**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended September 30, 2006





OR





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


**SECURITIES
      EXCHANGE ACT OF 1934**





Commission
      File Number: 001-31593





APOLLO
      GOLD CORPORATION


(Exact
      name of Registrant as Specified in Its Charter)





**Yukon
                Territory, Canada**
            **Not
                Applicable**(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            (I.R.S.
                Employer Identification No.)





**5655
      South Yosemite St., Suite 200**


**Greenwood
      Village, Colorado 80111-3220**


(Address
      of Principal Executive Offices) (Zip Code)





Registrant’s
      telephone number, including area code: **(720)
      886-9656**





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


Yes x No £





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





Large
                Accelerated Filero
            Accelerated
                Filer£
            Non-Accelerated
                Filerx





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


Yes £ No x





At
      November 10, 2006, there were 142,232,286 common shares of Apollo Gold
      Corporation outstanding.











**TABLE
      OF CONTENTS**





*Page*PART
                IFINANCIAL
                INFORMATION
            
            4ITEM
                1.
            
            FINANCIAL
                STATEMENTS (Unaudited)
            
            4Condensed
                Consolidated Balance Sheets - As of September 30, 2006 and as of
                December 31, 2005
            
            5Condensed
                Consolidated Statements of Operations for the Three and Nine Months
                Ended
                September 30, 2006 and 2005
            
            6Condensed
                Consolidated Statements of Shareholders’ Equity for the Year ended
                December 31, 2005 and the Nine Months Ended September 30,
                2006
            
            7Condensed
                Consolidated Statements of Cash Flows for the Three and Nine Months
                Ended
                September 30, 2006 and 2005
            
            8Notes
                to the Condensed Consolidated Financial Statements
            
            9ITEM
                2.
            
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            
            23ITEM
                3.
            
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            32ITEM
                4.
            
            CONTROLS
                AND PROCEDURES
            
            33PART
                IIOTHER
                INFORMATION
            
            34ITEM
                1.
            
            LEGAL
                PROCEEDINGS
            
            34ITEM
                1A.
            
            RISK
                FACTORS
            
            34ITEM
                2.
            
            UNREGISTERED
                SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
            
            35ITEM
                3.
            
            DEFAULTS
                UPON SENIOR SECURITIES
            
            35ITEM
                4.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            35ITEM
                5.
            
            OTHER
                INFORMATION
            
            35ITEM
                6.
            
            EXHIBITS
            
            35INDEX
                TO EXHIBITS
            
            36Certification
                of CEO Pursuant to Section 302
            
            Exhibit
                31.1Certification
                of CFO Pursuant to Section 302
            
            Exhibit
                31.2Certification
                of CEO and CFO Pursuant to Section 906
            
            Exhibit
                32.1




2




**STATEMENTS
      REGARDING FORWARD LOOKING INFORMATION**




This
      Quarterly Report on Form 10-Q contains forward looking statements as defined
      in
      the *Private
      Securities Litigation Reform Act of 1995* with
      respect to our financial condition, results of operations, business prospects,
      plans, objectives, goals, strategies, future events, capital expenditure, and
      exploration and development efforts. Forward-looking statements can be
      identified by the use of words such as “may,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “intends,” “continue,” or
      the negative of such terms, or other comparable terminology. These statements
      include comments regarding:




·
            our
                ability to effectively remediate the east wall instability problems
                at the
                Montana Tunnels mine and our plan to bring the Montana Tunnels mine
                back into production in February
                2007;


·
              future
                  positive cash flow from the Montana Tunnels
                  mine;


·
            future
                financial contributions by Elkhorn Tunnels, LLC, our joint venture
                partner
                in respect of the Montana Tunnels
                mine;




·
            the
                establishment and estimates of mineral reserves and
                resources;




·
            production
                and production costs;




·
            cash
                operating costs;




·
            total
                cash costs;




·
            grade;




·
            feasibility
                studies;




·
            expenditures;




·
            exploration;




·
            permits;




·
            expansion
                plans;




·
            plans
                for Black Fox and Huizopa;




·
            closure
                costs;




·
            cash
                flows;




·
            liquidity;




·
            estimates
                of environmental liabilities;




·
            our
                ability to obtain future financing to fund our estimated expenditure
                and
                capital requirements;


·
              anticipated
                  exploration, development and corporate overhead
                  expenditures;


·
            factors
                impacting our results of
                operations;




·
            application
                of Sarbanes-Oxley 404 reporting requirements and our ability to meet
                those
                reporting requirements; and




·
            the
                impact of adoption of new accounting
                standards.




3


These
        forward looking statements are subject to numerous risks, uncertainties and
        assumptions including:  additional
        operational and remediation problems at the Montana Tunnels mine; the failure
        of
        Elkhorn Tunnels, LLC to make the expected contributions under the joint venture
        in respect of the Montana Tunnels mine;  unexpected
        changes in business and economic conditions; metallurgy, processing,
        access, availability of materials, equipment, supplies and water; determination
        of reserves; delay in recommencing production at the Montana Tunnels mine;
        higher than anticipated remediation or operating costs at the Montana Tunnels
        mine; lower than anticipated production at the montana Tunnels mine; inability
        to continue or complete planned work programs at Black Fox or Huizopa; changes
        in
        project parameters; costs and timing of development of new reserves; results
        of
        current and future exploration activities; results of pending and future
        feasibility studies; political or economic instability, either globally or
        in
        the countries in which we operate; local and community impacts and issues;
        timing of receipt of government approvals; accidents and labor disputes;
        environmental costs and risks; competitive factors, including competition
        for
        property acquisitions; availability of external financing on reasonable
        terms or at all; and the factors discussed in our Annual Report on Form 10-K
        for
        the year ended December 31, 2005 under the heading “Risk Factors.” We disclaim
        any obligation to update forward looking statements, whether as a result
        of new
        information, future events or otherwise.


**ACCOUNTING
      PRINCIPLES, REPORTING CURRENCY AND OTHER INFORMATION**




Apollo
      Gold Corporation prepares its consolidated financial statements in accordance
      with accounting principles generally accepted in Canada and publishes its
      financial statements in United States dollars. This Quarterly Report on Form
      10-Q should be read in conjunction with our consolidated financial statements
      and related notes included in this quarterly report, as well as our annual
      financial statements for the fiscal year ended December 31, 2005 included
      in our Annual Report on Form 10-K. Certain classifications have been made to
      the
      prior period financial statements to conform with the current period
      presentation.




Unless
      stated otherwise, all dollar amounts are expressed in United States
      dollars.




References
      to “we,” “our,” “us,” the “Company” or “Apollo” mean Apollo Gold Corporation and
      its consolidated subsidiaries, or to any one or more of them, as the context
      requires.




**NON-GAAP
      FINANCIAL INFORMATION**




Cash
      operating, total cash and total production costs are non-GAAP financial measures
      and are used by management to assess performance of individual operations as
      well as a comparison to other gold producers. We have included cash operating
      costs information to provide investors with information about the cost structure
      of our mining operations.




The
      term
“cash operating costs” is used on a per ounce of gold basis. Cash operating
      costs per ounce is equivalent to direct operating cost as found on the
      Consolidated Statements of Operations, less production royalty expenses and
      mining taxes but includes by-product credits for payable silver, lead and
      zinc.




The
      term
“total cash costs” is equivalent to cash operating costs plus production
      royalties and mining taxes.




The
      term
“total production costs” is equivalent to total cash costs plus non-cash costs
      including depreciation and amortization.




This
      information differs from measures of performance determined in accordance with
      generally accepted accounting principles (GAAP) in Canada and the United States
      and should not be considered in isolation or a substitute for measures of
      performance prepared in accordance with GAAP. These measures are not necessarily
      indicative of operating profit or cash flow from operations as determined under
      GAAP and may not be comparable to similarly titled measures of other companies.
      See Item 2, Management’s Discussion and Analysis of Financial Condition and
      Results of Operations, for a reconciliation of these non-GAAP measures to our
      Statements of Operations.




**PART
              I**
            **FINANCIAL
                INFORMATION**




**ITEM
              1.**
            **FINANCIAL
                STATEMENTS**




These
      consolidated financial statements should be read in conjunction with the
      financial statements, accompanying notes and other relevant information included
      in the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005 filed with the Securities and Exchange Commission on March 31,
      2006.




4




**APOLLO
      GOLD CORPORATION**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


(In
      thousands of U.S. dollars)


(Unaudited)





**September
                30,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS**CURRENTCash
                and cash equivalents
            
            $
            1,978
            
            $
            127Accounts
                receivable
            
            
            256
            
            
            2,638Prepaids
            
            
            417
            
            
            400Inventories
            
            
            1,333
            
            
            1,708Total
                current assets
            
            
            3,984
            
            
            4,873Property,
                plant and equipment
            
            
            46,645
            
            
            40,045Restricted
                certificates of deposit
            
            
            7,554
            
            
            17,043Deferred
                financing costs
            
            
            345
            
            
            584TOTAL
                ASSETS
            
            $
            58,528
            
            $
            62,545**LIABILITIES**CURRENTAccounts
                payable
            
            $
            1,949
            
            $
            6,802Accrued
                liabilities
            
            
            2,020
            
            
            1,841Notes
                payable
            
            
            2,801
            
            
            596Property
                and mining taxes payable
            
            
            895
            
            
            1,172Total
                current liabilities
            
            
            7,665
            
            
            10,411Due
                to Elkhorn Tunnels, LLC (Note 4)
            
            
            3,077
            
            
            -Accrued
                severance
            
            
            370
            
            
            383Notes
                payable
            
            
            55
            
            
            75Convertible
                debenture
            
            
            7,376
            
            
            6,601Accrued
                site closure costs
            
            
            13,713
            
            
            12,634TOTAL
                LIABILITIES
            
            
            32,256
            
            
            30,104Continuing
                operations (Note 1)**SHAREHOLDERS’
                EQUITY**Share
                capital (Note 6)
            
            
            153,670
            
            
            148,295Issuable
                common shares
            
            
            231
            
            
            231Equity
                component of convertible debentures
            
            
            1,809
            
            
            1,809Note
                warrants
            
            
            1,062
            
            
            781Contributed
                surplus
            
            
            10,876
            
            
            10,561Deficit
            
            
            (141,376
            )
            
            (129,236
            )TOTAL
                SHAREHOLDERS’ EQUITY
            
            
            26,272
            
            
            32,441TOTAL
                LIABILITIES AND SHAREHOLDERS’ EQUITY
            
            $
            58,528
            
            $
            62,545




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




5




**APOLLO
      GOLD CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(In
      thousands of U.S. dollars, except share and per share amounts)


(Unaudited)




**Three
                  months ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue
                  from sale of minerals
              
              $
              372
              
              $
              13,351
              
              $
              10,177
              
              $
              36,264Operating
                  expensesDirect
                  operating costs
              
              
              3,211
              
              
              14,162
              
              
              13,957
              
              
              40,273Depreciation
                  and amortization
              
              
              324
              
              
              672
              
              
              1,282
              
              
              2,006General
                  and administrative expenses
              
              
              997
              
              
              866
              
              
              3,279
              
              
              3,732Stock-based
                  compensation
              
              
              126
              
              
              171
              
              
              315
              
              
              525Accretion
                  expense - accrued site closure costs
              
              
              237
              
              
              242
              
              
              711
              
              
              636Exploration
                  and business development
              
              
              188
              
              
              173
              
              
              788
              
              
              731(Gain)
                  loss on sale of property, plant and equipment
              
              
              3
              
              
              42
              
              
              7
              
              
              (1,323
              )5,086
              
              
              16,328
              
              
              20,339
              
              
              46,580Operating
                  loss
              
              
              (4,714
              )
              
              (2,977
              )
              
              (10,162
              )
              
              (10,316
              )Other
                  income (expenses)Interest
                  income
              
              
              99
              
              
              105
              
              
              253
              
              
              278Interest
                  expense
              
              
              (726
              )
              
              (747
              )
              
              (1,939
              )
              
              (1,940
              )Foreign
                  exchange loss and other
              
              
              (29
              )
              
              5
              
              
              (42
              )
              
              (28
              )Loss
                  from continuing operations for the period
              
              
              (5,370
              )
              
              (3,614
              )
              
              (11,890
              )
              
              (12,006
              )Loss
                  from discontinued operations for the period (Note 5)
              
              
              -
              
              
              (3,599
              )
              
              (250
              )
              
              (5,954
              )Net
                  loss for the period
              
              $
              (5,370
              )
              $
              (7,213
              )
              $
              (12,140
              )
              $
              (17,960
              )Basic
                  and diluted net loss per share from:Continuing
                  operations
              
              $
              (0.04
              )
              $
              (0.04
              )
              $
              (0.10
              )
              $
              (0.12
              )Discontinued
                  operations
              
              
              -
              
              
              (0.03
              )
              
              -
              
              
              (0.06
              )$
              (0.04
              )
              $
              (0.07
              )
              $
              (0.10
              )
              $
              (0.18
              )Basic
                  and diluted weighted-average number of shares outstanding
              
              
              121,997,402
              
              
              106,556,451
              
              
              120,131,131
              
              
              100,106,695




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




6


**APOLLO
      GOLD CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**


(In
      thousands of U.S. dollars)


