revenue
Recognition
 
 Revenue
is recognized from the sale of gold dore when persuasive evidence of an
arrangement exists, the price is determinable, the product has been delivered to
the refinery, the title and risk of loss has been transferred to the refiner and
collection of the sales price is reasonably assured from the customer. 
Sales are calculated based upon assay of the dore’s precious metal content and
its weight.  The Company receives 95% of the precious metal content
contained within the dore from the refinery based upon the preliminary assay of
the Company.  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.  Revenues from by-product
sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit.  By-product sales amounted to $707, $0 and $0 for
the fiscal years ended July 31, 2008, 2007 and 2006, respectively.
 
 Foreign Currency
Translation
 
 Assets
and liabilities of the Company's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).
 
 Comprehensive Income
(Loss)
 
 Comprehensive
income (loss) which is reported on the accompanying consolidated statement of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses, the fair
value change in our interest rate swap agreement and net unrealized gains and
losses on available-for-sale securities.
 
 Income
Taxes
 
 The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (“SFAS 109”).  The
cumulative effect of applying the provisions of this interpretation are required
to be reported separately as an adjustment to the opening balance of retained
earnings in the year of adoption.  The adoption of this standard did
not have an impact on the financial condition or the results of the Company’s
operations.
  F-13
  On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system.  This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures.  The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively.  If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax.  If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
  Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that the Company will not be liable for
any excess flat tax for calendar year 2008 and, accordingly, has recorded a
Mexican income tax provision as of July 31, 2008.
  As the
new legislation was recently enacted, it remains subject to ongoing varying
interpretations.  There is the possibility of implementation amendments by
the Mexican Government and the estimated future income tax liability recorded at
the balance sheet date may change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are
not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such tax
rate changes are enacted.
 
 Equity Based
Compensation
 
 In connection with offers of employment
to the Company’s executives as well as in consideration for agreements with
certain consultants, the Company issues options and warrants to acquire its
common stock. Employee and non-employee awards are made at the discretion of the
Board of Directors.
 
 Such options and warrants may be
exercisable at varying exercise prices currently ranging from $0.24 to $0.85 per
share of common stock with certain of these grants becoming exercisable
immediately upon grant. Certain grants have vested or are vesting over a period
of five years. Also, certain grants contain a provision whereby they become
immediately exercisable upon a change of control.
 
 Effective February 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123R
“Accounting for Stock Based Compensation” (“SFAS 123R”). Under SFAS 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. The Company adopted the provisions of SFAS 123R using
a modified prospective application. Under this method, compensation cost is
recognized for all share-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. Prior periods are not revised for comparative purposes.
Because the Company previously adopted only the pro forma disclosure provisions
of SFAS 123, it will recognize compensation cost relating to the unvested
portion of awards granted prior to the date of adoption, using the same estimate
of the grant-date fair value and the same attribution method used to determine
the pro forma disclosures under SFAS 123, except that forfeitures rates will be
estimated for all options, as required by SFAS 123R.
 
 The cumulative effect of applying the
forfeiture rates is not material. SFAS 123R requires that excess tax benefits
related to stock option exercises be reflected as financing cash inflows instead
of operating cash inflows.
  F-14
  The fair value of each option award is
estimated on the date of grant using a Black-Scholes option valuation model.
Expected volatility is based on the historical volatility of the price of the
Company stock. The risk-free interest rate is based on U.S. Treasury issues with
a term equal to the expected life of the option. The Company uses historical
data to estimate expected dividend yield, expected life and forfeiture rates.
The estimated per share weighted average grant-date fair values of stock options
and warrants granted during the fiscal years ended July 31, 2008, 2007 and 2006;
were $0.62,  $0.33 and $0.38, respectively. The fair values of the
options and warrants granted were estimated based on the following weighted
average assumptions:
 
 Year ended July 31,2008
                            
                            2007
                            
                            2006Expected
      volatility
                            47.60 – 60.88%
                            
                            73%
                            
                            95 – 165%Risk-free
      interest rate
                            4.61%
                            
                            5.75%
                            
                            5.95%Expected
      dividend yield
                            -
                            
                            -
                            
                            -Expected
      life
                            5.5
      years
                            
                            2.4
      years
                            
                            1-2
      years
 
 Stock
option and warrant activity for employees during the fiscal years ended July 31,
2008, 2007 and 2006 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, 2005
                        
                        
                        4,711,363
                        
                        
                        $
                        .09
                        
                        
                        
                        0.30
                        
                        
                        $
                        1,278Options
      granted
                        
                        
                        4,611,363
                        
                        
                        
                        .13
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      exercised
                        
                        
                        (590,909
                        )
                        
                        
                        .05
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      expired
                        
                        
                        (3,161,363
                        )
                        
                        
                        .05
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at July 31, 2006
                        
                        
                        5,570,454
                        
                        
                        $
                        .16
                        
                        
                        
                        -
                        
                        
                        $
                        702Options
      granted
                        
                        
                        1,050,000
                        
                        
                        
                        .36
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      exercised
                        
                        
                        (3,570,909
                        )
                        
                        
                        .08
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      expired
                        
                        
                        (549,545
                        )
                        
                        
                        .22
                        
                        
                        
                        -
                        
                        
                        
                        -Warrants
      and options outstanding at July 31, 2007
                        
                        
                        2,500,000
                        
                        
                        $
                        .34
                        
                        
                        
                        1.20
                        
                        
                        $
                        255Options
      granted*
                        
                        
                        2,500,000
                        
                        
                        
                        .63
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      exercised
                        
                        
                        (1,450,000
                        )
                        
                        
                        .32
                        
                        
                        
                        -
                        
                        
                        
                        -Options
      expired
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Warrants
      and options outstanding at July 31, 2008
                        
                        
                        3,550,000
                        
                        
                        $
                        .55
                        
                        
                        
                        4.00
                        
                        
                        $
                        334Warrants
      and options exercisable at July 31, 2008
                        
                        
                        1,800,000
                        
                        
                        $
                        .47
                        
                        
                        
                        2.83
                        
                        
                        $
                        308
  *
Issuances under 2006 Equity Incentive Plan.
  F-15
  Unvested
stock option and warrant balances for employees at July 31, 2008, 2007 and 2006
are as follows:
 
 Number of
                        Options
                    
                    
                    Weighted
                      average
                      exercise
                      price
                    
                    
                    Weighted
                      average
                      remaining
                      contracted
                        term (years)
                    
                    
                    Aggregate
                      Intrinsic valueOutstanding
      at July 31, 2005
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      granted
                    
                    
                    150,000
                    
                    
                    
                    .32
                    
                    
                    
                    2.00
                    
                    
                    $
                    17Outstanding
      at July 31, 2006
                    
                    
                    150,000
                    
                    
                    $
                    .32
                    
                    
                    
                    1.67
                    
                    
                    $
                    17Options
      granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at July 31, 2007
                    
                    
                    150,000
                    
                    
                    $
                    .32
                    
                    
                    
                    0.67
                    
                    
                    $
                    18Options
      granted
                    
                    
                    2,500,000
                    
                    
                    
                    .63
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      vested
                    
                    
                    (900,000
                    )
                    
                    
                    .58
                    
                    
                    
                    -
                    
                    
                    
                    -Unvested
      Options outstanding at July 31, 2008
                    
                    
                    1,750,000
                    
                    
                    $
                    .63
                    
                    
                    
                    4.49
                    
                    
                    $
                    8
  F-16
  Stock
option and warrant activity for non-employees during the years ended July 31,
2008, 2007 and 2006 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, 2005
                  
                  
                  31,902,004
                  
                  
                  $
                  .30
                  
                  
                  
                  1.13
                  
                  
                  $
                  3,430Options
      granted
                  
                  
                  6,844,000
                  
                  
                  
                  .28
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (12,835,004
                  )
                  
                  
                  .29
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (350,000
                  )
                  
                  
                  .10
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants
      and options outstanding at July 31, 2006
                  
                  
                  25,561,000
                  
                  
                  $
                  .29
                  
                  
                  
                  1.33
                  
                  
                  $
                  1,940Options
      granted
                  
                  
                  16,982,542
                  
                  
                  
                  .33Options
      exercised
                  
                  
                  (18,633,000
                  )
                  
                  
                  .29
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (1,375,000
                  )
                  
                  
                  .31
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants
      and options outstanding at July 31, 2007
                  
                  
                  22,535,542
                  
                  
                  $
                  .33
                  
                  
                  
                  1.48
                  
                  
                  $
                  2,578Options
      granted*
                  
                  
                  1,715,000
                  
                  
                  $
                  .66
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      exercised
                  
                  
                  (21,555,542
                  )
                  
                  
                  .33
                  
                  
                  
                  -
                  
                  
                  
                  -Options
      expired
                  
                  
                  (680,000
                  )
                  
                  
                  .30
                  
                  
                  
                  -
                  
                  
                  
                  -Warrants
      and options outstanding at July 31, 2008
                  
                  
                  2,015,000
                  
                  
                  $
                  .62
                  
                  
                  
                  3.54
                  
                  
                  $
                  54Warrants
      and options exercisable at July 31, 2008
                  
                  
                  1,560,000
                  
                  
                  $
                  .61
                  
                  
                  
                  2.71
                  
                  
                  $
                  48
  *
1,115,000 issued under 2006 Equity Incentive Plan.
  F-17
  Unvested
stock option and warrant balances for non-employees at July 31, 2008, 2007 and
2006 are as follows:
  Number of
                        Options
                    
                    
                    Weighted
                      Average
                      Exercise
                        price
                    
                    
                    Weighted
                      average
                      remaining
                      contracted
                        term (years)
                    
                    
                    Aggregate
                      Intrinsic
                        valueOutstanding
      at July 31, 2006
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -Options
      granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      vested
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at July 31, 2007
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -Options
      granted
                    
                    
                    650,000
                    
                    
                    
                    .63
                    
                    
                    
                    -
                    
                    
                    
                    -Options
      vested
                    
                    
                    (195,000
                    )
                    