(Unaudited)




**Share
                  Capital**
              
              **Issuable**
              
              **Equity
                  Component of****Number**
                **of
                  Shares**
              
              **Amount**
              
              **Common**
                **Shares**
              
              **Convertible
                  Debentures**
              
              **Note
                  Warrants**
              
              **Contributed**
                **Surplus**
              
              **Deficit**
              
              **Total**Balance,
                  December 31, 2004
              
              
              90,973,120
              
              $
              141,795
              
              $
              231
              
              $
              1,815
              
              $
              781
              
              $
              9,627
              
              $
              (107,028
              )
              $
              47,221Units
                  issued for cash
              
              
              4,199,998
              
              
              2,587
              
              
              -
              
              
              -
              
              
              -
              
              
              194
              
              
              -
              
              
              2,781Shares
                  issued for increase in Huizopa interest
              
              
              1,000,000
              
              
              410
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              410Shares
                  issued for cash
              
              
              10,000,000
              
              
              3,183
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,183Conversion
                  of convertibledebentures
              
              
              33,333
              
              
              23
              
              
              -
              
              
              (6
              )
              
              -
              
              
              -
              
              
              -
              
              
              17Engagement
                  fee shares and warrants
              
              
              350,000
              
              
              100
              
              
              -
              
              
              -
              
              
              -
              
              
              143
              
              
              -
              
              
              243Completion
                  fee shares
              
              
              900,000
              
              
              197
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              197Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              597
              
              
              -
              
              
              597Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (22,208
              )
              
              (22,208
              )Balance,
                  December 31, 2005
              
              
              107,456,451
              
              
              148,295
              
              
              231
              
              
              1,809
              
              
              781
              
              
              10,561
              
              
              (129,236
              )
              
              32,441Units
                  issued for cash
              
              
              11,650,000
              
              
              3,488
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,488Shares
                  issued for 2005 stock-based compensation
              
              
              2,290,408
              
              
              955
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              955Reduction
                  of exercise price of Note Warrants (Note 6(b))
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              305
              
              
              -
              
              
              -
              
              
              305Note
                  Warrants exercised
              
              
              600,000
              
              
              264
              
              
              -
              
              
              -
              
              
              (24
              )
              
              -
              
              
              -
              
              
              240Shares
                  issued for services
              
              
              1,325,000
              
              
              668
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              668Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              315
              
              
              -
              
              
              315Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (12,140
              )
              
              (12,140
              )Balance,
                  September 30, 2006
              
              
              123,321,859
              
              $
              153,670
              
              $
              231
              
              $
              1,809
              
              $
              1,062
              
              $
              10,876
              
              $
              (141,376
              )
              $
              26,272




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




7


**APOLLO
      GOLD CORPORATION**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(In
      thousands of U.S. dollars)


(Unaudited)




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Operating
                activitiesNet
                loss for the period
            
            $
            (5,370
            )
            $
            (7,213
            )
            $
            (12,140
            )
            $
            (17,960
            )Items
                not affecting cash:Depreciation
                and amortization
            
            
            324
            
            
            672
            
            
            1,282
            
            
            2,006Amortization
                of deferred financing costs
            
            
            80
            
            
            80
            
            
            239
            
            
            239Loss
                from discontinued operations
            
            
            -
            
            
            3,599
            
            
            250
            
            
            5,954Reduction
                in exercise price of Note Warrants (Note 6(b))
            
            
            -
            
            
            -
            
            
            305
            
            
            -Stock-based
                compensation
            
            
            126
            
            
            171
            
            
            315
            
            
            525Shares
                issued for services
            
            
            668
            
            
            -
            
            
            668
            
            
            -Accretion
                expense - accrued site closure costs
            
            
            237
            
            
            242
            
            
            711
            
            
            636Accretion
                expense - convertible debenture
            
            
            271
            
            
            221
            
            
            775
            
            
            850(Gain)
                loss on sale of property, plant and equipment
            
            
            3
            
            
            42
            
            
            7
            
            
            (1,323
            )Other
            
            
            21
            
            
            -
            
            
            57
            
            
            -Net
                change in non-cash operating working capital items
            
            
            470
            
            
            (614
            )
            
            (1,243
            )
            
            1,025Discontinued
                operations
            
            
            -
            
            
            872
            
            
            (250
            )
            
            1,358Net
                cash used in operating activities
            
            
            (3,170
            )
            
            (1,928
            )
            
            (9,024
            )
            
            (6,690
            )Investing
                activitiesProperty,
                plant and equipment expenditures
            
            
            (591
            )
            
            (1,037
            )
            
            (5,029
            )
            
            (4,736
            )Proceeds
                from disposal of property, plant and equipment
            
            
            -
            
            
            9
            
            
            92
            
            
            2,000Restricted
                certificate of deposit and other assets
            
            
            (525
            )
            
            (733
            )
            
            9,488
            
            
            (1,584
            )Discontinued
                operations
            
            
            -
            
            
            (318
            )
            
            -
            
            
            1,003Net
                cash (used in) provided by investing activities
            
            
            (1,116
            )
            
            (2,079
            )
            
            4,551
            
            
            (3,317
            )Financing
                activitiesProceeds
                on issuance of shares
            
            
            -
            
            
            -
            
            
            3,488
            
            
            5,944Proceeds
                from exercise of warrants
            
            
            240
            
            
            -
            
            
            240
            
            
            -Notes
                payable
            
            
            309
            
            
            -
            
            
            309
            
            
            -Payments
                of notes payable
            
            
            (315
            )
            
            (192
            )
            
            (763
            )
            
            (756
            )Funding
                by Elkhorn Tunnels, LLC (Note 4)
            
            
            3,050
            
            
            -
            
            
            3,050
            
            
            -Discontinued
                operations
            
            
            -
            
            
            (368
            )
            
            -
            
            
            (1,758
            )Net
                cash (used in) provided by financing activities
            
            
            3,284
            
            
            (560
            )
            
            6,324
            
            
            3,430Net
                (decrease) increase in cash and cash equivalents
            
            
            (1,002
            )
            
            (4,567
            )
            
            1,851
            
            
            (6,577
            )Cash
                and cash equivalents, beginning of period
            
            
            2,980
            
            
            4,876
            
            
            127
            
            
            6,886Cash
                and cash equivalents, end of period
            
            $
            1,978
            
            $
            309
            
            $
            1,978
            
            $
            309SUPPLEMENTAL
                CASH FLOW INFORMATIONInterest
                paid
            
            $
            349
            
            $
            298
            
            $
            899
            
            $
            923Income
                taxes paid
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -




During
      the three and nine months ended September 30, 2006, property, plant and
      equipment totaling $2,640 was acquired by issuing a promissory
      note.




During
      the three months ended September 30, 2005, property, plant and equipment of
      $99
      was acquired under a capital lease agreement.




During
      the nine months September 30, 2005, the Company issued 1,000,000 shares to
      Argonaut Mines LLC (“Argonaut”) in connection with the restructuring of the
      Huizopa interest in Mexico. Share capital and property, plant and equipment
      both
      increased by $410 as a result of this transaction.




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




8


**APOLLO
        GOLD CORPORATION**
 **Notes
        to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
        in U.S. dollars; tabular amounts in thousands)
 (Unaudited)




**1.**
            **CONTINUING
                OPERATIONS**




These
      consolidated financial statements are prepared on the basis of a going concern
      which assumes that Apollo Gold Corporation (“Apollo” or the “Company”) will
      realize its assets and discharge its liabilities in the normal course of
      business for the foreseeable future. To date the Company has funded its
      operations through (i) issuance of debt and equity securities, (ii) funding
      from
      joint venture partners (Note 4), (iii) the sale of the Florida Canyon Mine
      (an
      open pit heap leach operation located in the State of Nevada), the Standard
      Mine
      (an open pit heap leach operation situated 8 kilometers south of the Florida
      Canyon Mine) and four exploration properties located near the Florida Canyon
      Mine (collectively, the “Nevada Assets”) in November 2005 to Jipangu, Inc.
      (“Jipangu”) plus (iv) the sale of other surplus assets. The Company’s ability to
      continue as a going concern is dependent on its ability to continue to issue
      debt and equity securities, and/or generate cash flow from Montana
      Tunnels.




The
      Company estimates that with its current period end cash balance of $2.0 million
      supplemented by the monies raised in the equity offerings completed in October
      and November (as described in more detail in Note 10(a)) and the projected
      cash positive contribution from the joint ventured Montana Tunnels mine, it
      will
      have sufficient funds to finance the current work programs at the Black Fox
      development project (the “Black Fox Project”) and the Huizopa exploration
      project (the “Huizopa Project”), as well as corporate overhead. However, the
      Company will continue to explore financing opportunities to further develop
      and
      construct the Black Fox Project and advance its exploration program at the
      Huizopa Project. Apollo may raise additional funds from the sale of debt or
      equity securities, which may include Canadian flow-through financing to further
      fund exploration activities at the Black Fox Project. The availability, amount,
      terms and timing of this financing are not certain at this time.




If
      the
      Company is unable to generate cash flow from Montana Tunnels and/or secure
      additional financing, it may be unable to continue as a going concern and
      material adjustments would be required to the carrying value of assets and
      liabilities and balance sheet classifications used.




**2.**
            **NATURE
                OF OPERATIONS**




Apollo
      is
      engaged in gold mining including extraction, processing, refining and the
      production of other co-product metals, as well as related activities including
      exploration and development of mineral deposits principally in North America.
      The Company currently owns the Montana Tunnels mine (the “Mine”), an open pit
      mine and mill located in the State of Montana. Mining in the open pit was
      suspended in October 2005 due to pit wall instability. Following the suspension
      of the open pit mine operations the mill produced gold doré and lead-gold and
      zinc-gold concentrates from low grade ore stockpiles until May 12, 2006. On
      July
      28, 2006, the Company entered into a joint venture agreement (“JV Agreement”)
      with Elkhorn Tunnels, LLC (“Elkhorn”), an affiliate of Calim Private Equity LLC
      (“Calim”), in respect of the Mine. With the expected financial contributions
      from Elkhorn in connection with the joint venture, the Company believes that
      it
      will be able to recommence milling operations in early 2007 (see Note 4). Mining
      operations resumed in September 2006. The Company also owns the Diamond Hill
      mine, currently on care and maintenance, also located in the State of Montana.
      In connection with the joint venture agreement that the Company entered into
      with Elkhorn in respect of the Montana Tunnels mine, the Company entered into
      an
      option agreement with Elkhorn Goldfields Inc. (“EGI”), an affiliate of Elkhorn,
      pursuant to which the Company granted EGI an option to purchase the Diamond
      Hill
      mine for $800,000.




9


**APOLLO
        GOLD CORPORATION**
 **Notes
        to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
        in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**2.**
            **NATURE
                OF OPERATIONS (continued)**




Apollo
      has a development property, the Black Fox Project, which is located near the
      Township of Matheson in the Province of Ontario, Canada. Apollo also owns
      Mexican subsidiaries which own or have the right to acquire concessions at
      the
      Huizopa Project, located in the Sierra Madres in Chihuahua, Mexico.




**3.**
            **SIGNIFICANT
                ACCOUNTING POLICIES**




These
      unaudited consolidated interim financial statements have been prepared in
      accordance with Canadian generally accepted accounting principles (“Canadian
      GAAP”) and except as described in Note 9, conform in all material respects with
      accounting principles generally accepted in the United States (“U.S. GAAP”). The
      accounting policies followed in preparing these financial statements are those
      used by the Company as set out in the audited financial statements for the
      year
      ended December 31, 2005. Certain information and note disclosures normally
      included in consolidated financial statements prepared in accordance with
      Canadian GAAP have been omitted. These interim financial statements should
      be
      read together with the Company’s audited financial statements for the year ended
      December 31, 2005.




In
      the
      opinion of management, all adjustments considered necessary for fair
      presentation have been included in these financial statements. Interim results
      are not necessarily indicative of the results expected for the fiscal
      year.




Certain
      of the comparative figures have been reclassified to conform to the current
      period presentation.




**4.**
            **DUE
                TO ELKHORN TUNNELS, LLC**




***(a)***
            Joint
                Venture Agreement at Montana
                Tunnels




On
      July
      28, 2006, the Company entered into a JV Agreement with Elkhorn in respect of
      the
      Montana Tunnels mine which calls for Elkhorn to contribute $13 million over
      a
      five-month period. The money contributed will be used initially to remediate
      the
      east wall instability problems encountered at the Mine during September and
      early October 2005, which led to the suspension of mining on October 21, 2005,
      and thereafter to move the Mine back towards commercial production. Highlights
      of the JV Agreement are:




·
            Elkhorn
                is entitled to a 50% interest in the Mine when it has made its full
                contribution of $13 million.




·
            Montana
                Tunnels Mining, Inc. (“MTMI”) will be the operator of the Mine. A separate
                committee consisting of two designees from each of MTMI and Elkhorn
                will
                oversee the joint venture.




·
            If
                Elkhorn contributes at least $5 million but fails to make its full
                contribution of $13 million, then it will receive a 3% interest in
                the
                Mine for each $1 million
                contributed.