                    
                    .63
                    
                    
                    
                    -
                    
                    
                    
                    -Unvested
      options outstanding at July 31, 2008
                    
                    
                    455,000
                    
                    
                    $
                    .63
                    
                    
                    
                    4.49
                    
                    
                    $
                    3
  The impact on the Company’s results of
operations of recording equity based compensation for the fiscal years ended
July 31, 2008, 2007 and 2006, for employees and non-employees was approximately
$987, $492 and $362 and reduced earnings per share by $0.01, $0.00 and $0.00 per
basic and diluted share, respectively.  The Company has not recognized
any tax benefit or expense for the fiscal years ended July 31, 2008, 2007 and
2006, 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, 2008, 2007 and 2006,
there was approximately $686, $53 and $53, respectively, of unrecognized equity
based compensation cost related to options granted to executives and employees
which have not yet vested.
  Prior to
the adoption of FAS 123R, the Company applied the intrinsic value-based method
of accounting prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation an interpretation of APB Opinion
No. 25
issued in March 2000 (“FIN 44”), to account for its fixed plan stock
options. Under this method, compensation expense  was recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of FASB Statement
No. 123.
This Statement amended FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation.
  F-18
  The
following table illustrates the effect on the net loss and net loss per share as
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based compensation prior to February 1, 2006:
 
 Year Ended
                    July 31, 2006Net
      Loss
                  
                  $
                  (4,805
                  )Add
      stock-based employee compensation expense (recovery) included in reported
      net income loss
                  
                  
                  -Deduct
      total stock-based employee compensation expense determined under fair
      value based method for all awards, net of tax
                  
                  
                  (773
                  )Pro
      forma net loss
                  
                  $
                  (5,578
                  )Pro
      forma net loss per common share (basic and diluted)
                  
                  $
                  (.05
                  )Weighted
      average of common share (basic and diluted)
                  
                  
                  112,204,471Net
      loss per common share basic and diluted
                  
                  $
                  (.04
                  )
 
 Reclassifications
 
 Certain
items in these financial statements have been reclassified to conform to the
current period presentation. These reclassifications had no impact on the
Company’s results of operations, stockholders’ equity or cash
flows.
 
 Net Loss Per Common
Share
 
 Basic and
diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Equivalent common shares,
consisting of stock options and warrants, which amounted to 25,035,542 and
31,131,454 shares, respectively, are excluded from the calculation of diluted
net loss per share for the fiscal years ended July 31, 2007 and 2006 since their
effect is antidilutive.
 
 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 Federal Deposit Insurance Corporation limit of $100,000 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 are not designated as hedging
derivatives, they serve an economic purpose of protecting the company from the
effects of a decline in gold prices.  Because they are not designated
as hedges, however, special hedge accounting does not
apply.  Derivative results are simply marked to market through
earnings, with these effects recorded in other income or other expense, as appropriate
under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”).
  F-19
  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
 
 On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions".
 
 The fair value option established by
Statement 159 permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity will report unrealized
gains and losses on items for which the fair value option has been elected in
earnings (or another performance indicator if the business entity does not
report earnings) at each subsequent reporting date. A not-for-profit
organization will report unrealized gains and losses in its statement of
activities or similar statement. The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments and not to portions
of instruments.
 
 Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007.  The Company elected not to adopt the fair
value option for any eligible instruments.
 
 On
December 4, 2007, the FASB issued FASB Statement No. 160,“Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51.”
Statement 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. Statement 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest.
  F-20
 
 Statement
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited.  The Company believes adoption of this standard will not
have an impact on the financial condition or the results of the Company’s
operations.
 
 On April
21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
133 and Statement 47, and K4, Miscellaneous: Income Statement Classification of
Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities.  The Company believes adoption of this standard will not
have a material impact on the financial condition or the results of the
Company’s operations.
 
 The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:
 
 * FASB
Statements of Financial Accounting Standards and Interpretations, FASB Statement
133  Implementation Issues, FASB Staff Positions, AICPA Accounting
Research Bulletins and Accounting Principles Board Opinions that are not
superseded by actions of the FASB, and Rules and interpretive releases of the
SEC for SEC registrants.
 
 * FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position.
 
 * AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.
 
 Statement
162 is effective 60 days following the SEC's approval of the PCAOB amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. Since Statement 162 is only effective for nongovernmental
entities, the GAAP hierarchy will remain in AICPA Statement on Auditing
Standards (SAS) No. 69, The
Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
Principles" in the Independent Auditor's Report, for state and local
governmental entities and federal governmental entities. The Company believes
the adoption of this standard will not have a material impact on the financial
condition or the results of the Company’s operations.
 
 The FASB
issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts. This new standard clarifies how FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts.
 
 Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise's risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008. Except for the required disclosures, earlier
application is not permitted. The Company believes the adoption of this standard
will not have an impact on the financial condition or the results of the
Company’s operations.
  F-21


NOTE 3 -
Marketable Securities
 
 Marketable
securities are classified as current assets and are summarized as
follows:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Marketable
      equity securities, at cost
                  
                  $
                  50
                  
                  
                  $
                  50Marketable
      equity securities, at fair value
                    (See
      Notes 12 & 14)
                  
                  $
                  65
                  
                  
                  $
                  90
 
 NOTE 4 –
Material and Supplies Inventories
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Materials,
      supplies and other
                  
                  $
                  937
                  
                  
                  $
                  174Total
                  
                  $
                  937
                  
                  
                  $
                  174
  NOTE 5 -
Ore on Leach Pads and Inventories (“In-Process Inventory”)
  (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Ore
      on leach pads
                  
                  $
                  12,176
                  
                  
                  $
                  2,996Total
                  
                  $
                  12,176
                  
                  
                  $
                  2,996
  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 net realizable value. Net realizable value represents
the estimated future sales price of the product based on current and long-term
metals prices, less the estimated costs to complete production and bring the
product to sale. Write-downs of ore on leach pads and inventories, resulting
from net realizable value impairments, will be reported as a component of Costs applicable to sales.
The current portion of ore on leach pads and inventories is determined based on
the expected amounts to be processed within the next 12 months. Ore on leach
pads and inventories not expected to be processed within the next 12 months
will be classified as long-term.
  NOTE 6 –
Deposits
 
 Deposits are classified as current
assets and represent payments made on mining equipment and contract for the
Company’s El Chanate Project in Sonora, Mexico. Deposits are summarized as
follows:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Advance
      payment on Mining Contract to Sinergia (Note 18)
                  
                  $
                  -
                  
                  
                  $
                  683Equipment
      deposit
                  
                  
                  9
                  
                  
                  
                  193Other
                  
                  
                  -
                  
                  
                  
                  3Total
      Deposits
                  
                  $
                  9
                  
                  
                  $
                  879
  F-22
  NOTE 7 –
Other Current Assets
 
 Other
current assets consist of the following:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Value
      added tax to be refunded
                  
                  $
                  425
                  
                  
                  $
                  1,475Asset
      held for resale
                  
                  
                  -
                  
                  
                  
                  166Other
                  
                  
                  65
                  
                  
                  
                  34Total
      Other Current Assets
                  
                  $
                  490
                  
                  
                  $
                  1,675
 
 NOTE 8 –
Property and Equipment
 
 Property
and Equipment consist of the following:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Process
      equipment and facilities
                  
                  $
                  21,693
                  
                  
                  $
                  17,503Mining
      equipment
                  
                  
                  974
                  
                  
                  
                  863Mineral properties
                  
                  
                  141
                  
                  
                  
                  141Construction
      in progress
                  
                  
                  1,277
                  
                  
                  
                  -Computer
      and office equipment
                  
                  
                  316
                  
                  
                  
                  212Improvements
                  
                  
                  16
                  
                  
                  
                  16Furniture
                  
                  
                  38
                  
                  
                  
                  23Total
                  
                  
                  24,455
                  
                  
                  
                  18,758Less:
      accumulated depreciation
                  
                  
                  (3,537
                  )
                  
                  
                  (758
                  )Property
      and equipment, net
                  
                  $
                  20,918
                  
                  
                  $
                  18,000
 
 Depreciation
expense for the fiscal years ended July 31, 2008, 2007 and 2006 was
approximately $2,779, $720 and $34, respectively.
  F-23
  NOTE 9 -
Intangible Assets
 
 Intangible
assets consist of the following:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July31,
                    2007Repurchase
      of Net Profits Interest
                  
                  $
                  500
                  
                  
                  $
                  500Water
      Rights
                  
                  
                  134
                  
                  
                  
                  -Mobilization
      Payment to Mineral Contractor
                  
                  
                  70
                  
                  
                  
                  70Investment
      in Right of Way
                  
                  
                  18
                  
                  
                  
                  18Total
                  
                  
                  722
                  
                  
                  
                  588Accumulated
      Amortization
                  
                  
                  (541
                  )
                  
                  
                  (11
                  )Intangible
      assets, net
                  
                  $
                  181
                  
                  
                  $
                  577
 
 Purchased
intangible assets consisting of rights of way, water rights, easements and net
profit interests are carried at cost less accumulated amortization. Amortization
is computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the UOP method. It is the
Company’s policy to assess periodically the carrying amount of its purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance with
SFAS 144. There was no impairment at July 31, 2008.
 
 On September 13, 2006, the Company
repurchased the 5% net profits interest formerly held by Grupo Minera FG (“FG”),
and subsequently acquired by Daniel Gutierrez Cibrian, with respect to the
operations at the El Chanate mine. That net profits interest had originally been
granted to FG in connection with the April 2004 termination of the joint venture
agreement between FG and MSR, the Company’s wholly owned Mexican
subsidiary.  FG also received a right of first refusal to carry out
the works and render construction services required to effectuate the El Chanate
Project.  This right of first refusal is not applicable where a
funding source for the project determines that others should render such works
or services.  FG has assigned or otherwise transferred to MSR all
permits, licenses, consents and authorizations (collectively, “authorizations”)
for which FG had obtained in its name in connection with the development of the
El Chanate Project to the extent that the authorizations are
assignable.  To the extent that the authorizations are not assignable
or otherwise transferable, FG has given its consent for the authorizations to be
cancelled so that they can be re-issued or re-granted in MSR’s
name.  The foregoing has been completed.  The purchase price
for the buyback of the net profits interest was $500, and was structured as part
of the project costs financed by the loan agreement with Standard Bank, Plc.
(See Note 17). Mr. Cibrian retained a 1% net profits interest in MSR, payable
only after a total US $20 million in net profits has been generated from
operations at El Chanate.  The Company recorded this transaction on
its balance sheet as an intangible asset under guidance provided by FAS 142 –
Goodwill and Other Intangible
Assets to be amortized over the period of which the asset is expected to
contribute directly or indirectly to the Company’s cash flow.  On
March 23, 2007, The Company reacquired the remaining 1% net profits interest
(see Note 18).
 
 The Right of Way 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,
2008, 2007 and 2006 was approximately $530, $7 and $4,
respectively.  The Repurchase of Net Profits Interest from FG was
fully amortized as of July 31, 2008.
  NOTE 10 -
Mining Reclamation Bonds
 
 These represent certificates of deposit
that have been deposited as security for Mining Reclamation Bonds in Colorado.
They bear interest at rates varying from 4.35% to 5.01% annually and mature at
various dates through 2010.
  F-24
  NOTE 11 -
Mining Concessions
 
 Mining
concessions consists of the following:
 
 (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007El
      Chanate
                  
                  $
                  45
                  
                  
                  $
                  45El
      Charro
                  
                  
                  25
                  
                  
                  
                  25Total
                  
                  
                  70
                  
                  
                  
                  70Less:
      accumulated amortization
                  
                  
                  (11
                  )
                  
                  
                  (3
                  )Total
                  
                  $
                  59
                  
                  
                  $
                  67
 
 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, 2008, 2007 and 2006 was approximately $8, $3 and $0,
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 12 -
Loans Receivable - Affiliate
 
 Loans receivable - affiliate consist of
expense reimbursements due from a publicly-owned corporation in which the
Company has an investment. The Company's president and chairman of the board of
directors was an officer and director of that corporation. On March 10, 2008, the Company’s
president and chairman of the board of directors resigned as both an officer and
director of this corporation.These loans are non-interest
bearing and due on demand (see Note 3 & 14).
  NOTE 13 -
Reclamations and Remediation Liabilities (“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 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 abandonment costs as of July 31,
2008.  This review resulted in an increase in the Asset Retirement
Obligation by approximately $293.  As of July 31, 2008 and 2007,
approximately $1,666 and $1,249, respectively, was accrued for reclamation
obligations relating to mineral properties in accordance with SFAS No. 143,
“Accounting for Asset Retirement Obligations.”
  F-25
  The
following is a reconciliation of the liability for long-term Asset Retirement
Obligations for the years ended July 31, 2008 and 2007:
  (in thousands)Balance
      as of July 31, 2006
                    
                    $
                    -Additions,
      changes in estimates and other
                    
                    
                    1,218Liabilities
      settled
                    
                    
                    -Accretion
      expense
                    
                    
                    31Balance
      as of July 31, 2007
                    
                    $
                    1,249Additions,
      changes in estimates and other
                    
                    
                    293Liabilities
      settled
                    
                    
                    -Accretion
      expense
                    
                    
                    124Balance
      as of July 31, 2008
                    
                    $
                    1,666
 
 NOTE 14 –
Accumulated Other Comprehensive Income
 
 Accumulated other comprehensive income
(loss) consists of foreign translation gains and losses, unrealized gains and
losses on marketable securities and fair value changes on derivative instruments
and is summarized as follows:
  Foreign
                        currency items
                      
                      
                      Unrealized gain
                        (loss) on securities
                      
                      
                      Change in fair
                        value on interest
                        rate swaps
                      
                      
                      Accumulated other
                        comprehensive
                        incomeBalance
      as of July 31, 2005
                      
                      $
                      57
                      
                      
                      $
                      100
                      
                      
                      $
                      -
                      
                      
                      $
                      157Income
      (loss)
                      
                      
                      49
                      
                      
                      
                      (60
                      )
                      
                      
                      -
                      
                      
                      
                      (11
                      )Balance
      as of July 31, 2006
                      
                      $
                      106
                      
                      
                      $
                      40
                      
                      
                      $
                      -
                      
                      
                      $
                      146Income
      (loss)
                      
                      
                      (47
                      )
                      
                      
                      -
                      
                      
                      
                      205
                      
                      
                      
                      158Balance
      as of July 31, 2007
                      
                      
                      59
                      
                      
                      
                      40
                      
                      
                      
                      205
                      
                      
                      
                      304Income
      (loss)
                      
                      
                      622
                      
                      
                      
                      (25
                      )
                      
                      
                      (141
                      )
                      
                      
                      456Balance
      as of July 31, 2008
                      
                      $
                      681
                      
                      
                      $
                      15
                      
                      
                      $
                      64
                      
                      
                      $
                      760
 
 The Company has not recognized any
income tax benefit or expense associated with other comprehensive income items
for the years ended July 31, 2008, 2007 and 2006.
 
 NOTE 15 -
Related Party Transactions
 
 In August 2002, the Company purchased
marketable equity securities of a related company. The Company recorded
approximately $6, $9 and $10 in expense reimbursements including office rent
from this entity for the years ended July 31, 2008, 2007 and 2006, respectively
(see Notes 3 and 12).
 
 The Company utilizes Caborca
Industrial, a Mexican Corporation that is 100% owned by Gifford A. Dieterle, the
Company’s Chief Executive Officer, and Jeffrey W. Pritchard, the Company’s
Executive Vice President, for mining support services. These services include
but are not limited to the payment of mining salaries and related costs. Caborca
Industrial bills the Company for these services at slightly above cost. Mining
expenses charged by Caborca Industrial and eliminated upon consolidation
amounted to approximately $3,775, $702 and $122 for the year ended July 31,
2008, 2007 and 2006, respectively.
  F-26
  During the years ended July 31, 2008,
2007 and 2006, the Company paid Jack Everett, its former V.P. Exploration and
Director, consulting fees of $100, $0 and $69, respectively.  In
addition, this individual earned wages of $120 and $50 during the years ended
July 31, 2007 and 2006, respectively.  During the years ended July 31,
2007 and 2006, the Company paid its V.P. Exploration and Director, Roger Newell,
consulting fees of $0 and $89, respectively.  In addition, Mr. Newell
earned wages of $120 during the year ended July 31, 2007.  Also,
during the years ended July 31, 2008, 2007 and 2006, the Company paid Robert
Roningen, a director, legal and consulting fees of $35, $24 and $8,
respectively.
 
 In January 2006, the Company extended
the following stock options through January 3, 2007, all of which are
exercisable at $0.05 per share: Gifford A. Dieterle, Chief Executive Officer and
Director – 1,250,000 shares; Robert Roningen, Director – 500,000 shares; Jeffrey
W. Pritchard, V.P. Investor Relations and Director – 327,727 shares; Roger
Newell, V.P. Development and Director – 500,000 shares; and Scott Hazlitt, V.P.
Mine Development – 25,000 shares.   There was not a material
increase in the intrinsic value of these options at the date of modification as
compared to the intrinsic value of the original issuance of these stock options
on the applicable measurement date.  All of these options were
exercised prior to their extended expiration.
 
 On February 7, 2007, Robert Roningen
resigned as the Company’s Secretary and, on February 9, 2007, John Brownlie, the
Company’s Vice President of Operations, was appointed Chief Operating Officer
and Jeffrey W. Pritchard, the Company’s Vice President of Investor Relations,
was appointed Secretary.
 
 The Company’s V.P. Development and
Director, Roger Newell, has, since 1995, been a senior consultant in the
Minerals Advisory Group, LLC, Tucson, Arizona, an entity that provided $3,000 of
services to the Company for the year ended July 31, 2006.
 
 On December 20, 2007, at the
recommendation of the Compensation Committee of the Board of Directors, the
Company’s executive officers, directors and employees were granted 1,095,000
restricted shares under our 2006 Equity Incentive Plan.  The
restricted shares granted vest equally over three years from the date of
grant.  In addition, the Company’s executive officers were granted
3,150,000 stock options under our 2006 Equity Incentive Plan.  The
stock options have a term of seven years and vest as follows: 20% vested upon
issuance and the balance vest 20% annually thereafter.  The exercise
price of the stock options is $0.63 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars).  In the event of a
termination of continuous service (other than as a result of a change of
control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall be the lesser of
the original expiration date or one year from the date continuous service
terminates.  Upon the happening of a change of control, all unvested
stock options and unvested restricted stock grants immediately
vest.
 
 On July 17, 2008, at the recommendation
of the Compensation Committee of the Board of Directors, the Company’s executive
officers and directors were granted 515,000 shares under its 2006 Equity
Incentive Plan.  The restricted shares granted vested
immediately.
 
 NOTE 16 -
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.
  F-27
  The Company issued 1,150,000 shares of
common stock and 12,600,000 common stock purchase warrants to Standard Bank as
part of a commitment fee to entering into the credit facility on August 15,
2006, with its wholly-owned subsidiaries MSR and Oro.  The Company
recorded the issuance of the 1,150,000 shares of common stock and 12,600,000
warrants as deferred financing costs of approximately $351 and $3,314,
respectively, as a reduction of stockholders' equity on the Company's balance
sheet. The issuance of 1,150,000 shares was recorded at the fair market value of
the Company's common stock at the closing date or $0.305 per
share.  The warrants were valued at approximately $3,314 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet (See
Note 18).  The balance of deferred financing costs, net of
amortization, as of July 31, 2008 and 2007, as a reduction of stockholders'
equity, was approximately $2,611 and $3,438.  Amortization expense for
the years ended July 31, 2008, 2007 and 2006, was approximately $931, $750 and
$0, respectively.
 