10


**APOLLO
          GOLD CORPORATION**
 **Notes
          to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
          in U.S. dollars; tabular amounts in thousands)
 (Unaudited)




**4.**
            **DUE
                TO ELKHORN TUNNELS, LLC
                (continued)**




·
            If
                Elkhorn fails to contribute at least $5 million then its contribution
                will
                be converted to a promissory note (the “Note”) equal to the amount
                actually contributed, plus interest, payable only out of future positive
                cash flows from the Mine or in the event the Mine is sold or otherwise
                financed. The Note would bear interest at the rate of 6% per
                annum and payments of principal and interest on the Note would be
                payable within 30 days after the end of each calendar quarter, beginning
                with the end of the first full calendar quarter during which the
                Mine is
                cash flow positive. If Elkhorn’s failure to contribute at least $5
                million is the result of a breach of the JV Agreement by Apollo,
                or
                otherwise for cause, then the Note would bear interest at the rate
                of 12%
                per annum and the Note plus interest would be payable not later than
                the
                fifth anniversary thereof.




·
            When
                Elkhorn has contributed the full $13 million, then (a) Elkhorn will
                be
                entitled to recover interest on that amount and (b) Elkhorn will
                receive
                65% and Apollo will receive 35% of the positive free cash flow from
                the
                Mine until such time as Elkhorn has recovered its full contribution
                of $13
                million. At that time, Apollo would become entitled to 60% and Elkhorn
                40%
                of the positive free cash flow from the Mine, until both parties
                have
                received an equal amount. Thereafter, the sharing would revert to
                50/50.




·
            If
                Elkhorn earns less than a 50% interest in the Mine, then it will
                be
                entitled to recover interest on the amount actually contributed by
                it, and
                after payment of that interest each party will receive its proportionate
                share of positive free cash flow.




As
      of
      September 30, 2006, Elkhorn had contributed $3.1 million in connection with
      the
      JV Agreement which contributions are recorded as Due to Elkhorn Tunnels, LLC
      in
      the accompanying Consolidated Balance Sheet since Elkhorn’s contributions were
      short of the $5 million required to earn an interest in the Mine as of such
      date
      (see Note 10(b)).




***(b)***
            Additional
                Agreements with EGI




In
      addition to the JV Agreement, Apollo entered into two other agreements with
      EGI,
      an affiliate of Calim. The first agreement is an option agreement pursuant
      to
      which EGI was granted an option to purchase Apollo’s Diamond Hill mine for
      $800,000. The option has an exercise term of two years. The second agreement
      is
      a mill operating and option agreement pursuant to which EGI will have the right
      to have MTMI process the ore from EGI’s Elkhorn mine through the 1,000 ton per
      day Diamond Hill mill which is situated within the Montana Tunnels mill complex.
      The milling agreement also provides EGI a two-year option to purchase the
      Diamond Hill mill for $1 million.




11


**APOLLO
          GOLD CORPORATION**
 **Notes
          to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
          in U.S. dollars; tabular amounts in thousands)
 (Unaudited)




**5.**
            **DISCONTINUED
                OPERATIONS**




In
      November 2005, the Company sold the Nevada Assets to Jipangu for $14.0 million
      in cash.




The
      following table presents summarized financial information related to
      discontinued operations:




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenue
                from sale of minerals
            
            $
            -
            
            $
            6,582
            
            $
            -
            
            $
            14,677Direct
                operating costs
            
            
            -
            
            
            5,935
            
            
            -
            
            
            13,829Depreciation
                and amortization
            
            
            -
            
            
            -
            
            
            -
            
            
            776Accretion
                expense
            
            
            -
            
            
            280
            
            
            -
            
            
            737Royalty
                expenses
            
            
            -
            
            
            65
            
            
            -
            
            
            231Exploration
                and business development
            
            
            -
            
            
            28
            
            
            -
            
            
            217Gain
                on sale of property, plant and equipment
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,615
            )Impairment
            
            
            -
            
            
            3,861
            
            
            -
            
            
            8,425-
            
            
            10,169
            
            
            -
            
            
            20,600Operating
                loss
            
            
            -
            
            
            (3,587
            )
            
            -
            
            
            (5,923
            )Interest
                expense
            
            
            -
            
            
            (12
            )
            
            -
            
            
            (69
            )Realized
                and unrealized gain on commodity contracts
            
            
            -
            
            
            -
            
            
            -
            
            
            38Loss
                on disposal of discontinued operations
            
            
            -
            
            
            -
            
            
            (250
            )
            
            -Loss
                from discontinued operations for the period
            
            $
            -
            
            $
            (3,599
            )
            $
            (250
            )
            $
            (5,954
            )





**6.**
            **SHARE
                CAPITAL**




***(a)***
            Shares
                issued in 2006




*(i)*  On
      January 26, 2006, the Company completed a private placement of 11,650,000 units
      with Jipangu at Cdn$0.35 per unit for proceeds of $3.5 million. Each unit
      consists of one common share of the Company and 0.17167 of a warrant for a
      total
      of 2,000,000 warrants, with each whole warrant exercisable for two years at
      Cdn$0.39 for one common share of the Company.




*(ii)*  On
      February 27, 2006, the Company issued 2,290,398 common shares of the Company
      at
      Cdn$0.48 per share to officers of the Company, as approved by the Company’s
      Board of Directors in December 2005. In connection with this, the Company
      announced on January 23, 2006 that the number of executive officers would be
      reduced from seven to three, effective February 18, 2006 and the Company entered
      into severance agreements with the four departing officers pursuant to which
      an
      aggregate of 1,187,175 common shares were issued to the officers as part of
      their severance. Also on January 23, 2006, the Company entered into amended
      employment agreements with the three remaining executive officers pursuant
      to
      which the officers agreed to reduce their base salaries by an aggregate of
      $170,000 per annum in exchange for an aggregate of 1,103,223 common
      shares.




12


**APOLLO
          GOLD CORPORATION**
 **Notes
          to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
          in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**6.**
            **SHARE
                CAPITAL (continued)**




*(iii)*  On
      August
      29, 2006, the Company issued 400,000 common shares for investor relations
      services at $0.67 per share.




*(iv)*  On
      September 12, 2006, the Company issued 925,000 common shares at $0.43 per share
      to Standard New York Securities, Inc. as a completion fee related to the JV
      Agreement in respect of MTMI.




***(b)***
            Warrants




The
      following summarizes outstanding warrants as at September 30, 2006:




**Date
                Issued**
            
            **Number
                of Warrants**
            
            **Number
                of Shares**
            
            **Exercise
                Price**
            
            **Expiry
                Date**Exercisable
                in US$October
                19, 2004
            
            
            1,000,000
            
            
            1,000,000
            
            $
            0.80
            
            
            October
                19, 2006November
                4, 2004
            
            
            1,400,133
            
            
            1,400,133
            
            
            0.80
            
            
            November
                4, 2006December
                31, 2004
            
            
            6,224,999
            
            
            6,224,999
            
            
            1.00
            
            
            December
                31, 2006November
                4, 2004
            
            
            4,413,600
            
            
            4,413,600
            
            
            0.40
            
            
            November
                4, 2007November
                4, 2004
            
            
            240,000
            
            
            240,000
            
            
            0.80
            
            
            November
                4, 2007November
                4, 2004
            
            
            1,396,000
            
            
            1,396,000
            
            
            0.80
            
            
            November
                4, 2007January
                7, 2005
            
            
            3,149,998
            
            
            3,149,998
            
            
            1.00
            
            
            January
                7, 200717,824,730
            
            
            17,824,730Exercisable
                in Cdn$December
                23, 2002
            
            
            3,000,000
            
            
            3,000,000
            
            
            Cdn$
                3.25
            
            
            December
                23, 2006June
                30, 2005
            
            
            1,250,000
            
            
            1,250,000
            
            
            Cdn$
                0.40
            
            
            June
                30, 2007January
                26, 2006
            
            
            2,000,000
            
            
            2,000,000
            
            
            Cdn$
                0.39
            
            
            January
                26, 20086,250,000
            
            
            6,250,00024,074,730
            
            
            24,074,730





In
      addition, 1,250,000 broker compensation warrants were issued and were
      immediately exercisable on January 7, 2005. Each broker compensation
      warrant is exercisable at $0.75 into one equity unit comprised of one common
      share of the Company and 0.75 of a share purchase warrant, with each whole
      share
      purchase warrant exercisable into one common share of the Company at $1.00
      per
      common share. The broker compensation warrants expire on January 7, 2007.
      The share purchase warrants are exercisable for two years from the date of
      issue.





On
      January 6, 2006, the Company agreed to reduce the exercise price on 5,013,600
      warrants issued as attachments to the convertible debentures (“Debentures”) in
      November 2004 from $0.80 to $0.40 per common share. The reduction in exercise
      price was in consideration for pledging the Company’s Black Fox property to The
      Canada Trust Company (the “Secured Party”) as substitute collateral for the
      Debentures, which were previously secured by an $11.0 million restricted cash
      deposit. The Secured Party is trustee for the holders of the Debentures. The
      reduction in the exercise price was effective January 16, 2006, and applies
      to
      all warrants attached to the Debentures except for the 240,000 warrants held
      by
      the Company’s insiders, which remain exercisable at $0.80 per common share. The
      Company recorded an additional cost of $305,000 as a result of this reduction
      of
      the exercise price.




13




**APOLLO
            GOLD CORPORATION**
 **Notes
            to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
            in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**6.**
            **SHARE
                CAPITAL (continued)**





***(c)***
            Options




A
      summary
      of information concerning outstanding stock options at September 30, 2006 is
      as
      follows:




**Fixed
                Stock Options**
            
            **Performance-based**
              **Stock
                Options****Number
                of**
              **Common**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                of**
              **Common**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Balances,
                December 31, 2005
            
            
            3,874,100
            
            $
            1.15
            
            
            1,794,582
            
            $
            0.80Options
                granted
            
            
            433,000
            
            
            0.55
            
            
            -
            
            
            -Options
                cancelled
            
            
            (342,250
            )
            
            1.08
            
            
            (254,061
            )
            
            0.80Balances,
                September 30, 2006
            
            
            3,964,850
            
            $
            1.09
            
            
            1,540,521
            
            $
            0.80





*(i)*  Fixed
      stock option plan




The
      Company has a stock option plan that provides for the granting of options to
      directors, officers, employees and service providers of the
      Company.




The
      following table summarizes information concerning outstanding and exercisable
      fixed stock options at September 30, 2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Number**
              **Outstanding**
            
            **Expiry
                Date**
            
            **Weighted
                Average**
              **Exercise**
              **Price
                per Share**
            
            **Number**
              **Exercisable**
            
            **Weighted
                Average**
              **Exercise**
              **Price
                per Share**950,000
            
            
            December
                31, 2006
            
            $
            1.16
            
            
            950,000
            
            $
            1.16686,500
            
            
            February
                18, 2013
            
            
            2.24
            
            
            686,500
            
            
            2.24261,000
            
            
            March
                10, 2014
            
            
            2.05
            
            
            261,000
            
            
            2.0525,000
            
            
            May
                19, 2014
            
            
            1.44
            
            
            25,000
            
            
            1.4423,000
            
            
            August
                10, 2014
            
            
            0.95
            
            
            23,000
            
            
            0.951,186,350
            
            
            March
                10, 2015
            
            
            0.65
            
            
            593,175
            
            
            0.65100,000
            
            
            August
                4, 2015
            
            
            0.27
            
            
            50,000
            
            
            0.27300,000
            
            
            December
                12, 2015
            
            
            0.20
            
            
            -
            
            
            -125,000
            
            
            March
                28, 2016
            
            
            0.65
            
            
            62,500
            
            
            0.65200,000
            
            
            May
                23, 2016
            
            
            0.53
            
            
            -
            
            
            -108,000
            
            
            August
                10, 2016
            
            
            0.48
            
            
            -
            
            
            -3,964,850
            
            
            
            
            $
            1.09
            
            
            2,651,175
            
            $
            1.39





*(ii)*  Performance-based
      stock option plan




As
      of
      September 30, 2006 the 1,540,521 performance-based stock options exercisable
      at
      $0.80 were fully vested and have an expiry date of June 25, 2007.




14




**APOLLO
            GOLD CORPORATION**
 **Notes
            to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
            in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**6.**
            **SHARE
                CAPITAL (continued)**





***(d)***
            Stock-based
                compensation




The
      fair
      value of each option granted is estimated at the time of grant using the
      Black-Scholes option pricing model with weighted average assumptions for grants
      as follows:





**Nine
                months ended September 30,****2006**
            
            **2005**Risk
                free interest rate
            
            
            3.9
            %
            
            3.8
            %Dividend
                yield
            
            
            0
            %
            
            0
            %Volatility
            
            
            89
            %
            
            74
            %Expected
                life in years
            
            
            6
            
            
            5





**7.**
            **INCOME
                TAXES**




The
      Company did not record a recovery for income taxes for the period ended
      September 30, 2006 as the net loss carry forwards are fully offset by a
      valuation allowance.





**8.**
            **SEGMENTED
                INFORMATION**




Apollo
      operates the Montana Tunnels mine in the United States and the Black Fox
      development project in Canada. The reportable segments have been determined
      at
      the level where decisions are made on the allocation of resources and capital
      and where performance is measured. The Nev ada
      Assets have been reported as discontinued operations (see Note 5). The
      accounting policies for these segments are the same as those followed by the
      Company as a whole.




Amounts
      as at September 30, 2006 are as follows:




**Montana
                Tunnels**
            
            **Black**
              **Fox**
            
            **Corporate**
              **and
                Other**
            
            **Total**Cash
                and cash equivalents
            
            $
            549
            
            $
            27
            
            $
            1,402
            
            $
            1,978Other
                non-cash current assets
            
            
            1,385
            
            
            64
            
            
            557
            
            
            2,0061,934
            
            
            91
            
            
            1,959
            
            
            3,984Property,
                plant and equipment
            
            
            15,346
            
            
            30,026
            
            
            1,273
            
            
            46,645Restricted
                certificates of deposit
            
            
            6,950
            
            
            604
            
            
            -
            
            
            7,554Deferred
                financing costs
            
            
            -
            
            
            -
            
            
            345
            
            
            345Total
                assets
            
            $
            24,230
            
            $
            30,721
            
            $
            3,577
            
            $
            58,528Current
                liabilities
            
            $
            5,283
            
            $
            246
            
            $
            2,136
            
            $
            7,665Due
                to Elkhorn Tunnels, LLC (Note 4)
            
            
            3,077
            
            
            -
            
            
            -
            
            
            3,077Accrued
                severance
            
            
            -
            
            
            -
            
            
            370
            
            
            370Notes
                payable and convertible debenture
            
            
            -
            
            
            55
            
            
            7,376
            
            
            7,431Accrued
                site closure costs
            
            
            13,345
            
            
            368
            
            
            -
            
            
            13,713Total
                liabilities
            
            $
            21,705
            
            $
            669
            
            $
            9,882
            
            $
            32,256





15


**APOLLO
              GOLD CORPORATION**
 **Notes
              to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
              in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**8.**
            **SEGMENTED
                INFORMATION (continued)**





Amounts
      as at December 31, 2005 are as follows:





**Montana
                Tunnels**
            
            **Black**
              **Fox**
            
            **Corporate**
              **and
                Other**
            
            **Total**Cash
                and cash equivalents
            
            $
            8
            
            $
            15
            
            $
            104
            
            $
            127Other
                non-cash current assets
            
            
            4,218
            
            
            100
            
            
            428
            
            
            4,7464,226
            
            
            115
            
            
            532
            
            
            4,873Property,
                plant and equipment
            
            
            13,917
            
            
            24,794
            
            
            1,334
            
            
            40,045Restricted
                certificates of deposit
            
            
            5,465
            
            
            581
            
            
            10,997
            
            
            17,043Deferred
                financing costs
            
            
            -
            
            
            -
            
            
            584
            
            
            584Total
                assets
            
            $
            23,608
            
            $
            25,490
            
            $
            13,447
            
            $
            62,545Current
                liabilities
            
            $
            5,444
            
            $
            221
            
            $
            4,746
            
            $
            10,411Accrued
                severance
            
            
            -
            
            
            -
            
            
            383
            
            
            383Notes
                payable and convertible debenture
            
            
            -
            
            
            66
            
            
            6,610
            
            
            6,676Accrued
                site closure costs
            
            
            12,634
            
            
            -
            
            
            -
            
            
            12,634Total
                liabilities
            
            $
            18,078
            
            $
            287
            
            $
            11,739
            
            $
            30,104





Amounts
      for the three and nine month periods ended September 30, 2006 and 2005,
      respectively, are as follows:




**Three
                months ended September 30, 2006****Montana
                Tunnels**
            
            **Black
                Fox**
            
            **Corporate
                and Other**
            
            **Total**Revenue
                from sale of minerals
            
            $
            372
            
            $
            -
            
            $
            -
            
            $
            372Direct
                operating costs
            
            
            3,211
            
            
            -
            
            
            -
            
            
            3,211Depreciation
                and amortization
            
            
            298
            
            
            -
            
            
            26
            
            
            324General
                and administrative expenses
            
            
            -
            
            
            -
            
            
            997
            
            
            997Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            126
            
            
            126Accretion
                expense - accrued site closure costs
            
            
            237
            
            
            -
            
            
            -
            
            
            237Exploration
                and business development and other
            
            
            -
            
            
            -
            
            
            191
            
            
            1913,746
            
            
            -
            
            
            1,340
            
            
            5,086Operating
                loss
            
            
            (3,374
            )
            
            -
            
            
            (1,340
            )
            
            (4,714
            )Interest
                income
            
            
            76
            
            
            -
            
            
            23
            
            
            99Interest
                expense
            
            
            (109
            )
            
            -
            
            
            (617
            )
            
            (726
            )Foreign
                exchange loss and other
            
            
            -
            
            
            -
            
            
            (29
            )
            
            (29
            )Loss
                from continuing operations
            
            $
            (3,407
            )
            $
            -
            
            $
            (1,963
            )
            $
            (5,370
            )Investing
                activitiesProperty,
                plant and equipment expenditures
            
            $
            2,640
            
            $
            586
            
            $
            5
            
            $
            3,231




16


**APOLLO
                GOLD CORPORATION**
 **Notes
                to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
                in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**8.**
            **SEGMENTED
                INFORMATION (continued)**




**Nine
                months ended September 30, 2006****Montana
                Tunnels**
            
            **Black
                Fox**
            
            **Corporate
                and Other**
            
            **Total**Revenue
                from sale of minerals
            
            $
            10,177
            
            $
            -
            
            $
            -
            
            $
            10,177Direct
                operating costs
            
            
            13,957
            
            
            -
            
            
            -
            
            
            13,957Depreciation
                and amortization
            
            
            1,199
            
            
            -
            
            
            83
            
            
            1,282General
                and administrative expenses
            
            
            -
            
            
            -
            
            
            3,279
            
            
            3,279Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            315
            
            
            315Accretion
                expense - accrued site closure costs
            
            
            711
            
            
            -
            
            
            -
            
            
            711Exploration
                and business development and other
            
            
            -
            
            
            -
            
            
            795
            
            
            79515,867
            
            
            -
            
            
            4,472
            
            
            20,339Operating
                loss
            
            
            (5,690
            )
            
            -
            
            
            (4,472
            )
            
            (10,162
            )Interest
                income
            
            
            190
            
            
            -
            
            
            63
            
            
            253Interest
                expense
            
            
            (127
            )
            
            -
            
            
            (1,812
            )
            
            (1,939
            )Foreign
                exchange loss and other
            
            
            -
            
            
            -
            
            
            (42
            )
            
            (42
            )Loss
                from continuing operations
            
            $
            (5,627
            )
            $
            -
            
            $
            (6,263
            )
            $
            (11,890
            )Investing
                activitiesProperty,
                plant and equipment expenditures
            
            $
            2,640
            
            $
            4,908
            
            $
            121
            
            $
            7,669




**Three
                months ended September 30, 2005****Montana
                Tunnels**
            
            **Black
                Fox**
            
            **Corporate
                and Other**
            
            **Total**Revenue
                from sale of minerals
            
            $
            13,351
            
            $
            -
            
            $
            -
            
            $
            13,351Direct
                operating costs
            
            
            14,162
            
            
            -
            
            
            -
            
            
            14,162Depreciation
                and amortization
            
            
            615
            
            
            -
            
            
            57
            
            
            672General
                and administrative expenses
            
            
            -
            
            
            -
            
            
            866
            
            
            866Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            171
            
            
            171Accretion
                expense
            
            
            242
            
            
            -
            
            
            -
            
            
            242Exploration
                and business development and other
            
            
            -
            
            
            -
            
            
            215
            
            
            21515,019
            
            
            -
            
            
            1,309
            
            
            16,328Operating
                loss
            
            
            (1,668
            )
            
            -
            
            
            (1,309
            )
            
            (2,977
            )Interest
                income
            
            
            -
            
            
            -
            
            
            105
            
            
            105Interest
                expense
            
            
            (14
            )
            
            -
            
            
            (733
            )
            
            (747
            )Foreign
                exchange loss and other
            
            
            -
            
            
            -
            
            
            5
            
            
            5Loss
                from continuing operations
            
            $
            (1,682
            )
            $
            -
            
            $
            (1,932
            )
            $
            (3,614
            )Investing
                activitiesProperty,
                plant and equipment expenditures
            
            $
            106
            
            $
            870
            
            $
            160
            
            $
            1,136




17


**APOLLO
                GOLD CORPORATION**
 **Notes
                to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
                in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**8.**
            **SEGMENTED
                INFORMATION (continued)**




**Nine
                months ended September 30, 2005****Montana
                Tunnels**
            
            **Black
                Fox**
            
            **Corporate
                and Other**
            
            **Total**Revenue
                from sale of minerals
            
            $
            36,264
            
            $
            -
            
            $
            -
            
            $
            36,264Direct
                operating costs
            
            
            40,273
            
            
            -
            
            
            -
            
            
            40,273Depreciation
                and amortization
            
            
            1,885
            
            
            -
            
            
            121
            
            
            2,006General
                and administrative expenses
            
            
            -
            
            
            -
            
            
            3,732
            
            
            3,732Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            525
            
            
            525Accretion
                expense
            
            
            636
            
            
            -
            
            
            -
            
            
            636Exploration
                and business development
            
            
            -
            
            
            -
            
            
            731
            
            
            731Gain
                on sale of property, plant and equipment
            
            
            (1,365
            )
            
            -
            
            
            42
            
            
            (1,323
            )41,429
            
            
            -
            
            
            5,151
            
            
            46,580Operating
                loss
            
            
            (5,165
            )
            
            -
            
            
            (5,151
            )
            
            (10,316
            )Interest
                income
            
            
            -
            
            
            -
            
            
            278
            
            
            278Interest
                expense
            
            
            (52
            )
            
            -
            
            
            (1,888
            )
            
            (1,940
            )Foreign
                exchange loss and other
            
            
            -
            
            
            -
            
            
            (28
            )
            
            (28
            )Loss
                from continuing operations
            
            $
            (5,217
            )
            $
            -
            
            $
            (6,789
            )
            $
            (12,006
            )Investing
                activitiesProperty,
                plant and equipment expenditures
            
            $
            197
            
            $
            4,359
            
            $
            689
            
            $
            5,245





**9.**
            **DIFFERENCES
                BETWEEN CANADIAN AND U.S.
                GAAP**




The
      Company prepares its consolidated financial statements in accordance with
      Canadian GAAP. The following adjustments and/or additional disclosures would
      be
      required in order to present the financial statements in accordance with U.S.
      GAAP and with practices prescribed by the U.S. Securities and Exchange
      Commission for the three and nine month periods ended September 30, 2006 and
      2005.




Material
      variances between financial statement items under Canadian GAAP and the amounts
      determined under U.S. GAAP are as follows:




**Consolidated
      Balance Sheet**


**September
      30, 2006**




**Property**
              **Plant**
              **and**
              **Equipment**
            
            **Deferred**
              **Financing**
            
            **Convertible**
              **Debenture**
            
            **Share**
              **Capital**
            
            **Equity**
              **Component
                of**
              **Convertible**
              **Debentures**
            
            **Contributed**
              **Surplus**
            
            **Deficit**As
                at September 30, 2006, Canadian GAAP
            
            $
            46,645
            
            $
            345
            
            $
            7,376
            
            $
            153,670
            
            $
            1,809
            
            $
            10,876
            
            $
            (141,376
            )Impairment
                of property, plant and equipment, and change in depreciation and
                amortization(a)
            
            
            (4,077
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,077
            )Black
                Fox development costs(b)
            
            
            (21,863
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21,863
            )Convertible
                debenture(c)(i)
            
            
            -
            
            
            134
            
            
            966
            
            
            (1
            )
            
            (1,809
            )
            
            123
            
            
            855Convertible
                debenture(c)(ii)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,675
            
            
            (20,675
            )Flow-through
                common shares
            
            
            -
            
            
            -
            
            
            -
            
            
            (238
            )
            
            -
            
            
            -
            
            
            238As
                at September 30, 2006, U.S. GAAP
            
            $
            20,705
            
            $
            479
            
            $
            8,342
            
            $
            153,431
            
            $
            -
            
            $
            31,674
            
            $
            (186,898
            )




18


**APOLLO
                GOLD CORPORATION**
 **Notes
                to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
                in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**9.**
            **DIFFERENCES
                BETWEEN CANADIAN AND U.S. GAAP
                (continued)**





**** **Consolidated
      Balance Sheet**


**December
      31, 2005**




**Property**
              **Plant**
              **and**
              **Equipment**
            
            **Deferred**
              **Financing**
            
            **Convertible**
              **Debenture**
            
            **Share**
              **Capital**
            
            **Equity**
              **Component
                of**
              **Convertible**
              **Debentures**
            
            **Contributed**
              **Surplus**
            
            **Deficit**As
                at December 31, 2005, Canadian GAAP
            
            $
            40,045
            
            $
            584
            
            $
            6,601
            
            $
            148,295
            
            $
            1,809
            
            $
            10,561
            
            $
            (129,236
            )Impairment
                of property, plant and equipment, and change in depreciation and
                amortization(a)
            