 The Company closed two private
placements in January 2007 pursuant to which it issued an aggregate of
12,561,667 units, each unit consisting of one share of its common stock and a
warrant to purchase 1⁄4 of a share of its common stock at $0.30 per unit for
proceeds of approximately $3,486, net of commissions of approximately
$283.  Each warrant issued  in the January 2007 placements
is exercisable for 1⁄4 of a share of common stock, at an exercise price equal to
$0.40 per share.  Thus, a holder must exercise four warrants to
purchase one share of common stock.  Each warrant has a term of
eighteen months and is fully exercisable from the date of
issuance.  The Company issued to the placement agents eighteen month
warrants to purchase up to an aggregate of 942,125 shares of common stock at an
exercise price of $0.30 per share.  Such placement agent warrants are
valued at approximately $142 using the Black-Scholes option pricing
method.
 
 The Company also received proceeds of
approximately $7,473, $5,643 and $742 during the years ended July 31, 2008, 2007
and 2006, from the exercising of an aggregate of 22,994,178, 22,203,909 and
4,825,913 of warrants and options, respectively, issued to investors in past
private placements, to officers and directors as well as to outside parties for
services rendered.
 
 On March 22, 2007, the Company issued
500,000 shares of common stock to John Brownlie, the Company’s Chief Operating
Officer under the Company’s 2006 Equity Incentive Plan. The fair value of the
shares issued in March 2007 amounted to $225 or $0.45 per share.  The
shares, which were granted to Mr. Brownlie as compensation for services already
provided to the Company, vested immediately.  The compensation expense
was fully recognized on the date of the grant.
 
 In March 2007, the Company issued
65,625 shares of common stock to an independent contractor for services provided
related to the Company’s El Chanate project. The fair value of the services
provided amounted to $26 or $0.40 per share. In April 2007, this independent
contractor was engaged as the general manager of the Company’s El Chanate
project for a six month term with an option for an additional six month term, if
mutually agreed upon by both parties. Pursuant to the agreement, the Company
issued 113,636 shares of common stock with a fair value of $50 or $0.44 per
share at the fair market value of the Company’s common stock on the date of the
agreement. The issuance of these shares vest over the six-month
term.  The independent contractor and the Company mutually agreed to
terminate the contractor after three months as construction was
complete.  The Company issued 56,818 shares of the Company’s common
stock on the vested portion of the 113,636 shares or 50%.
 
 On
December 20, 2007, at the recommendation of the Compensation Committee of the
Board of Directors, the Company’s executive officers, directors and employees
were granted 1,095,000 restricted shares under our 2006 Equity Incentive Plan
(the “Plan”).   The restricted shares granted vest equally over
three years from the date of grant.  The fair value of the Company’s
stock was $0.63 on the date of grant resulting in the Company recording
approximately $690 in deferred compensation cost.  For the year ended
July 31, 2008, the Company has recorded approximately $194 in equity
compensation expense upon the vesting of a portion of restricted
shares.
  F-28
  On July
17, 2008, at the recommendation of the Compensation Committee of the Board of
Directors, the Company’s executive officers and directors were granted 515,000
shares under our 2006 Equity Incentive Plan. The restricted shares granted
vested immediately.  The fair value of the Company’s stock was $0.70
on the date of grant resulting in the Company recording approximately $361 in
equity compensation expense.
 
 Recapitalization
 
 In February 2007, the Company's
Certificate of Incorporation was amended to increase the Company's authorized
shares of capital stock from 200,000,000 to 250,000,000 shares.  In
January 2008, the Company amended its Certificate of Incorporation to increase
the Company’s authorized shares of capital stock from 250,000,000 to 300,000,000
shares.
 
 Warrants and
Options
 
 The fair value of each warrant and
option award is estimated on the date of grant using a Black-Scholes option
valuation model.  The Company issues warrants and options to purchase
common stock with an exercise price of no less than fair market value of the
underlying stock at the date of grant.
 
 On November 30, 2006, the Company’s
board of directors granted 100,000 common stock options to each of John Postle,
Ian A. Shaw and Mark T. Nesbitt, the Company’s independent directors. The
options are to purchase shares of the Company’s common stock at an exercise
price of $0.33 per share (the closing price of its common stock on that date)
for a period of two years. The Company utilized the Black-Scholes Method to fair
value the 300,000 options received by the directors and recorded approximately
$40 as equity based compensation expense.  The grant date fair value
of each stock option was $0.13.
 
 On December 13, 2006, the Company
issued two year options to purchase the Company’s common stock at an exercise
price of $0.36 per share to its Chief Operating Officer, Chief Financial Officer
and the Company’s Canadian counsel.  These options are for the
purchase of 250,000 shares, 100,000 shares and 100,000 shares,
respectively.  The Company utilized the Black-Scholes Method to fair
value the 450,000 options received by these individuals and recorded
approximately $61 as stock based compensation expense.  The grant date
fair value of each stock option was $0.14.
 
 On March 22, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.45 per share to the Company’s then SEC Counsel.  These options are
for the purchase of 100,000 shares and were issued under the 2006
Equity-Incentive Plan.  The Company utilized the Black-Scholes Method
to fair value these options and recorded approximately $15 as equity based
compensation expense.  The grant date fair value of each stock option
was $0.15.
 
 On June 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price of
$0.384 per share to the Company’s CFO.  These options are for the
purchase of 500,000 shares and were issued under the 2006 Equity-Incentive
Plan.  The Company utilized the Black-Scholes Method to fair value
these options and recorded approximately $65 as equity based compensation
expense.  The grant date fair value of each stock option was
$0.13.
 
 On August 13, 2007, the Company issued
two year options to purchase the Company’s common stock at an exercise price
ranging from $0.43 to $0.50 per share to outside parties for services
provided.  These options are for the purchase of 465,000 shares and
were issued under the 2006 Equity-Incentive Plan.  The Company
utilized the Black-Scholes Method to fair value these options and recorded
approximately $58 as equity based compensation expense.  The average
grant date fair value of each stock option was $0.12 with an exercise price of
no less than fair market value of the underlying stock at the date of
grant.
  F-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
500,000, 500,000, 500,000, 500,000, 350,000, 150,000, 150,000, 150,000, 100,000,
100,000 and 150,000 stock options, respectively, aggregating 3,150,000 stock
options under our 2006 Equity Incentive Plan . The stock options have a term of
seven years and vest as follows: 20% vested upon issuance and the balance vest
20% annually thereafter. The exercise price of the stock options is $0.63 per
share (per the Plan, the closing price on the Toronto Stock Exchange on the
trading day immediately prior to the day of determination converted to U.S.
Dollars). In the event of a termination of continuous service (other than as a
result of a change of control, as defined in the Plan, unvested stock options
shall terminate and, with regard to vested stock options, the exercise period
shall be the lesser of the original expiration date or one year from the date
continuous service terminates. Upon the happening of a change of control, all
unvested stock options and unvested restricted stock grants immediately
vest.  The Company utilized the Black-Scholes method to fair value the
3,150,000 options received by these individuals totaling $1,060.  For
the fiscal year ended July 31, 2008, the Company recorded approximately $375 in
equity compensation expense on the vested portion of these stock options. The
grant date fair value of each stock option was $0.34.
 
 On July 17, 2008, the Company closed in
escrow pending execution of Mexican collateral documents and certain other
ministerial matters an Amended And Restated Credit Agreement (the “Credit
Agreement”) involving our wholly-owned Mexican subsidiaries Minera Santa Rita S.
de R.L. de C.V. (“MSR”) and Oro de Altar S. de R.L. de C.V. (“Oro”), as
borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank PLC
(“Standard Bank”), as the lender., Pursuant to the Credit Agreement, the Company
agreed to issue to Standard Bank a two year warrant to purchase an aggregate of
600,000 shares of our common stock at an exercise price of $0.852 per
share.  The warrants were valued at approximately $103 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet as
of July 31, 2008 (See Note 17).  The grant date fair value of each
stock option was $0.17.
 
 2006 Equity Incentive
Plan
 
 The 2006 Equity Incentive Plan (the
“Plan”), approved by stockholders on February 21, 2007, is intended to attract
and retain individuals of experience and ability, to provide incentive to the
Company’s employees, consultants, and non-employee directors, to encourage
employee and director proprietary interests in the Company, and to encourage
employees to remain in the Company’s employ.
 
 The Plan authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights and
restricted stock awards (each, an “Award”). A maximum of 10,000,000 shares of
common stock are reserved for potential issuance pursuant to Awards under the
Plan.  Unless sooner terminated, the Plan will continue in effect for
a period of 10 years from its effective date.
 
 The Plan is administered by the
Company’s Board of Directors which has delegated the administration to the
Company’s Compensation Committee.  The Plan provides for Awards to be
made to such of the Company’s employees, directors and consultants and its
affiliates as the Board may select.
 
 Stock options awarded under the Plan
may vest and be exercisable at such times (not later than 10 years after the
date of grant) and at such exercise prices (not less than Fair Market Value at
the date of grant) as the Board may determine.  Unless otherwise
determined by the Board, stock options shall not be transferable except by will
or by the laws of descent and distribution. The Board may provide for options to
become immediately exercisable upon a "change in control," as defined in the
Plan.
 
 The exercise price of an option must be
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.
  F-30
  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 TSX or any stock exchange upon
which the common stock is listed.
 