            
            (4,260
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,260
            )Black
                Fox development costs(b)
            
            
            (19,181
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (19,181
            )Convertible
                debenture(c)(i)
            
            
            -
            
            
            227
            
            
            1,512
            
            
            (1
            )
            
            (1,809
            )
            
            123
            
            
            401Convertible
                debenture(c)(ii)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,675
            
            
            (20,675
            )Flow-through
                common shares
            
            
            -
            
            
            -
            
            
            -
            
            
            (238
            )
            
            -
            
            
            -
            
            
            238As
                at December 31, 2005, U.S. GAAP
            
            $
            16,604
            
            $
            811
            
            $
            8,113
            
            $
            148,056
            
            $
            -
            
            $
            31,359
            
            $
            (172,713
            )








Under
      U.S. GAAP, the net loss and net loss per share would be adjusted as
      follows:




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Loss
                from continuing operations for the period based on Canadian
                GAAP
            
            $
            (5,370
            )
            $
            (3,614
            )
            $
            (11,890
            )
            $
            (12,006
            )Change
                in depreciation of property, plant and equipment (a)
            
            
            -
            
            
            134
            
            
            183
            
            
            432Black
                Fox Project development costs (b)
            
            
            (587
            )
            
            (871
            )
            
            (2,682
            )
            
            (4,359
            )Convertible
                debenture ((c)(i))
            
            
            161
            
            
            (416
            )
            
            454
            
            
            9Loss
                from continuing operations for the period based on U.S.
                GAAP
            
            
            (5,796
            )
            
            (4,767
            )
            
            (13,935
            )
            
            (15,924
            )Loss
                from discontinued operations for the period based on Canadian
                GAAP
            
            
            -
            
            
            (3,599
            )
            
            (250
            )
            
            (5,954
            )Commodity
                contracts loss (d)
            
            
            -
            
            
            -
            
            
            -
            
            
            1,340Standard
                Mine development costs
            
            
            -
            
            
            (526
            )
            
            -
            
            
            (840
            )Loss
                from discontinued operations for the period based on U.S.
                GAAP
            
            
            -
            
            
            (4,125
            )
            
            (250
            )
            
            (5,454
            )Net
                loss for the period based on U.S. GAAP
            
            $
            (5,796
            )
            $
            (8,892
            )
            $
            (14,185
            )
            $
            (21,378
            )Comprehensive
                loss
            
            $
            (5,796
            )
            $
            (8,892
            )
            $
            (14,185
            )
            $
            (21,378
            )Basic
                and diluted loss per share in accordance with U.S. GAAP:Continuing
                operations
            
            $
            (0.05
            )
            $
            (0.04
            )
            $
            (0.12
            )
            $
            (0.16
            )Discontinued
                operations
            
            
            -
            
            
            (0.04
            )
            
            -
            
            
            (0.05
            )Net
                loss per share - U.S. GAAP, basic and diluted
            
            $
            (0.05
            )
            $
            (0.08
            )
            $
            (0.12
            )
            $
            (0.21
            )





19




**APOLLO
        GOLD CORPORATION**
 **Notes
        to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
        in U.S. dollars; tabular amounts in thousands)
 (Unaudited)




**9.**
            **DIFFERENCES
                BETWEEN CANADIAN AND U.S. GAAP (continued)**


***(a)***
                Impairment
                    of property, plant and
                    equipment




Under Canadian
        GAAP, write-downs for impairment of property, plant and equipment are determined
        using current proven and probable reserves and mineral resources expected
        to be
        converted into mineral reserves. In 2002, under U.S. GAAP, write-downs were
        determined using current proven and probable reserves. Accordingly, for U.S.
        GAAP purposes, an impairment of property, plant and equipment and an adjustment
        to the related depreciation has been recorded.




***(b)***
            Black
                Fox Project




Under
      Canadian GAAP, mining development costs at the Black Fox Project have been
      capitalized. Under U.S. GAAP, these expenditures are expensed as incurred.
      Accordingly, for U.S. GAAP purposes, a reduction in property, plant and
      equipment of $21.9 million has been recorded as at September 30,
      2006.




***(c)***
            Convertible
                debenture




*(i)*  Under
      Canadian GAAP, the convertible debentures were recorded as a compound financial
      instrument including detachable note warrants. On issuance in November 2004,
      under U.S. GAAP, the detachable note warrant is similarly treated as an equity
      instrument with the remainder of the convertible debentures treated as a
      liability. Further, under U.S. GAAP, the beneficial conversion feature
      determined using the effective conversion price based on the proceeds allocated
      to the convertible debenture in accordance with EITF 00-27, “Application of
      Issue No. 98-5 to Certain Convertible Instruments”, is allocated to contributed
      surplus. This discount on the debenture is recognized as additional interest
      expense immediately as the debt is convertible at the date of issuance. Canadian
      GAAP does not require the recognition of any beneficial conversion
      feature.




*(ii)*  Under
      Canadian GAAP, the convertible debentures were recorded as an equity instrument
      on issuance in March 2002. Under U.S. GAAP, on issuance, the convertible
      debenture would have been recorded as a liability and reclassified to equity
      only upon conversion. Further, under U.S. GAAP, the beneficial conversion
      feature was allocated to contributed surplus and the Company recognized
      debenture issuance costs of $20.7 million. Canadian GAAP does not require the
      recognition of any beneficial conversion feature.




***(d)***
            Discontinued
                operations




Prior
      to
      January 1, 2004, under U.S. GAAP, unrealized gains and losses on the put and
      call option contracts were recorded in the statement of operations. As of
      January 1, 2004, the Company adopted the provisions of CICA Accounting Guideline
      13, *Hedging
      Relationships* and
      unrealized gains and losses on these contracts are now recorded in the statement
      of operations under Canadian GAAP.




***(e)***
            Comprehensive
                income




SFAS
      No.
      130, “Reporting Comprehensive Income” (“SFAS 130”) establishes standards for the
      reporting and display of comprehensive income and its components in a full
      set
      of general purpose financial statements. SFAS 130 requires that all items that
      are required to be recognized under accounting
      standards as components of comprehensive income be reported in a financial
      statement. For the Company, the only component of comprehensive loss is the
      net
      loss for the period.




20


**APOLLO
        GOLD CORPORATION**
 **Notes
        to the Condensed Consolidated Financial Statements**
 Ninemonth
        period ended September 30, 2006
 (Stated
        in U.S. dollars; tabular amounts in thousands)
 (Unaudited)




**9.**
              **DIFFERENCES
                  BETWEEN CANADIAN AND U.S. GAAP
                  (continued)**




***(f)***
            Statement
                of cash flows




Under
      Canadian GAAP, mining development costs at the Black Fox Project are included
      in
      cash flows from investing activities in the consolidated statements of cash
      flows. Under U.S. GAAP, these expenditures are included in cash flows from
      operating activities. Accordingly, under U.S. GAAP, the consolidated statements
      of cash flows for the three and nine months ended September 30, 2006 would
      reflect an increase in cash provided by investing activities of $0.6 million
      and
      $2.7 million and for the three and nine months ended September 30, 2005 an
      increase of $0.9 million and $4.4 million, respectively, and a corresponding
      increase in cash used in operating activities.




***(g)***
            Share-Based
                Payment




As
      of
      January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment”. The adoption of this standard did not impact the
      Company’s financial position or results of operations.




**10.**
            **SUBSEQUENT
                EVENTS**




***(a)***
            Issuance
                of stock




*(i)*  On
      October 30, 2006, the Company completed an offering of 2,222,221 flow-through
      units of the Company at Cdn$0.45 per unit to the MineralFields Group for net
      proceeds of Cdn$903,000. Each flow-through unit is comprised of one flow-through
      common share of the Company and one-half of one share purchase warrant, each
      whole warrant exercisable into one common share of the Company for a period
      of
      two years from closing at an exercise price of Cdn$1.00 for the first twelve
      months and Cdn$1.15 for the last twelve months. In connection with this
      offering, 166,666 broker warrants were issued. Each broker warrant is
      exercisable at Cdn$0.45 for two years into one equity unit with each equity
      unit
      comprised of one common share of the Company and one-half of one share purchase
      warrant. The broker’s share purchase warrants are exercisable into one common
      share of the Company for a period of two years from closing at an exercise
      price
      of Cdn$1.00 for the first twelve months and Cdn$1.15 for the last twelve
      months.




*(ii)*  On
      November 9, 2006, the Company completed an offering of approximately 16.7
      million units of the Company at $0.30 per unit for net proceeds of approximately
      $4.6 million. Each unit sold in the offering consists of one common share and
      one-half of one warrant to purchase one common share at $0.50 exercisable for
      three years after closing. The warrants contain provisions that provide that,
      subject to certain exceptions, if the Company sells, grants an option to
      purchase or otherwise disposes, issues or reprices any common shares (or any
      securities that are convertible into or exercisable for common shares) at a
      price per share less than $0.50 per share, then the exercise price of the
      warrants will be reduced to such price. In connection with this offering,
      approximately 1.2 million underwriter’s warrants were issued with the same terms
      as described above.




21




**APOLLO
        GOLD CORPORATION**
 **Notes
        to the Condensed Consolidated Financial Statements**
 **Nine** **month period ended September 30, 2006**
 (Stated
        in U.S. dollars; tabular amounts in thousands)
 (Unaudited)


**10.**
                **SUBSEQUENT
                    EVENTS (****continued)**




***(b)***
            Contributions
                by Elkhorn in respect of the JV
                Agreement




As
      of
      November 14, 2006, Elkhorn has contributed $5,000,000 in connection with the
      JV
      Agreement representing an additional $1,950,000 since September 30,
      2006 which is sufficient for Elkhorn to earn an initial 15% interest
      in the Mine (see Note 4).




22


**ITEM
              2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




**All
      Dollar amounts are expressed in United States Dollars**




The
      following discussion and analysis should be read in conjunction with the
      accompanying consolidated financial statements and related notes. The financial
      statements have been prepared in accordance with generally accepted accounting
      principles in Canada (Canadian GAAP). For a reconciliation to GAAP in the United
      States (U.S. GAAP), see Note 9 to the attached consolidated financial
      statements.




In
      this
      Form 10-Q, the terms “cash operating cost,” “total cash cost” and “total
      production cost” are non-GAAP financial measures and are used on a per ounce of
      gold sold basis. Cash operating costs per ounce is equivalent to direct
      operating cost as found on the Consolidated Statements of Operations, less
      production royalty expenses and mining taxes but includes by-product credits
      for
      payable silver, lead, and zinc production. Total cash costs is equivalent to
      cash operating costs plus production royalties and mining taxes. The term “total
      production costs” is equivalent to total cash costs plus non-cash costs
      including depreciation and amortization.




Certain
      of the comparative figures have been reclassified to conform with the current
      period presentation.




**RECONCILIATION
      OF CASH OPERATING AND TOTAL PRODUCTION COSTS PER OUNCE**




**($
                in thousands)**
            
            **Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006****(1)**
            
            **2005**
            
            **2006****(1)**
            
            **2005**Gold
                ounces sold
            
            
            —
            
            
            14,104
            
            
            4,959
            
            
            39,073Direct
                operating costs
            
            
            n/a**(**1
            )
            $
            14,162
            
            $
            13,957
            
            $
            40,273Less:Mining
                taxes, royalty expenses
            
            
            
            
            
            345
            
            
            282
            
            
            932By-product
                credits
            
            
            
            
            
            6,929
            
            
            6,906
            
            
            19,280Cash
                operating cost
            
            
            
            
            
            6,888
            
            
            6,769
            
            
            20,061Cash
                operating cost per ounce
            
            
            
            
            **$**
            **488**
            
            **$**
            **1,365**
            
            **$**
            **513**Cash
                operating costs
            
            
            
            
            
            6,888
            
            
            6,769
            
            
            20,061Add:Mining
                taxes, royalty expenses
            
            
            
            
            
            345
            
            
            282
            
            
            932Total
                cash costs
            
            
            
            
            
            7,233
            
            
            7,051
            
            
            20,993Total
                cash cost per ounce
            
            
            
            
            **$**
            **513**
            
            **$**
            **1,422**
            
            **$**
            **537**Total
                cash costs
            
            
            
            
            
            7,233
            
            
            7,051
            
            
            20,993Add:Depreciation
                & amortization (operations only)
            
            
            
            
            
            615
            
            
            1,199
            
            
            1,885Total
                production costs
            
            
            
            
            
            7,848
            
            
            8,250
            
            
            22,878Total
                production cost per ounce
            
            
            
            
            **$**
            **556**
            
            **$**
            **1,664**
            
            **$**
            **586**





(1) The
      Montana Tunnels mine ceased milling operations on May 12, 2006; therefore,
      no
      metal products were produced after that date. ****





**BACKGROUND
      AND RECENT DEVELOPMENTS**




We
      are
      principally engaged in the exploration, development and mining of gold. We
      own
      the Montana Tunnels mine, an open pit mine and mill located near Helena,
      Montana, which produced gold doré and lead-gold and zinc-gold concentrates until
      May 12, 2006. On July 28, 2006, the Company entered into a joint venture
      agreement (“JV Agreement”) with Elkhorn Tunnels, LLC (“Elkhorn”) in respect of
      the Montana Tunnels mine. With the expected financial contributions from Elkhorn
      in connection with the joint venture, the Company believes that it will be
      able
      to remediate the pit wall instability and recommence mill operations in February
      2007. We also own the Diamond Hill mine, currently on care and maintenance,
      also
      located in the State of Montana. In connection with the joint venture agreement
      that we entered into with Elkhorn in respect of the Montana Tunnels mine, the
      Company entered into an option agreement with Elkhorn Goldfields Inc. (“EGI”),
      an affiliate of Elkhorn, pursuant to which the Company granted EGI an option
      to
      purchase the Diamond Hill mine for $800,000.