 Information  regarding
the options approved by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2008 and 2007 is summarized
below:
 
 2007
                      
                      
                      2008Shares
                      
                      
                      Option
      Price
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Shares
                      
                      
                      Option
      Price
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOutstanding
      beginning at year
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      1,050,000
                      
                      
                      $
                      0.36-0.45
                      
                      
                      $
                      0.38Granted
                      
                      
                      1,050,000
                      
                      
                      
                      0.36-0.45
                      
                      
                      
                      0.38
                      
                      
                      
                      3,615,000
                      
                      
                      
                      0.38-0.63
                      
                      
                      $
                      0.61Canceled
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      end of year
                      
                      
                      1,050,000
                      
                      
                      $
                      0.36-0.45
                      
                      
                      $
                      0.38
                      
                      
                      
                      4,665,000
                      
                      
                      $
                      0.36-0.63
                      
                      
                      $
                      0.56Exercisable
                      
                      
                      1,050,000
                      
                      
                      $
                      0.36-0.45
                      
                      
                      $
                      0.38
                      
                      
                      
                      3,360,000
                      
                      
                      $
                      0.36-0.63
                      
                      
                      $
                      0.54Weighted  average
      remaining contractual life (years)
                      
                      1-2 years
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      5-6 years
                      
                      
                      
                      -
                      
                      
                      
                      -Available
      for future grants
                      
                      
                      8,450,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,225,000
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 Restricted
stock awards granted by the Compensation Committee under the Equity Incentive
Plan for the fiscal years ended July 31, 2008 and 2007, were 500,000 and
1,610,000 shares, respectively.  There was no activity within the
equity incentive plan for the fiscal year ended July 31, 2006.
  F-31
  NOTE 17 -
Debt
 
 Long
      term debt consists of the following:
                  
                  (in
      thousands)July
      31,
                    2008
                  
                  
                  July
      31,
                    2007Total
      long-term debt
                  
                  $
                  12,500
                  
                  
                  $
                  12,500Less
      current portion
                  
                  
                  4,125
                  
                  
                  
                  -Long-term
      debt
                  
                  $
                  8,375
                  
                  
                  $
                  12,500
 
 On August 15, 2006, the Company entered
into a credit facility (the “Credit Facility”) involving its wholly-owned
subsidiaries MSR and Oro, as borrowers, us, as guarantor, and Standard Bank plc
(“Standard Bank”), as the lender and the offshore account
holder.  Under the Credit Facility, MSR and Oro have agreed to borrow
money in an aggregate principal amount of up to US$12,500 (the “Loan”) for the
purpose of constructing, developing and operating the Company’s El Chanate
Project (the “Mine”).  The Company is guaranteeing the repayment of
the loan and the performance of the obligations under the Credit
Facility.  The Loan is scheduled to be repaid in fourteen quarterly
payments with the first principal payment having been made on September 30,
2008.  The Loan bears interest at LIBOR plus 4.00%, with LIBOR
interest periods of 1, 2, 3 or 6 months and with interest payable at the end of
the applicable interest period.  As of July 31, 2008 and 2007, the
accrued interest on this facility was approximately $72 and $100,
respectively.
 
 Approximate
future principal payments under this loan are as follows (in
thousands):
 
 Fiscal
      Years Ending July 31,2009
                    
                    $
                    4,1252010
                    
                    
                    3,1252011
                    
                    
                    3,5002012
                    
                    
                    1,750$
                    12,500
 
 The Credit Facility contains covenants
customary for a project financing loan, including but not limited to
restrictions (subject to certain exceptions) on incurring additional debt,
creating liens on its property, 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 debt service coverage ratio of not less than 1.2 to 1.0, (ii) a
projected debt service coverage ratio of not less than 1.2 to 1.0, (iii) a loan
life coverage ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio
of at least 2.0 to 1.0 and (v) a minimum reserve tail.  The Company
also is required to maintain a certain minimum level of unrestricted cash, and
upon meeting certain Mine start-up production and performance criteria, MSR and
Oro are required to maintain a specified amount of cash as a reserve for debt
repayment.  As of July 31, 2008, the Company was in compliance with
these financial covenants.
 
 The Loan is secured by all of the
tangible and intangible assets and property owned by MSR and Oro pursuant to the
terms of a Mortgage Agreement, a Non-Possessory Pledge Agreement, an Account
Pledge Agreement and certain other agreements entered into in Mexico (the
“Mexican Collateral Documents”).    As additional collateral
for the Loan, the Company, together with its subsidiary, Leadville Mining &
Milling Holding Corporation, have pledged all of its ownership interest in MSR
and Oro.  In addition to these collateral arrangements, MSR and Oro
are required to deposit all proceeds of the Loan and all cash proceeds received
from operations and other sources in an offshore, controlled account with
Standard Bank.  Absent a default under the loan documents, MSR and Oro
may use the funds from this account for specific purposes such as approved
project costs and operating costs.
  F-32
  As part of the fee for entering into
and closing the Credit Facility, the Company issued to Standard Bank 1,150,000
shares of its restricted common stock and a warrant for the purchase of
12,600,000 shares of its common stock at an exercise price of $0.317 per share,
expiring on the earlier of (a) December 31, 2010 or (b) the date one year after
the repayment of the Credit Facility.  Previously, pursuant to the
mandate and commitment letter for the facility, the Company issued to Standard
Bank 1,000,000 shares of its restricted common stock and a warrant for the
purchase of 1,000,000 shares of its common stock at an exercise price of $0.32
per share, expiring on the earlier of (a) December 31, 2010 or (b) the date one
year after the repayment of the Credit Facility.  The Company recorded
the issuance of the 1,000,000 shares of common stock as deferred financing costs
of approximately $270 as a reduction of stockholders' equity on its balance
sheet. The issuance of these shares was recorded at the fair market value of the
Company’s common stock at the commitment letter date or $0.27 per
share.  In addition, the warrants were valued at approximately $253
using the Black-Scholes option pricing model and were reflected as deferred
financing costs as a reduction of stockholders' equity on the Company’s balance
sheet in 2006. The Company registered for public resale the 2,150,000 shares
issued to Standard Bank and the 13,600,000 shares issuable upon exercise of
warrants issued to Standard Bank.
 
 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 Facility both with Standard Bank (See
Note 20 for more details on these transactions).
 
 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 MSR and Oro, as
borrowers (“Borrowers”), the Company, 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 (the “Original
Agreement”). Under the Original Agreement, MSR and Oro could borrow, and did
borrow, 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
Original Agreement.
 
 The
Credit Agreement establishes 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. The Borrowers may request a borrowing of
the Revolving Commitment from time to time, provided that the Borrowers are not
entitled to request a borrowing more than once in any calendar month (each
borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
and guaranteed in the same manner as the Term Loan. Term Loan principal shall be
repaid quarterly commencing on September 30, 2008 and consisting of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900 and two final payments in the amount of $400. There is no prepayment
fee.  Principal under the Term Loan and the Revolving Loans shall bear
interest at a rate per annum equal to the LIBO Rate, as defined in the Credit
Agreement, for the applicable Interest Period plus the Applicable Margin. An
Interest Period can be one, two, three or six months, at the option of the
Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively.  The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment.   Pursuant to the terms of the Original Credit
Agreement, Standard Bank exercised significant control over the operating
accounts of MSR located in Mexico and in the United States. Standard Bank’s
control over the accounts has been lifted significantly under the terms of the
Credit Agreement, giving the Borrowers authority to exercise primary day-to-day
control over the accounts. However, the accounts remain subject to an account
pledge agreement between MSR and the Lender.
  F-33
  In
connection with the refinance proceedings, the Borrowers, as a condition
precedent to closing, obtained a waiver letter from the Lender of any default or
event of default as a result of not being in compliance with regulations of
Mexican federal law with regard to certain filing and environmental bonding
issues in connection with the operation of mining the El Chanate concessions as
well as certain insurance requirements. The Borrowers have not yet complied with
these regulations due to the absence of professionals in the area qualified to
conduct  studies to facilitate compliance. The Borrowers have agreed
to make a commercially reasonable effort to come into compliance with these
requirements.  See also Note 25 “Subsequent Events”.
 
 NOTE 18 –
Mining, Engineering and Supply Contracts
 
 In early December 2005, the Company’s
wholly-owned Mexican subsidiary, MSR, which holds the rights to develop and mine
El Chanate Project, entered into a Mining Contract with a Mexican mining
contractor, Sinergia Obras Civiles y Mineras, S.A. de C.V,("Sinergia"). The
Mining Contract becomes effective if and when MSR sends the Contractor a formal
"Notice of Award".
 
 On August 2, 2006, the Company amended
the November 24, 2005 Mining Contract between its subsidiary, MSR, and Sinergia.
Pursuant to the amendment, MSR's right to deliver the Notice to Proceed to
Sinergia was extended to November 1, 2006. Provided that this Notice was
delivered to Sinergia on or before that date, with a specified date of
commencement of the Work (as defined in the contract) not later than February 1,
2007, the mining rates set forth in the Mining Contract would still apply;
subject to adjustment for the rate of inflation between September 23, 2005
and the date of commencement of the work.  As consideration for these
changes, the Company paid Sinergia $200 of the requisite advance payment
discussed below.  On November 1, 2006, MSR delivered the Notice of
Award specifying January 25, 2007, as the date of commencement of
Work.   Based on a revised crushing and stacking plan and since
MSR is placing the leach pad overliner material both Sinergia and MSR mutually
agreed to delay mining until the end of March 2007. Mining of the El Chanate
Project initiated on March 25, 2007.
 
 Pursuant to the Mining Contract,
Sinergia, using its own equipment, generally is performing all of the mining
work (other than crushing) at the El Chanate Project for the life of the
mine.  MSR delivered to the Contractor a mobilization payment of $70
and the advance payment of $520.  The advance payments are recoverable
by MSR out of 100% of subsequent payments due to Sinergia under the Mining
Contract.  Pursuant to the Mining Contract, upon termination, Sinergia
would be obligated to repay any portion of the advance payment that had not yet
been recouped.  Sinergia’s mining rates are subject to escalation on
an annual basis.  This escalation is tied to the percentage escalation
in Sinergia’s costs for various parts for its equipment, interest rates and
labor.  One of the principals of Sinergia is one of the former
principals of FG.  FG was the Company’s former joint venture
partner.  As of July 31, 2008, the entire advance payment has been
recovered by MSR.
 