23




We
      also
      own a development property, the Black Fox project, which is located near the
      township of Matheson in the Province of Ontario, Canada. Additionally, we own
      Mexican subsidiaries which own or have the right to acquire concessions of
      the
      Huizopa exploration property located in the Sierra Madres in Chihuahua, Mexico.




**Recent
      Events**




**Montana
      Tunnels**




On
      July
      28, 2006, we entered into a joint venture agreement pursuant to which Elkhorn
      may make scheduled financial contributions in exchange for up to a 50% interest
      in the Montana Tunnels mine. With the expected financial contributions from
      Elkhorn, we plan to bring the Montana Tunnels mine back into production in
      February 2007. Recruitment of equipment maintenance personnel commenced on
      August 10, 2006 followed by the hiring of mine operating personnel during the
      first week of September. On September 10, 2006 remediation within the open
      pit
      recommenced and at September 30, 2006, 642,000 tons of waste had been mined.
      As
      at November 8, 2006, the tonnage mined had risen to approximately 3,000,000
      tons. The overall remediation plan, which was developed in conjunction with
      a
      third party consultant Knight Piesold, calls for the unloading of 5,000,000
      tons
      from the upper benches of the open pit to mitigate rock fall hazards. The plan
      also calls for a new, wider haul ramp and the removal of 2,500,000 tons of
      waste
      from the pit bottom. We expect the mill to commence operations in February
      2007.
      As at September 30, 2006, Elkhorn had contributed $3,050,000 towards its earn-in
      requirement of $13,000,000. As at November 14, 2006, Elkhorn had contributed
      $5,000,000, which is sufficient for Elkhorn to earn an initial 15% interest
      in
      the Montana Tunnels mine.




In
      connection with the remediation, on August 1, 2006, we financed the purchase
      of
      four CAT 785 haul trucks (the “Trucks”) with a $2,640,000 promissory note
      payable to the Great American Group (the “Great American Note”). The Great
      American Note accrues interest at the rate of 1.5% per month and matures on
      December 1, 2006. The Great American Note is secured by the Trucks. We expect
      to
      replace the Great American Note with additional financing with a
      longer maturity.




**Black
      Fox**




At
      Black
      Fox we continued work on updating the gold resources and new resource and
      reserve numbers were filed in a Canadian National Instrument 43-101 on August
      14, 2006. The new resource and reserve numbers are as follows:





**Tonnes**
              **000’s**
            
            **Grade**
              **g
                Au/t**
            
            **Grade**
              **Oz
                Au/t**
            
            **Ounces**Open
                Pit - MaterialReserve
                (1)
            
            
            3,062
            
            
            4.56
            
            
            0.147
            
            
            448,800Indicated
                Resource
            
            
            2,356
            
            
            3.27
            
            
            0.105Inferred
                Resource
            
            
            6,626
            
            
            4.00
            
            
            0.129Underground
                - MaterialIndicated
                Resource
            
            
            1,004
            
            
            9.66
            
            
            0.311Inferred
                Resource
            
            
            1,228
            
            
            9.71
            
            
            0.312






(1)
      We
      report no reserves at Black Fox under SEC Industry Guide 7, which requires
      a
      final bankable feasibility study.





***Non-Reserve
        Mineral Resources***
  *Cautionary
        Note to US Investors concerning estimates of Indicated Mineral
        Resources.* This  Management’s
        Discussion and Analysis uses the term “indicated
        mineral resources”. We advise US investors that while the term is
        recognized and required by Canadian regulations, the US Securities and Exchange
        Commission does not recognize it. US investors are cautioned not to assume
        that
        any part or all of the mineral deposits in these categories will ever be
        converted into mineral reserves.
  *Cautionary
        Note to US Investors concerning estimates of Inferred Mineral
        Resources.* This Management’s
        Discussion and Analysis uses the term “inferred mineral
        resources”. We advise US investors that while the term is recognized and
        required by Canadian regulations, the US Securities and Exchange Commission
        does
        not recognize it. “Inferred mineral resources” have a great amount of
        uncertainty as to their existence, and great uncertainty as to their economic
        and legal feasibility. It cannot be assumed that all or any part of an inferred
        mineral resource will ever be upgraded to a higher category. In accordance
        with
        Canadian rules, estimates of inferred mineral resources cannot form the basis
        of
        feasibility or other economic studies. US investors are cautioned not to
        assume
        that part or all of the inferred mineral resource exists, or is economically
        or
        legally minable.


**Huizopa**




At
      Huizopa, on February 9, 2006, we entered into an agreement with the Ejido
      Huizopa (“Ejido”), the owner of 12,800 hectares of land that covers our mining
      concessions in Huizopa (“Ejido Land”), pursuant to which we have the right to
      use Ejido Land for all activities necessary for the exploration, development,
      and production of potential ore deposits in our Huizopa project
      area.




24




**Finance,
      corporate and other developments**




Upon
      closing of the sale of our Nevada assets to Jipangu Inc. (“Jipangu”) on November
      18, 2005, $11.0 million of the $14.0 million purchase price was deposited as
      substitute collateral for the Apollo 12% Series 2004-B secured convertible
      debentures (“Debentures”), which were previously secured by the Nevada assets.
      In January 2006, after meeting certain conditions, we replaced the $11.0 million
      cash collateral with our Black Fox property as security for the Debentures,
      which resulted in $8.4 million additional funds being available to the Company
      after paying $2.6 million (Cdn$3.0 million) to release an existing lien over
      the
      Black Fox property. In connection with the substitution of collateral for the
      Debentures we reduced the exercise price on 5,013,600 of the note warrants
      attached to the Debentures from $0.80 to $0.40 per common share. The Company
      recorded an additional cost of $0.3 million as a result of this reduction of
      the
      exercise price.




On
      January 26, 2006, we completed a $3.5 million private placement to Jipangu
      of
      11,650,000 equity units priced at Cdn$0.35 per unit with each unit consisting
      of
      one of our common shares and 0.17167 of a warrant, with each whole warrant
      exercisable for two years at Cdn$0.39 for one of our common shares.




On
      January 23, 2006, we announced that we would reduce the number of executive
      officers from seven to three, effective February 18, 2006. We entered into
      severance agreements with the four departing officers, pursuant to which the
      departing officers received termination packages consisting of a combination
      of
      cash and Company common stock and as a result, an aggregate of 1,187,175 common
      shares were issued at Cdn$0.48 per share to the departing officers.




Also
      on
      January 23, 2006, the Company entered into amended employment agreements with
      the three remaining executive officers pursuant to which the officers agreed
      to
      reduce their base salaries by an aggregate of $170,000 per annum in exchange
      for
      an aggregate of 1,103,223 common shares at Cdn$0.48 per share.





On
      October 30, 2006, the Company completed an offering of 2,222,221 flow-through
      units of the Company at Cdn$0.45 per unit to the MineralFields Group for net
      proceeds of Cdn$903,000. Each flow-through unit is comprised of one flow-through
      common share of the Company and one-half of one share purchase warrant, each
      whole warrant exercisable into one common share of the Company for a period
      of
      two years from closing at an exercise price of Cdn$1.00 for the first twelve
      months and Cdn$1.15 for the last twelve months. In connection with this
      offering, 166,666 broker warrants were issued. Each broker warrant is
      exercisable at Cdn$0.45 for two years into one equity unit with each equity
      unit
      comprised of one common share of the Company and one-half of one share purchase
      warrant. The broker’s share purchase warrants are exercisable into one common
      share of the Company for a period of two years from closing at an exercise
      price
      of Cdn$1.00 for the first twelve months and Cdn$1.15 for the last twelve
      months.




On
      November 9, 2006, the Company completed an offering of approximately 16.7
      million units of the Company at $0.30 per unit for net proceeds of approximately
      $4.6 million. Each unit sold in the offering consists of one common share and
      one-half of one warrant to purchase one common share at $0.50 exercisable for
      three years after closing. The warrants contain provisions that provide that,
      subject to certain exceptions, if the Company sells, grants an option to
      purchase or otherwise disposes, issues or reprices any common shares (or any
      securities that are convertible into or exercisable for common shares) at a
      price per share less than $0.50 per share, then the exercise price of the
      warrants will be reduced to such price. In connection with this offering,
      approximately 1.2 million underwriter’s warrants will be issued with the same
      terms as described above.




25




**Production
      from Continuing Operations & Metals Price Averages**




The
      table
      below summarizes our production of gold, silver and other metals, as well as
      average metal prices, for each period indicated:




**Nine
                months ended**
              **September
                30,**
              **2006****(1)**
            
            **Year
                Ended December 31,**
              **2005**
            
            **Year
                Ended December 31,**
              **2004**Production:Gold
                (ounces)
            
            
            4,959
            
            
            44,099
            
            
            33,743Silver
                (ounces)
            
            
            116,004
            
            
            524,722
            
            
            970,751Lead
                (pounds)
            
            
            1,196,317
            
            
            10,428,061
            
            
            10,064,265Zinc
                (pounds)
            
            
            3,040,058
            
            
            22,380,136
            
            
            26,222,805Average
                metal prices:Gold
                - London bullion mkt. ($/ounce)
            
            $
            603
            
            $
            445
            
            $
            409Silver
                - London bullion mkt. ($/ounce)
            
            $
            11.21
            
            $
            7.31
            
            $
            6.66Lead
                - LME ($/pound)
            
            $
            0.53
            
            $
            0.44
            
            $
            0.40Zinc
                - LME ($/pound)
            
            $
            1.36
            
            $
            0.63
            
            $
            0.48





(1) The
      Montana Tunnels mine ceased production operations on May 12, 2006; therefore,
      no
      metal products were produced after that date.





**MATERIAL
      CHANGES IN RESULTS OF OPERATIONS**




***Three
      Months Ended September 30, 2006 Compared to the Three Months Ended September
      30,
      2005***




**Revenue
      from the Sale of Minerals.**




Revenue
      from continuing operations for the three months ended September 30,
      2006  decreased
      97% to $0.4 million from $13.4 million for the same period in 2005. The decrease
      in revenue is due to the cessation of milling on May 12, 2006 with the revenue
      recorded in the quarter being a negotiated final adjustment of concentrate
      deliveries made prior to May 12, 2006.




The
      following presents the key statistics for the Montana Tunnels operation for
      the
      three months ended September 30, 2006 and 2005, respectively:




**Three
                months ended September 30,****2006****(1)(2)**
            
            **2005**Tons
                mined
            
            
            641,934
            
            
            4,217,617Tons
                milled
            
            
            -
            
            
            1,299,610Gold
                grade oz/ton
            
            
            n/a
            
            
            0.0150Zinc
                grade %
            
            
            n/a
            
            
            0.42Gold
                ounces
            
            
            -
            
            
            14,104Silver
                ounces
            
            
            -
            
            
            129,736Lead
                pounds
            
            
            -
            
            
            3,389,443Zinc
                pounds
            
            
            -
            
            
            7,401,636Total
                cash costs per ounce
            
            
            n/a
            
            $
            513Total
                production costs per ounce
            
            
            n/a
            
            $
            556Total
                revenue ($millions)
            
            $
            0.4
            
            $
            13.4Capital
                expenditures ($millions)
            
            $
            2.6
            
            $
            0.1





(1) The
      Montana Tunnels mine recommenced mining operations in September 2006 and mined
      641,934 tons of waste.


(2) The
      Montana Tunnels mine ceased milling operations on May 12, 2006; therefore,
      no
      metal products were produced after that date. Revenue recorded during the third
      quarter 2006 was from a negotiated final adjustment of concentrate deliveries
      made prior to May 12, 2006. ****




26





The
      decrease in production in the third quarter 2006 compared to the third quarter
      2005 is a result of the cessation of milling in May 2006. Capital expenditures
      of $2.6 million at the Montana Tunnels mine were for the purchase of four
      additional haul trucks to be used as part of the remediation of the
      mine.




**Operating
      Expenses.**




*Direct
      Operating Expenses.* Direct
      operating costs, which includes mining costs, processing costs and smelting
      and
      refining charges, for the three months ended September 30, 2006 decreased 77%
      to
      $3.2 million from $14.2 million for the three months ended September 30, 2005.
      The decrease in costs is a result of the cessation of all production operations
      at the Montana Tunnels mine on May 12, 2006 until August 10, 2006 when mining
      and recruitment of operational personnel recommenced following the signing
      of
      the JV agreement with Elkhorn.




*Depreciation
      and Amortization.*  Depreciation
      and amortization expenses were $324,000 and $672,000 for the three months ended
      September 30, 2006 and 2005, respectively.




*General
      and Administrative Expenses.* General
      and administrative expenses were $1.0 million and $0.9 million for the three
      months ended September 30, 2006 and 2005, respectively. A decrease in general
      and administrative expenses due to reduced numbers of personnel and lower audit
      and accounting expenses was offset by the issuance of 925,000 common shares
      to
      Standard New York Securities Inc., valued at $400,000, issued as payment of
      fees
      for services provided in connection with Montana Tunnels joint venture.




*Stock-Based
      Compensation.* In
      January 2004, the Company adopted the fair value method of accounting for stock
      options as set out in CICA Handbook section 3870, Stock-Based Compensation
      and
      Other Stock-Based Payments. Stock-based compensation was $126,000 and $171,000
      for the three months ended September 30, 2006 and 2005,
      respectively.




*Accretion
      Expense.* Accrued
      accretion expense was $237,000 for the three months ended September 30, 2006
      compared to $242,000 for the same period in 2005, respectively, primarily due
      to
      accrued site closure costs at the Montana Tunnels mine.





*Exploration
      and Business Development Expense.* Expenses
      for exploration and development, consisting of drilling and related expenses
      at
      our exploration properties, totaled $188,000 and $173,000 for the three months
      ended September 30, 2006 and 2005, respectively. The expenses have remained
      relatively the same from 2005 as there has been no increase in activity at
      our
      Huizopa exploration project.




*Total
      Operating Expenses* .
      As a
      result of these expense components, our total operating expenses decreased
      69%
      to $5.1 million for the three months ended September 30, 2006, from $16.3
      million for the three months ended September 30, 2005.




**Other
      Income (Expenses).**




*Interest
      Income and Interest Expense.* We
      realized interest income of $99,000 and interest expense of $726,000 during
      the
      three months ended September 30, 2006 compared to $105,000 in interest income
      and $747,000 in interest expense during the three months ended September 30,
      2005. Included in interest expense for the three months ended September 30,
      2006
      is $76,000 for the $2.6 million financing of the purchase of four additional
      haul trucks at Montana Tunnels, most of the remainder being interest accretion
      on the convertible debenture.




27




**Loss
      from Continuing Operations.**




As
      a
      result of the foregoing, the Company incurred a loss from continuing operations
      of $5.4 million, or $0.04 per share, for the three months ended September 30,
      2006, as compared to a loss of $3.6 million, or $0.04 per share, for the three
      months ended September 30, 2005.




**Loss
      from Discontinued Operations.**




For
      the
      three months ended September 30, 2006, loss from discontinued operations was
      nil, compared to a loss of $3.6 million, or $0.03 per share, for the three
      months ended September 30, 2005.




*Florida
      Canyon Mine and Standard Mine.* As
      part
      of the sale of the Nevada assets, the Florida Canyon and Standard mines were
      sold on November 18, 2005 and therefore had no activity in the three month
      period ended September 30, 2006. For the three months ended September 30, 2005
      revenues at these two mines were $6.6 million and operating costs were $10.2
      million.




**Net
      Loss.**




For
      the
      three months ended September 30, 2006, we incurred a net loss of $5.4 million,
      or $0.04 per share, as compared to a net loss of $7.2 million, or $0.07 per
      share, for the three months ended September 30, 2005.




***Nine
      months Ended September 30, 2006 Compared to the Nine months Ended September
      30,
      2005***




**Revenue
      from the Sale of Minerals.**




Revenue
      from continuing operations for the nine months ended September 30,
      2006  decreased
      72% to $10.2 million from $36.3 million for the same period in 2005. The
      decrease in revenue is due to the cessation of milling on May 12, 2006 and
      milling lower grade stockpiled ore until the cessation of milling.




The
      following presents the key statistics for the Montana Tunnels operation for
      the
      nine months ended September 30, 2006 and 2005, respectively:




**Nine
                months ended September 30,****2006****(1)(2)**
            
            **2005**Tons
                mined
            
            
            3,256,605
            
            
            13,606,591Tons
                milled
            
            
            1,426,512
            
            
            3,965,389Gold
                grade oz/ton
            
            
            0.0078
            
            
            0.014Zinc
                grade %
            
            
            0.20
            
            
            0.36Gold
                ounces
            
            
            4,959
            
            
            39,073Silver
                ounces
            
            
            116,004
            
            
            421,479Lead
                pounds
            
            
            1,196,317
            
            
            9,273,121Zinc
                pounds
            
            
            3,084,152
            
            
            19,800,021Total
                cash costs per ounce
            
            $
            1,422
            
            $
            537Total
                production costs per ounce
            
            $
            1,664
            
            $
            586Total
                revenue ($millions)
            
            $
            10.2
            
            $
            36.3Capital
                expenditures ($millions)
            
            $
            2.6
            
            $
            0.2





(1) The
      Montana Tunnels mine recommenced mining operations in September
      2006.


(2) The
      Montana Tunnels mine ceased milling operations on May 12, 2006; therefore,
      no
      metal products were produced after that date.





The
      decrease in production at the Montana Tunnels mine for the nine months ended
      September 30, 2006 compared to the same period 2005 is a result of the
      discontinuation of mining in October 2005 and the cessation of milling in May
      2006. The increase in cash and production costs per ounce are mainly the result
      of (1) milling lower grade ore through May 12, 2006, (2) holding costs of the
      mine after metal production ceased and (3) waste removal as part of the
      remediation of the open pit during September 2006.




28




**Operating
      Expenses.**




*Direct
      Operating Expenses.* Direct
      operating costs, which includes mining costs, processing costs and smelting
      and
      refining charges, for the nine months ended September 30, 2006 decreased 65%
      to
      $14.0 million from $40.3 million for the nine months ended September 30, 2005.
      The decrease in costs is a result of (1) ceasing mining in the open pit in
      October 2005 and (2) ceasing all production operations at the Montana Tunnels
      mine on May 12, 2006 until August 10, 2006 when recruitment of operational
      personnel began and mining recommenced September 2006 following the signing
      of
      the JV agreement with Elkhorn.




*Depreciation
      and Amortization.*  Depreciation
      and amortization expenses were $1.3 million and $2.0 million for the nine months
      ended September 30, 2006 and 2005, respectively.




*General
      and Administrative Expenses.* General
      and administrative expenses were $3.3 million and $3.7 million for the nine
      months ended September 30, 2006 and 2005, respectively. This decrease is due
      to
      a reduction in the number of personnel and lower audit and accounting expenses,
      which was partially offset by an increase in legal and other professional
      services.




*Stock-Based
      Compensation.* In
      January 2004, the Company adopted the fair value method of accounting for stock
      options as set out in CICA Handbook section 3870, Stock-Based Compensation
      and
      Other Stock-Based Payments. Stock-based compensation was $315,000 and $525,000
      for the nine months ended September 30, 2006 and 2005, respectively. This
      decrease is due to a reduction in personnel .




*Accretion
      Expense.* Accrued
      accretion expense was $711,000 compared to $636,000 for the nine months ended
      September 30, 2006 and 2005, respectively, primarily due to accrued site closure
      costs at the Montana Tunnels mine.





*Exploration
      and Business Development Expense.* Expenses
      for exploration and development, consisting of drilling and related expenses
      at
      our exploration properties, totaled $788,000 and $731,000 for the nine months
      ended September 30, 2006 and 2005, respectively.




*Gain
      on Sale of Property, Plant and Equipment.* A
      $1.3
      million gain on the sale of spare mining equipment at Montana Tunnels was
      realized during the nine months ended September 30, 2005, while during the
      same
      period in 2006, a loss of $7,000 was realized.




*Total
      Operating Expenses* .
      As a
      result of these expense components, our total operating expenses decreased
      56%
      to $20.3 million for the nine months ended September 30, 2006, from $46.6
      million for the nine months ended September 30, 2005.




**Other
      Income (Expenses).**




*Interest
      Income and Interest Expense.* We
      realized interest income of $253,000 and interest expense of $1.9 million during
      the nine months ended September 30, 2006 compared to $278,000 in interest income
      and $1.9 million in interest expense during the nine months ended September
      30,
      2005.




**Loss
      from Continuing Operations.**




As
      a
      result of the foregoing, the Company incurred a loss from continuing operations
      of $11.9 million, or $0.10 per share, for the nine months ended September 30,
      2006, as compared to a loss of $12.0 million, or $0.12 per share, for the nine
      months ended September 30, 2005.




29




**Loss
      from Discontinued Operations.**




For
      the
      nine months ended September 30, 2006, loss from discontinued operations was
      $0.3
      million, compared to a loss of $6.0 million, or $0.06 per share, for the nine
      months ended September 30, 2005.




*Florida
      Canyon Mine and Standard Mine.* As
      part
      of the sale of the Nevada assets, the Florida Canyon and Standard mines were
      sold on November 18, 2005 and therefore had no activity during the nine month
      period ended September 30, 2006. For the nine months ended September 30, 2005
      revenues at these two mines were $14.7 million and operating costs were $20.6
      million.




**Net
      Loss.**




For
      the
      nine months ended September 30, 2006, we incurred a net loss of $12.1 million,
      or $0.10 per share, as compared to a net loss of $18.0 million, or $0.18 per
      share, for the nine months ended September 30, 2005.




**MATERIAL
      CHANGES IN LIQUIDITY**




To
      date,
      we have funded our operations primarily through issuances of debt and equity
      securities, funding from joint venture partners, the sale of the Nevada assets
      and the sale of surplus assets. At September 30, 2006, we had cash of $2.0
      million, compared to cash of $0.1 million at December 31, 2005. The increase
      in
      cash since December 31, 2005 is primarily the result of investing cash inflows
      of $4.6 million and financing cash inflows of $6.3 million, offset by operating
      cash outflows of $9.0 million.




During
      the nine months ended September 30, 2006, investing activities totaled $4.6
      million. The $11.0 million held as cash collateral security for the Debentures
      that was in restricted cash at December 31, 2005, was released in January 2006.
      Capital expenditures for the further development of the Black Fox project were
      $4.9 million, which included the final payment of $2.6 million to the former
      owners of Black Fox. Investing activities includes $1.4 million for the funding
      of the Montana Tunnels reclamation liability.




During
      the nine months ended September 30, 2006, financing activities provided $6.3
      million in cash, which includes $3.5 million from the completion of a private
      placement with Jipangu for 11,650,000 equity units at $0.30 (Cdn$0.35) per
      share. Each unit consists of one common share of the Company and 0.17167 of
      a
      warrant for a total of 2,000,000 warrants, with each whole warrant exercisable
      for two years at Cdn$0.39 for one common share of the Company. Contributions
      from Elkhorn in connection with the Montana Tunnels joint venture were $3.1
      million. Payments of notes payable accounted for a cash outflow of $0.8 million.
      Additionally, we financed the purchase of four haul trucks with a $2.6
      million promissory note due December 1, 2006. We expect to replace the note
      with additional longer term financing.




We
      estimate that with our current period end cash balance of $2.0 million
      supplemented by the monies raised in the equity offerings completed in October
      and November (as described in more detail in Note 10(a) to the financial
      statements) and the projected cash positive contribution from the joint ventured
      Montana Tunnels mine, we will have sufficient funds to finance the current
      work
      programs at the Black Fox development project (the “Black Fox Project”) and the
      Huizopa exploration project (the “Huizopa Project”), as well as corporate
      overhead. However, we will continue to explore financing opportunities to
      further develop and construct the Black Fox Project and continue our exploration
      program at the Huizopa Project. We may raise additional funds from the sale
      of
      debt or equity securities, which may include Canadian flow-through financing
      to
      further fund exploration activities at the Black Fox Project. The availability,
      amount, terms and timing of this financing are not certain at this
      time.




Our
      ability to raise capital is highly dependent upon the commercial viability
      of
      our projects and the associated prices of precious metals. Because of the
      significant impact that changes in the prices of gold and silver have on our
      financial condition, declines in these metals prices may negatively impact
      short-term liquidity and our ability to raise additional funding for long-term
      projects. In the event that cash balances decline to a level that cannot support
      our operations, our management will defer certain planned capital expenditures
      and exploration activities as needed to conserve cash for operations. There
      can
      be no assurance that we will be successful in generating adequate funding for
      planned capital expenditures, environmental remediation and reclamation
      expenditures and for exploration expenditures.




30




**DIFFERENCES
      BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
      (GAAP)**




The
      Company reports under Canadian GAAP and reconciles to U.S. GAAP. The application
      of U.S. GAAP has a significant effect on the net loss and net loss per share.
      For a detailed explanation see Note 9 of our interim financial statements.




**CRITICAL
      ACCOUNTING ESTIMATES AND POLICIES**




The
      preparation of financial statements in conformity with generally accepted
      accounting principals requires management to make a variety of estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities as of the date of the financial
      statements as well as the reported amounts of revenues and expenses during
      the
      reporting periods covered by the financial statements.