 On March 23, 2007, the Company
reacquired the remaining 1% net profits interest in its Mexican affiliate, MSR
from one of the successors to FG (“FG’s Successor”). When the joint venture was
terminated in March 2004, FG received, among other things, a participation
certificate entitling it to receive 5% of the annual dividends of MSR, when
declared. The participation certificate also gave FG the right to participate,
but not to vote, in the meetings of MSR’s Board of Managers, Technical Committee
and Partners. In August 2006, the Company repurchased the participation
certificate from FG’s Successor for $500 with FG’s Successor retaining a 1% net
profits interest in MSR, payable only after a total $20 million in net profits
has been generated from operations at El Chanate. The Company reacquired the
remaining 1% net profits interest in consideration of its advancing $319 to
Sinergia under the Mining Contract. FG’s Successor is a principal of
Sinergia.  As of July 31, 2008, the entire advance has been
recovered.
  F-34
  NOTE 19 -
Employee and Consulting Agreements
 
 The Company entered into employment
agreements, effective July 31, 2006, with the following executive officers:
Gifford A. Dieterle, President and Treasurer, Roger A. Newell, Vice President of
Development, Jack V. Everett, Vice President of Exploration, and Jeffrey W.
Pritchard, Vice President of Investor Relations.  On December 5, 2006,
effective January 1, 2007, the Company entered into an employment agreement with
J. Scott Hazlitt, Vice President of Mine Development.
 
 On June 6, 2007, Jack V. Everett
resigned as Vice President of Exploration and a Director of the Company and
entered into a consulting agreement with the Company to provide mining and
mineral exploration consultation services.
 
 On September 10, 2007, Roger A. Newell
resigned as Vice President of Development. He will continue to serve as a member
of the Company’s Board of Directors.
 
 Mr. Dieterle is entitled to a base
annual salary of at least $180, Mr. Hazlitt is entitled to a base annual salary
of at least $125 and each of the other executives is entitled to a base annual
salary of at least $120.  Each executive is entitled to a bonus or
salary increase in the sole discretion of the board of directors.  In
addition, Messrs. Dieterle, Newell, Everett and Pritchard each received two year
options to purchase an aggregate of 250,000 shares of the Company’s common stock
at an exercise price of $0.32 per share (the closing price on July 31,
2006).  These options have all been exercised.  As discussed
below, these agreements have been amended to provide for salary
increases.
 
 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.
  F-35
  In conjunction with the employment
agreements, the Company’s board of directors deeming it essential to the best
interests of its stockholders to foster the continuous engagement of key
management personnel and recognizing that, as is the case with many publicly
held corporations, a change of control might occur and that such possibility,
and the uncertainty and questions which it might raise among management, might
result in the departure or distraction of management personnel to the detriment
of the company and its stockholders, determined to reinforce and encourage the
continued attention and dedication of members of the Company’s management to
their engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of the
company, it entered into identical agreements regarding change in control with
the executives.  Each of the agreements regarding change in control
continues through December 31, 2009 (December 31, 2010 for Mr. Hazlitt) and
extends automatically to the third anniversary thereof unless the Company gives
notice to the executive prior to the date of such extension that the agreement
term will not be extended. Notwithstanding the foregoing, if a change in control
occurs during the term of the agreements, the term of the agreements will
continue through the second anniversary of the date on which the change in
control occurred.  Each of the agreements entitles the executive to
change of control benefits, as defined in the agreements and summarized below,
upon his termination of employment with the Company during a potential change in
control, as defined in the agreements, or after a change in control, as defined
in the agreements, when his termination is caused (1) by the Company for any
reason other than permanent disability or cause, as defined in the agreement (2)
by the executive for good reason as defined in the agreements or, (3) by the
executive for any reason during the 30 day period commencing on the first date
which is six months after the date of the change in control.  Each
executive would receive a lump sum cash payment of three times his base salary
and three times his bonus award from the prior year, as well as outplacement
benefits.  In addition, the exercise price of all Company options
would decrease to $0.01 per share.  Each agreement also provides that
the executive is entitled to a payment to make him whole for any federal excise
tax imposed on change of control or severance payments received by
him.
 
 A “Change of Control” is deemed to
occur on the earlier of (1) the date any person is or becomes the beneficial
owner of securities representing 30% or more of the voting power of the
Company’s then outstanding securities; (2) the date on which the following
individuals cease for any reason to constitute a majority of the number of
directors then serving: (i)individuals who, as of the date of the Change of
Control Agreement, constitute the Board and (ii) any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company’s
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date of
the Change of Control Agreement or whose appointment, election or nomination for
election was previously so approved or recommended; (3) the consummation of a
merger or consolidation of the Company or any direct or indirect subsidiary with
another entity, other than a transaction where the individuals serving on the
board of directors constitute at least a majority of the combined entity and the
outstanding securities continue to represent at least 50% of the combined voting
power of the combined entity or a transaction to effect a recapitalization of
the Company where no person is or becomes the holder of securities representing
30% or more of the combined voting power; (4) the approval by the stockholders
of the Company or a plan of complete liquidation or dissolution of the Company;
or (5) the sale or disposition or all or substantially all of the Company’s
assets, other than a sale or disposition to an entity of which 50% the combined
voting power is held by the Company’s stockholders.
 
 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.
  F-36
  On September 14, 2007, the Company
entered into a Second Amended Engagement Agreement (the “Agreement”) with
Christopher Chipman, the Company’s Chief Financial Officer, effective May 1,
2007.  The Agreement supersedes and replaces Mr. Chipman’s prior
agreement that expired on August 31, 2007.  He receives an annual fee
of $175.  Mr. Chipman can terminate the Agreement on 60 days prior
notice.  The Company can terminate the Agreement without cause on 30
days prior notice and for cause (as defined in the Agreement).  The
Agreement also terminates upon Mr. Chipman’s disability (as defined in the
Agreement) or death. In the event that the Company terminates the Agreement
without cause, Mr. Chipman will be entitled to a cash termination payment equal
to his Annual Fee in effect upon the date of termination, payable in equal
monthly installments beginning in the month following his
termination.  In the event the Agreement is terminated by Mr. Chipman
at his election or due to his death or disability, Mr. Chipman will be entitled
to the fees otherwise due and payable to him through the last day of the month
in which such termination occurs.  In conjunction with Agreement, the
Company entered into a change of control agreement similar to the agreements
entered into with the Company’s other executive
officers.    In connections with the original engagement
agreement with Mr. Chipman in March 2006, Mr. Chipman received a two year option
to purchase an aggregate of 50,000 shares of Company Common Stock at an exercise
price of $.34 per share.  This option has been exercised in
full.
 
 On May 12, 2006, the Company entered
into an employment agreement with John Brownlie, pursuant to which Mr. Brownlie
originally served as Vice President Operations.  Mr. Brownlie became
our Chief Operating Officer in February 2007.  Mr. Brownlie serves as
Vice President Operations. Mr. Brownlie receives a base annual salary of $150
and is entitled to annual bonuses. Upon his employment, he received options to
purchase an aggregate of 200,000 shares of the Company’s common stock at an
exercise price of $.32 per share. 50,000 options vested immediately and the
balance vest upon the Company achieving "Economic Completion" as that term is
defined in the Standard Bank Credit Facility (when the Company has commenced
mining operations and has been operating at anticipated capacity for 60 to 90
days). The term of the options is two years from the date of vesting. The
agreement runs for an initial two year period, and automatically renews
thereafter for additional one year periods unless terminated by either party
within 30 days of a renewal date. The Company can terminate the agreement for
cause or upon 30 days notice without cause. Mr. Brownlie can terminate the
agreement upon 60 days notice without cause or, if there is a breach of the
agreement by the Company that is not timely cured, upon 30 days notice. In the
event that the Company terminates him without cause or he terminates due to the
Company’s breach, he will be entitled to certain severance payments. The Company
utilized the Black-Scholes method to fair value the 200,000 options received by
Mr. Brownlie. The Company recorded approximately $70 as deferred compensation
expense as of the date of the agreement and recorded the vested portion or
$17,500 as stock based compensation expense for the year ended July 31,
2006.
 
 On August 29, 2007, at the
recommendation of the Compensation Committee, the Board increased the salaries
of the Company’s executive officers to be commensurate with industry standards
and amended their respective agreements accordingly. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $250; John Brownlie, Chief Operating Officer, $225; Christopher Chipman,
Chief Financial Officer, $175 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $195; Roger A. Newell, Vice
President - Development, $135; and J. Scott Hazlitt, Vice President - Mine
Development, $135. The salary increase for Mr. Brownlie and the consulting fee
increase for Mr. Chipman were retroactive to May 1, 2007 and the salary increase
for Mr. Pritchard is retroactive to August 1, 2007.
 
 On July 17, 2008, at the recommendation
of the Compensation Committee of our Board of Directors, our executive officers
were awarded salary increases effective August 1, 2008. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $288; John Brownlie, Chief Operating Officer, $259; Christopher Chipman,
Chief Financial Officer, $201 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $224; and J. Scott Hazlitt, Vice
President - Mine Development, $155.
 
 See Note 25 – Subsequent Events for
changes to executive agreements subsequent to the fiscal year ended July 31,
2008.
  F-37
  NOTE 20 -
Sales Contracts, Commodity and Financial Instruments
 
 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 15). 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 purchase a gold cap, enabling the
company to buy gold 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.  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.  Critically, the volume of these
derivative positions represents about 86 percent of current sales, such that
these derivative positions serve only to mitigate the Company’s gold price risk,
rather than eliminate or reverse the natural exposure of the
Company.
 
 Under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
these contracts must be carried on the balance sheet at their fair value. The
Company records these changes in fair value and any cash settlements within
Other Income or Expense. The contracts were not designated as hedging
derivatives, and therefore special hedge accounting is not applied.
 