**CONTRACTUAL
      OBLIGATIONS**




The
      Company has several outstanding equipment leases and financings. In connection
      with the remediation of the open pit at Montana Tunnels, we financed the
      purchase of four CAT 785 haul trucks (the “Trucks”) on August 1, 2006, with a
      $2,640,000 promissory note payable to the Great American Group (the “Great
      American Note”). The Great American Note accrues interest at the rate of 1.5%
      per month and matures on December 1, 2006. The Great American Note is secured
      by
      the Trucks. We expect to replace the Great American Note with
      additional financing with a longer maturity.




**OFF
      BALANCE SHEET ARRANGEMENTS**




On
      July
      28, 2006, the Company entered into a JV Agreement with Elkhorn in respect of
      the
      Montana Tunnels mine (“the Mine”) which calls for Elkhorn to contribute $13
      million over a five-month period. The money contributed will be used initially
      to remediate the east wall instability problems encountered at the Mine during
      September and early October 2005, which led to the suspension of mining on
      October 21, 2005, and thereafter to move the Mine back towards commercial
      production. If Elkhorn were to fail to make its financial contributions,
      the Company would be required to seek other financing sources to obtain the
      funds necessary to remediate the Mine and bring it back into commercial
      production. Highlights of the JV Agreement are:




·
            Elkhorn
                is entitled to a 50% interest in the Mine when it has made its full
                contribution of $13 million.




·
            Montana
                Tunnels Mining, Inc. (“MTMI”) will be the operator of the Mine. A separate
                committee consisting of two designees from each of MTMI and Elkhorn
                will
                oversee the joint venture.




·
            If
                Elkhorn contributes at least $5 million but fails to make its full
                contribution of $13 million, then it will receive a 3% interest in
                the
                Mine for each $1 million
                contributed.






31


·
            If
                Elkhorn fails to contribute at least $5 million then its contribution
                will
                be converted to a promissory note (the “Note”) equal to the amount
                actually contributed, plus interest, payable only out of future positive
                cash flows from the Mine or in the event the Mine is sold or otherwise
                financed. The Note would bear interest at the rate of 6% per
                annum and payments of principal and interest on the Note would be
                payable within 30 days after the end of each calendar quarter, beginning
                with the end of the first full calendar quarter during which the
                Mine is
                cash flow positive. If Elkhorn’s failure to contribute at least $5
                million is the result of a breach of the JV Agreement by Apollo,
                or
                otherwise for cause, then the Note would bear interest at the rate
                of 12%
                per annum and the Note plus interest would be payable not later than
                the
                fifth anniversary thereof.




·
            When
                Elkhorn has contributed the full $13 million, then (a) Elkhorn will
                be
                entitled to recover interest on that amount and (b) Elkhorn will
                receive
                65% and Apollo will receive 35% of the positive free cash flow from
                the
                Mine until such time as Elkhorn has recovered its full contribution
                of $13
                million. At that time, Apollo would become entitled to 60% and Elkhorn
                40%
                of the positive free cash flow from the Mine, until both parties
                have
                received an equal amount. Thereafter, the sharing would revert to
                50/50.




·
            If
                Elkhorn earns less than a 50% interest in the Mine, then it will
                be
                entitled to recover interest on the amount actually contributed by
                it, and
                after payment of that interest each party will receive its proportionate
                share of positive free cash flow.




As
      of
      September 30, 2006, Elkhorn had contributed $3.1 million in connection with
      the
      JV Agreement which contributions are recorded as Due to Elkhorn Tunnels, LLC
      in
      the Consolidated Balance Sheet since Elkhorn’s contributions were short of the
      $5 million required to earn an interest in the Mine as of such date. As of
      November 14, 2006, Elkhorn has contributed $5.0 million in connection with
      the
      JV Agreement, representing an additional $1.9 million since September 30, 2006,
      which is sufficient for Elkhorn to earn an initial 15% interest in the
      Mine.




**ENVIRONMENTAL**




The
      Company’s current environmental liabilities are at Montana Tunnels and Black
      Fox. As of September 30, 2006, we have accrued $13.7 million related to
      reclamation, severance and other closure requirements at Montana Tunnels ($13.3
      million) and Black Fox ($0.4 million), an increase of $1.1 million from December
      31, 2005. These liabilities are covered by a combination of surety bonds,
      restricted cash and property totaling $18.5 million at September 30, 2006.
      We
      have accrued the present value of management’s estimate of the liability as of
      September 30, 2006.




**ITEM
              3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




Our
      exposure to market risk includes, but is not limited to, the following risks:
      changes in interest rates on our investment portfolio, changes in foreign
      currency exchange rates and commodity price fluctuations.




**Interest
      Rate Risk**




Other
      than a convertible debenture with a fixed coupon rate of 12% per annum and
      the
      1.5% per month Great American Note which was issued on August 1, 2006, we have
      minimal debt and thus no material interest rate exposure related to debt. When
      appropriate we invest excess cash in short-term debt instruments of the United
      States and Canadian governments and their agencies on both a fixed and variable
      interest rate basis. Our restricted certificates of deposit are invested in
      long-term debt instruments of the United States and Canadian governments and
      their agencies on a fixed interest rate basis. Over time the rates received
      on
      such investments may fluctuate with changes in economic conditions. As a result
      our investment income may fall short of expectations during periods of lower
      interest rates. We estimate that given the cash balances expected during 2006,
      a
      one percent change in interest rates would result in a $50,000 change in
      interest income. We may in the future actively manage our exposure to interest
      rate risk.




32




**Foreign
      Currency Exchange Rate Risk**




Most
      of
      the Company’s activities at its Black Fox project are transacted in Canadian
      dollars and some of the Company’s cash balances are therefore maintained in
      Canadian dollars. Since the Company’s reporting currency is the U.S. dollar,
      foreign currency gains and losses on its Canadian dollar cash balances can
      result in volatile net losses and earnings, and adversely affect the Company’s
      financial position and results of operations.




**Commodity
      Price Risk**




The
      profitability of the Company’s operations will be dependent upon the market
      price of gold. Gold prices fluctuate widely and are affected by numerous factors
      beyond the control of the Company. The level of interest rates, the rate of
      inflation, the world supply of gold and the stability of exchange rates can
      all
      cause significant fluctuations in prices. Such external economic factors are
      in
      turn influenced by changes in international investment patterns, monetary
      systems and political developments. The price of gold has fluctuated widely
      in
      recent years, and future price declines could cause some projects to become
      uneconomic, thereby having a material adverse effect on the Company’s business
      and financial condition.




Furthermore,
      reserve calculations and life-of-mine plans using significantly lower gold
      prices could result in material write-downs of the Company’s investment in
      mining properties and increased amortization.




In
      addition to adversely affecting the Company's reserve estimates and its
      financial condition, declining gold prices could require a reassessment of
      the
      feasibility of a particular project. Such a reassessment may be the result
      of a
      management decision or may be required under financing arrangements related
      to a
      particular project. Even if the project is ultimately determined to be
      economically viable, the need to conduct such a reassessment may cause delays
      in
      the implementation of the project.




**ITEM
      4.** **CONTROLS
      AND PROCEDURES**




**Disclosure
      Controls and Procedures**




Apollo
      maintains disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the reports that we file or submit
      under
      the Exchange Act is recorded, processed, summarized and reported within the
      time
      periods specified in the SEC’s rules and forms, and that such information is
      accumulated and communicated to Apollo’s management, including its Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required financial disclosure.




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision of our management, including the Chief Executive Officer and
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b)
      under
      the Exchange Act. Based upon, and as of the date of this evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were not effective, because of the material weaknesses
      discussed below. In light of the material weaknesses described below, we
      performed additional analysis and other post-closing procedures to ensure our
      consolidated financial statements were prepared in accordance with generally
      accepted accounting principles. Accordingly, management believes that the
      financial statements included in this report fairly present in all material
      respects our financial condition, results of operations and cash flows for
      the
      periods presented.




33




We
      identified a material weakness for the year ended December 31, 2005. A
      material weakness is a significant deficiency, or combination of significant
      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. In January 2006, a major restructuring and streamlining at the
      corporate office significantly changed the design and structure of the internal
      controls and procedures at the corporate level. We lacked appropriate review
      of
      non-routine or complex accounting matters, related accounting entries, and
      appropriate documentation, disclosure and application of Canadian and U.S.
      GAAP,
      primarily due to a lack of sufficient personnel with a level of technical
      accounting expertise commensurate with our reporting requirements. As of this
      date our management has not had sufficient time to evaluate these controls
      and
      therefore believes this material weakness still exists.




**Changes
      in Internal Control**




Related
      to the reduction in staffing at the Montana Tunnels mine in mid October 2005
      and
      an additional reduction in staffing in early May 2006, at which time the mine
      ceased production operations, our controls at that location are not operating
      as
      previously designed related to segregation of duties over procurement, inventory
      control and accounting duties. Corporate management has increased its
      involvement with day-to-day oversight and management of the Montana Tunnels
      mine, but as of this date, management has not had sufficient time to evaluate
      these controls and therefore believes the change in controls is significant
      enough to be reported as a material weakness. In an effort to address this
      material weakness, staffing additions have been made and staffing requirements
      and other changes in control are being evaluated as the future operational
      requirements of the Montana Tunnels mine are being determined.





We
      intend
      to continue to monitor our internal controls, and if further improvements or
      enhancements are identified, we will take steps to implement such improvements
      or enhancements. As a result of the changes disclosed above, there were changes
      in our internal control over financial reporting, which have materially
      affected, or are reasonably likely to materially affect, such internal
      controls.




**PART
              II**
            **OTHER
                INFORMATION**




**ITEM
              1.**
            ******LEGAL
                PROCEEDINGS**




In
      May
      2006, a purported class action lawsuit was filed in U.S. District Court Missoula
      Division of Montana by 14 former employees at our Montana Tunnels mine alleging
      (i) violations of the Worker Adjustment and Retraining Notification Act of
      1988
      (the “WARN Act”) and the Montana Wage Act and (ii) breach of contract. The
      allegations relate to the termination of the employees following the cessation
      of mining in October 2005. Specifically, the plaintiffs allege that we gave
      deficient WARN Act notice and are seeking damages for back pay and benefits.
      We
      believe that we have meritorious defenses in this suit and are vigorously
      defending ourselves against these claims.




**ITEM
      1A.** **RISK
      FACTORS**




Item
      1A
      of our Annual Report on Form 10-K for the year ended December 31, 2005 sets
      forth information relating to important risks and uncertainties that could
      materially adversely affect our business, financial condition or results of
      operations. Those risk factors continue to be relevant to understanding our
      business, financial condition and operating results. Certain of those risk
      factors have been updated in this Quarterly Report on Form 10-Q to provide
      updated information, as set forth below.




34





**We
      have experienced operational problems at our Montana Tunnels mine and
      temporarily** **ceased
      production operations** **.**





Since
      the
      sale of our Nevada assets in November 2005, all of our revenues have been
      derived from our milling operations at the Montana Tunnels mine, which is a
      low
      grade mine. Historically, the Montana Tunnels mine has been unprofitable. During
      2004, we experienced problems related to the milling of low-grade ore at the
      Montana Tunnels mine, which negatively affected our revenues and earnings.
      Throughout 2005, we experienced operational problems, particularly in the open
      pit, leading to the suspension of mining on October 21, 2005 for safety reasons
      due to increased wall activity in the open pit. After the suspension of mining
      and until May 12, 2006, we were able to continue to produce gold doré, lead-gold
      and zinc-gold concentrates from milling low grade stockpiled ore. However,
      on
      May 12, 2006, all operations ceased at the Mine and it was placed on care and
      maintenance. On
      July
      28, 2006, we entered into a joint venture agreement with Elkhorn Tunnels, LLC,
      an affiliate of Calim Private Equity LLC, in respect of the Montana Tunnels
      mine
      pursuant to which Elkhorn is making scheduled financial contributions in
      exchange for up to a fifty percent interest in the Mine. Recruitment of
      equipment maintenance personnel commenced on August 10, 2006 followed by the
      hiring of mine operating personnel during the first week of September. On
      September 10, 2006 remediation within the open pit recommenced. With the
      expected financial contributions from Elkhorn under joint venture agreement,
      we
      believe that we will be able to remediate the pit wall instability and
      recommence mill operations in early 2007. However, there can be no assurances
      that our joint venture partner will make the expected financial contributions
      or
      that we will be able to remediate the pit wall instability.





**ITEM
      2.** **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.




**ITEM
      3.** **DEFAULTS
      UPON SENIOR SECURITIES**




None.




**ITEM
      4.** **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.




**ITEM
      5.** **OTHER
      INFORMATION**




None.




**ITEM
      6.** **EXHIBITS**




**Exhibit
                No.**
            
            **Title
                of Exhibit**31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act





35


**SIGNATURES**




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


**APOLLO GOLD
              CORPORATION**Date: November
              14, 2006
            
            /s/ R.
              DAVID
              RUSSELLR.
              David Russell, President andChief
              Executive Officer




Date: November
              14, 2006
            
            /s/ MELVYN
              WILLIAMSMelvyn
              Williams,Chief
                Financial Officer and Senior Vice President Finance and Corporate
                Development


**Index
      to Exhibits**





**Exhibit
                No.**
            
            **Title
                of Exhibit**31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act





36