 The following is a reconciliation of
the derivative contracts regarding the Company’s Gold Price Protection
agreement:
 
 (in thousands)Asset
      balance as of July 31, 2005
                    
                    $
                    -Premium
      paid
                    
                    
                    (800
                    )Loss
      on change in fair value of derivative
                    
                    
                    582Asset
      balance as of July 31, 2006
                    
                    $
                    (218
                    )Loss
      on change in fair value of derivative
                    
                    
                    1,226Net
      cash settlements
                    
                    
                    (460
                    )Liability
      balance as of July 31, 2007
                    
                    $
                    548Loss
      on change in fair value of derivative
                    
                    
                    1,356Net
      cash settlements
                    
                    
                    (1,166
                    )Liability
      balance as of July 31, 2008
                    
                    $
                    738
  Rather than modifying the original Gold
Price Protection agreement with Standard Bank to satisfy these forward sale
obligations, the Company has 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
oz. Since inception, the Company has paid Standard Bank  an aggregate
of approximately $1,641 on the settlement of 46,883 ounces with corresponding
reductions in the Company’s derivative liability ($1,166 or 25,329 ounces of
gold for the fiscal year ended July 31, 2008).   These expenses
were incurred concurrently with sales revenues that reflected actual sales of
physical gold at market prices well above the option strike price of $535 per
ounce.  The remaining ounces to settle with regard to this agreement
amounted to 75,044 as of July 31, 2008.
 
 On
October 11, 2006, prior to our initial draw on the Credit Facility, the Company
entered into interest rate swap agreements in accordance with the terms of the
Credit Facility.  Although the Credit Facility requires that it hedge
at least 50% of its outstanding debt under this facility, the Company elected to
cover $9,375 or 75% of the outstanding debt. The termination date on our
existing 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.
  F-38
  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, 2009 from these
two swaps was determined to be immaterial.
  F-39
  The following is a reconciliation of
the derivative contract regarding the Company’s Interest Rate Swap
agreement:
  (in thousands)Balance
      as of July 31, 2005
                    
                    $
                    -Change
      in fair value of swap agreement
                    
                    
                    -Interest
      expense (income)
                    
                    
                    -Balance
      as of July 31, 2006
                    
                    $
                    -Change
      in fair value of swap agreement
                    
                    
                    48Interest
      expense (income)
                    
                    
                    -Net
      cash settlements
                    
                    
                    -Liability
      balance as of July 31, 2007
                    
                    $
                    48Change
      in fair value of swap agreement
                    
                    
                    141Interest
      expense (income)
                    
                    
                    78Net
      cash settlements
                    
                    
                    (75
                    )Liability
      balance as of July 31, 2008
                    
                    $
                    192
  The Company is exposed to credit losses
in the event of non-performance by counterparties to these interest rate swap
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty under defined guidelines, and monitors the market position with
each counterparty as required by SFAS 133.
  The
Effect of Derivative Instruments on the Statement of Financial Performance (in
thousands):
  Quarter
                                Ended
                              
                              Derivatives in Cash
                                Flow Hedging
                                Relationships
                              
                              Effective
                                Results
                                Recognized
                                in OCI
                              
                              Location of Results
                                Reclassifed from AOCI to
                                Earnings
                              
                              Amount
                                Reclassified
                                from
                                AOCI to
                                Income
                              
                              
                              Ineffective
                                Results
                                Recognized
                                in Earnings
                              
                              
                              Location
                                of
                                Ineffective
                                Results10/31/07
                              
                              Interest
      Rate contracts
                              
                              $
                              (66
                              )
                              Interest Income (Expense)
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              N/A1/31/08
                              
                              Interest
      Rate contracts
                              
                              $
                              (201
                              )
                              Interest
      Income (Expense)
                              
                              
                              (5
                              )
                              
                              
                              -
                              
                              
                              
                              N/A4/30/08
                              
                              Interest
      Rate contracts
                              
                              $
                              28
                              
                              Interest
      Income (Expense)
                              
                              
                              (24
                              )
                              
                              
                              -
                              
                              
                              
                              N/A7/31/08
                              
                              Interest
      Rate contracts
                              
                              $
                              19
                              
                              Interest
      Income (Expense)
                              
                              
                              (49
                              )
                              
                              
                              (24
                              )
                              
                              
                              N/A
  Quarter
                                        Ended
                                      
                                      Derivatives
      Not
                                        Designated
      in Hedging
                                        Relationships
                                      
                                      Location
      of Results
                                      
                                      Amount
      of
                                        Gain
      (Loss)10/31/07
                                      
                                      Gold
      contracts
                                      
                                      Other
      Income (Expense)
                                      
                                      $
                                      (358
                                      )1/31/08
                                      
                                      Gold
      contracts
                                      
                                      Other
      Income (Expense)
                                      
                                      $
                                      (345
                                      )4/30/08
                                      
                                      Gold
      contracts
                                      
                                      Other
      Income (Expense)
                                      
                                      $
                                      (337
                                      )7/31/08
                                      
                                      Gold
      contracts
                                      
                                      Other
      Income (Expense)
                                      
                                      $
                                      (319
                                      )
  F-40
  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
      DerivativesOctober
      31, 2007
                                  
                                  Balance
      Sheet Location
                                  
                                  Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  115Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  613January
      31, 2008
                                  
                                  Balance
      Sheet Location
                                  
                                  Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  313Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  660April
      30, 2008
                                  
                                  Balance
      Sheet Location
                                  
                                  Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  274Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  702July
      31, 2008
                                  
                                  Balance
      Sheet Location
                                  
                                  Fair
      ValuesDerivatives
      designated as hedging instrumentsInterest
      rate derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  192Derivatives
      designated as non-hedging instrumentsGold
      derivatives
                                  
                                  Other
      Liabilities
                                  
                                  $
                                  738
 
 NOTE 21 –
Accrued Expenses
 
 Accrued
      expenses at July 31, 2008 and 2007 consists of the
    following:(in
      thousands)July 31,2008
                  
                  
                  2007Net
      profit interest
                  
                  $
                  753
                  
                  
                  $
                  -Net
      smelter return
                  
                  
                  189
                  
                  
                  
                  -Mining
      contract
                  
                  
                  193
                  
                  
                  
                  51Income
      tax payable
                  
                  
                  777
                  
                  
                  
                  -Utilities
                  
                  
                  110
                  
                  
                  
                  165Interest
                  
                  
                  72
                  
                  
                  
                  100Other
      liabilities
                  
                  
                  578
                  
                  
                  
                  287$
                  2,672
                  
                  
                  $
                  603
  F-41
  NOTE 22 -
Income Taxes
 
 The
Company’s Income tax (expense) benefit consisted of:
 
 (in
      thousands)July
      31,
                      2008
                    
                    
                    July
      31,
                      2007
                    
                    
                    July
      31,
                      2006Current:United
      States
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Foreign
                    
                    
                    (2,111
                    )
                    
                    
                    -
                    
                    
                    
                    -(2,111
                    )
                    
                    
                    -
                    
                    
                    
                    -Deferred:United
      States
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
                    
                    
                    (1,396
                    )
                    
                    
                    -
                    
                    
                    
                    -(1,396
                    )
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    (3,507
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
 
 The
Company’s Income (loss) from operations before income taxconsisted
of:
 
 (in
      thousands)July
      31,
                        2008
                      
                      
                      July
      31,
                        2007
                      
                      
                      July
      31,
                        2006United
      States
                      
                      $
                      (6,556
                      )
                      
                      $
                      (5,514
                      )
                      
                      $
                      (4,005
                      )Foreign
                      
                      
                      16,427
                      
                      
                      
                      (1,958
                      )
                      
                      
                      (800
                      )Total
                      
                      $
                      9,871
                      
                      
                      $
                      (7,472
                      )
                      
                      $
                      (4,805
                      )
 
 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,
                      2008
                    
                    
                    July
      31,
                      2007
                    
                    
                    July
      31,
                      2006Income
      (loss) from operations before income tax
                    
                    $
                    9,871
                    
                    
                    $
                    (7,472
                    )
                    
                    $
                    (4,805
                    )US
      statutory corporate income tax rate
                    
                    
                    34
                    %
                    
                    
                    34
                    %
                    
                    
                    34
                    %Income
      tax (expense) benefit computed at US statutory corporate income tax
      rate
                    
                    
                    (3,356
                    )
                    
                    
                    2,540
                    
                    
                    
                    1,634Reconciling
      items:Change
      in valuation allowance on deferred tax assets
                    
                    
                    (1,137
                    )
                    
                    
                    (2,540
                    )
                    
                    
                    (1,634
                    )Difference
      in foreign tax
                    
                    
                    986
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      tax expense
                    
                    $
                    (3,507
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
  F-42
  Components
of the Company’s deferred income tax assets (liabilities) are as
follows:
 
 (in
      thousands)July
      31,
                      2008
                    
                    
                    July
      31,
                      2007
                    
                    
                    July
      31,
                      2006Net
      deferred income tax assets,  non current:Remediation
      and reclamation costs
                    
                    $
                    (29
                    )
                    
                    $
                    -
                    
                    
                    $
                    -Net
      operating losses
                    
                    
                    9,334
                    
                    
                    
                    8,197
                    
                    
                    
                    5,823Depreciation
      and amortization
                    
                    
                    602
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    9,907
                    
                    
                    $
                    8,197
                    
                    
                    $
                    5,823Valuation
      allowances
                    
                    
                    (9,334
                    )
                    
                    
                    (8,197
                    )
                    
                    
                    (5,823
                    )$
                    573
                    
                    
                    $
                    -
                    
                    
                    $
                    -Net
      deferred income tax liabilities, current:Depreciation
      and amortization
                    
                    $
                    12
                    
                    
                    $
                    -
                    
                    
                    $
                    -Foreign
      currency exchange
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    -Inventory
      valuation
                    
                    
                    (1,925
                    )
                    
                    
                    -
                    
                    
                    
                    -Accounts
      receivable
                    
                    
                    (413
                    )
                    
                    
                    -
                    
                    
                    
                    -Other
                    
                    
                    261
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    (2,063
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
 
 The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".  The cumulative
effect of applying the provisions of this interpretation are required to be
reported separately as an adjustment to the opening balance of retained earnings
in the year of adoption.  The adoption of this standard did not have
an impact on the financial condition or the results of the Company’s
operations.
  On
October 1, 2007, the Mexican Government enacted legislation which introduces
certain tax reforms as well as a new minimum flat tax system.  This new
flat tax system integrates with the regular income tax system and is based on
cash-basis net income that includes only certain receipts and
expenditures.  The flat tax is set at 17.5% of cash-basis net income as
determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009,
respectively.  If the flat tax is positive, it is reduced by the regular
income tax and any excess is paid as a supplement to the regular income
tax.  If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax.
  Companies
are required to prepay income taxes on a monthly basis based on the greater of
the flat tax or regular income tax as calculated for each monthly period. 
Annualized income projections indicate that the Company will not be liable for
any excess flat tax for calendar year 2008 and, accordingly, has recorded a
Mexican income tax provision as of July 31, 2008.
  As the
new legislation was recently enacted, it remains subject to ongoing varying
interpretations.  There is the possibility of implementation amendments by
the Mexican Government and the estimated future income tax liability recorded at
the balance sheet date may change.
 
 Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which are,
on a more likely than not basis,  not expected to be realized. The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are
enacted.
  F-43
  For income tax purposes in the United
States, the Company had available net operating loss carryforwards ("NOL") as of
July 31, 2008, 2007 and 2006 of approximately $22,179, $17,464 and $15,048,
respectively to reduce future federal taxable income. If any of the NOL's are
not utilized, they will expire at various dates through 2027. 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 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.
 
 Approximate
future minimum payments under this lease are as follows (in
thousands):
 
 Fiscal
      Years Ending July 31,2009
                      
                      $
                      1322010
                      
                      
                      1422011
                      
                      
                      1472012
                      
                      
                      1512013
                      
                      
                      13$
                      585
 
 Rent expense was approximately $107,
$66 and $63 for the years ended July 31, 2008, 2007 and 2006,
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 or Acts of God; 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.
  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 is surrounded entirely by the Company’s other
concessions.
  F-44
  NOTE 24 –
Unaudited Supplementary Data
  The
following is a summary of selected fiscal quarterly financial information
(unaudited and 000’s except per share data and price):
  2008Three
      Months EndedOctober 31
                                                  
                                                  
                                                  January 31
                                                  
                                                  
                                                  April 30
                                                  
                                                  
                                                  July 31Revenues
                                                  
                                                  $
                                                  6,526
                                                  
                                                  
                                                  $
                                                  8,043
                                                  
                                                  
                                                  $
                                                  8,730
                                                  
                                                  
                                                  $
                                                  9,805Costs
      applicable to sales
                                                  
                                                  $
                                                  2,204
                                                  
                                                  
                                                  $
                                                  2,419
                                                  
                                                  
                                                  $
                                                  2,717
                                                  
                                                  
                                                  $
                                                  3,350Net
      income applicable to common shares
                                                  
                                                  $
                                                  1,747
                                                  
                                                  
                                                  $
                                                  2,126
                                                  
                                                  
                                                  $
                                                  2,740
                                                  
                                                  
                                                  $
                                                  (249
                                                  )Net
      income per common share, basic
                                                  
                                                  $
                                                  0.01
                                                  
                                                  
                                                  $
                                                  0.01
                                                  
                                                  
                                                  $
                                                  0.02
                                                  
                                                  
                                                  $
                                                  0.00Net
      income per common share, diluted
                                                  
                                                  $
                                                  0.01
                                                  
                                                  
                                                  $
                                                  0.01
                                                  
                                                  
                                                  $
                                                  0.01
                                                  
                                                  
                                                  $
                                                  0.00Basic
      weighted-average shares outstanding
                                                  
                                                  
                                                  170,855
                                                  
                                                  
                                                  
                                                  174,765
                                                  
                                                  
                                                  
                                                  175,645
                                                  
                                                  
                                                  
                                                  175,040Diluted
      weighted-average shares outstanding
                                                  
                                                  
                                                  192,998
                                                  
                                                  
                                                  
                                                  196,191
                                                  
                                                  
                                                  
                                                  197,239
                                                  
                                                  
                                                  
                                                  195,469Closing
      price of common stock
                                                  
                                                  $
                                                  0.63
                                                  
                                                  
                                                  $
                                                  0.70
                                                  
                                                  
                                                  $
                                                  0.65
                                                  
                                                  
                                                  $
                                                  0.652007Three
      Months EndedOctober 31
                                                  
                                                  
                                                  January 31
                                                  
                                                  
                                                  April 30
                                                  
                                                  
                                                  July 31Revenues
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -Costs
      applicable to sales
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -Net
      loss applicable to common shares
                                                  
                                                  $
                                                  (1,161
                                                  )
                                                  
                                                  $
                                                  (1,673
                                                  )
                                                  
                                                  $
                                                  (2,649
                                                  )
                                                  
                                                  $
                                                  (1,989
                                                  )Net
      loss per common share, basic
                                                  
                                                  $
                                                  (0.01
                                                  )
                                                  
                                                  $
                                                  (0.01
                                                  )
                                                  
                                                  $
                                                  (0.02
                                                  )
                                                  
                                                  $
                                                  (0.01
                                                  )Net
      income loss per common share, diluted(1)
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  -Basic
      weighted-average shares outstanding
                                                  
                                                  
                                                  132,598
                                                  
                                                  
                                                  
                                                  138,074
                                                  
                                                  
                                                  
                                                  164,582
                                                  
                                                  
                                                  
                                                  149,811Diluted
      weighted-average shares outstanding(1)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Closing
      price of common stock
                                                  
                                                  $
                                                  0.31
                                                  
                                                  
                                                  $
                                                  0.40
                                                  
                                                  
                                                  $
                                                  0.41
                                                  
                                                  
                                                  $
                                                  0.44
 (1)
              Net
      loss per common share, diluted and computation of diluted weighted average
      common shares  was not included as their effect would have been
      anti-dilutive.
  F-45
 
 2006Three
      Months EndedOctober 31
                                  
                                  
                                  January 31
                                  
                                  
                                  April 30
                                  
                                  
                                  July 31Revenues
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Costs
      applicable to sales
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Net
      loss applicable to common shares
                                  
                                  $
                                  (813
                                  )
                                  
                                  $
                                  (921
                                  )
                                  
                                  $
                                  (1,482
                                  )
                                  
                                  $
                                  (1,589
                                  )Net
      loss per common share, basic
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.01
                                  )Net
      income loss per common share, diluted(1)
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Basic
      weighted-average shares outstanding
                                  
                                  
                                  95,969
                                  
                                  
                                  
                                  98,507
                                  
                                  
                                  
                                  124,884
                                  
                                  
                                  
                                  112,204Diluted
      weighted-average shares outstanding(1)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Closing
      price of common stock
                                  
                                  $
                                  0.23
                                  
                                  
                                  $
                                  0.38
                                  
                                  
                                  $
                                  0.35
                                  
                                  
                                  $
                                  0.32
 (2)
              Net
      loss per common share, diluted and computation of diluted weighted average
      common shares  was not included as their effect would have been
      anti-dilutive.
 
 NOTE 25 –
Subsequent Events
 
 On
September 18, 2008, the Company closed its Amended And Restated Credit
Agreement  involving our wholly-owned Mexican subsidiaries MSR and
Oro, as Borrowers, the Company, as guarantor, and Standard Bank PLC (“Standard
Bank”), as the lender.  The Company made its first principal payment
of $1,125 on September 30, 2008.
 
 In
September 2008, our Board of Directors (the "Board") approved and recommended to
our stockholders a proposal to effect a reverse stock split of all outstanding
shares of our Common Stock in an amount which our Board of Directors deems
appropriate to result in a sustained per share market price above $2.00 per
share, to be at a ratio of not less than one-for-four and not more than
one-for-six (the "Reverse Stock Split").  In conjunction with the
Reverse Stock Split, our Board has approved and is recommending to our
stockholders a proposal to effect a reduction in the number of shares of Common
Stock authorized for issuance and an increase in the par value thereof in
proportion to the Reverse Stock Split. We will not issue fractional shares in
connection with the Reverse Stock Split. Any fractional shares that result from
the Reverse Stock Split will be rounded up to the next whole
share.  However, if the Board determines that effecting these
capitalization changes would not be in the best interests of our stockholders,
the Board can determine not to effect any or all of the changes.
 
 These
changes, if authorized by the stockholders at the Meeting and if subsequently
implemented by our Board of Directors, will be effected by the filing of an
Amendment to our Certificate of Incorporation.
 
 On August
11, 2008, Jeffrey Pritchard was appointed our Executive Vice
President.
 
 On
October 28, 2008, we entered into an Engagement Agreement with John Brownlie,
our Chief Operating Officer.  The agreement supersedes a May 12, 2006
employment agreement between us and Mr. Brownlie.  Pursuant to the
Engagement Agreement, Mr. Brownlie serves as our Chief Operating Officer and
receives a base annual fee of at least $259 and is entitled to annual
bonuses.  The Engagement Agreement runs through August 31, 2009, and
automatically renews thereafter for additional one year periods unless
terminated by either party within 30 days of a renewal date. We can terminate
the agreement for cause or upon 30 days notice without cause. Mr. Brownlie can
terminate the agreement upon 60 days notice without cause or, if there is a
breach of the agreement by us that is not timely cured, upon 30 days notice. In
the event that we terminate him without cause or he terminates due to our
breach, he will be entitled to certain severance payments. We previously entered
into a change of control agreement with Mr. Brownlie similar to the agreements
entered into with our other executive officers.
  F-46
  NOTE 26
-Securities and Exchange Commission Comment Letter
 
 In response to a comment letter issued
by the staff of the Securities and Exchange Commission, or the SEC, the
accompanying consolidated financial statements include a statement of
stockholders' equity for the year ended July 31, 2006 and expanded disclosures
in the footnotes to the financial statements to cover each of the three years
ended July 31, 2008, 2007 and 2006.  The Company has also expanded its
footnote disclosure regarding accounts receivable, marketable securities, ore on
leach pads and inventory, long term debt, revenue recognition, equity based
compensation, related party transactions, stockholders;' equity, employee and
consulting agreements, sales contracts, and financial instruments.  In
addition, the Company made certain reclassifications that it determined were not
material.  These reclassifications had no impact on the Company's
financial position, results of operations, stockholders' equity or cash
flows.
  F-47