** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549**

##### **FORM10-Q/A**

**AmendmentNo. 1**
| (MARK ONE)                                                                                                                                          |                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                |                                                                                          |
| **x**                                                                                                                                               | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                |                                                                                          |
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2006.**                                                                                                  |
| ** **                                                                                                                                          | ** **                                                                                    |
| **OR**                                                                                                                                              |
|                                                                                                                                                |                                                                                          |
| **o**                                                                                                                                               | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                |                                                                                          |
| **FOR THE  TRANSITION PERIOD  FROM         TO         .** |

 

**COMMISSIONFILE NUMBER 1-13627**

###### **APEXSILVER MINES LIMITED**(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

| **CAYMAN ISLANDS, BRITISH WEST INDIES**   | **NOT  APPLICABLE**  |
|-------------------------------------------|----------------------|
| (STATE OR OTHER  JURISDICTION OF          | (I.R.S. EMPLOYER     |
| INCORPORATION OR  ORGANIZATION)           | IDENTIFICATION  NO.) |
|                                      |                 |
| **WALKER  HOUSE**                         | ** **           |
| **MARY  STREET**                          | ** **           |
| **GEORGE  TOWN, GRAND CAYMAN**            | ** **           |
| **CAYMAN  ISLANDS, BRITISH WEST INDIES**  | **NOT  APPLICABLE**  |
| (ADDRESS OF  PRINCIPAL EXECUTIVE OFFICES) | (ZIP CODE)           |

 

**(345)949-0050**(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

INDICATE BY CHECK MARKWHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BYSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILESUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THEPAST 90 DAYS:   YES x   NO o

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR ANON-ACCELERATED FILER:
| LARGE ACCELERATED  FILER o | ACCELERATED  FILER x | NON-ACCELERATED  FILER o |
|---------------------------------|---------------------------|-------------------------------|

 

INDICATE BY CHECK MARKWHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THEEXCHANGE ACT):   YES o   NO x

AT AUGUST 3, 2006, 58,410,300 ORDINARY SHARES, $0.01PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING.

 

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**EXPLANATORYNOTE**

Apex Silver MinesLimited (“we,” “us,” or the “Company”) is filing this Amendment No. 1(this “Amendment”) to its Quarterly Report on Form 10-Q for the quarterlyperiod ended June 30, 2006 to restate its consolidated financial statements andrelated financial information.

We are restatingthe consolidated financial statements to correct the liability of our metalsderivative positions. We determined that the method used in prior periods toestimate the fair value of our open metals derivative positions was notappropriate. pursuant to Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“FAS No. 133”), we recordour open derivative positions at their fair value on our consolidated balancesheet and record the changes in fair value to current earnings at the end ofeach reporting period.

Our derivativepositions mature or expire on various dates over an approximate six-yearperiod commencing in July 2007. Many of the derivative positions mature orexpire beyond the periods covered by the major commodities price indices suchas LME or COMEX, or expire in future periods covered by those indices withrespect to which only limited trading activity has occurred. In instances whereonly limited market activity existed, we used price projections provided by anindependent third party employing statistical analysis and models to estimatethe fair value of our open derivative positions. The models used by theindependent third party relied on commodities prices indices out to threemonths and mean reversion statistical estimates beyond the three-monthperiod. Recently, we reassessed the market information reflected in thecommodities prices indices out to twenty-seven months and quoted pricesfrom the counterparties holding the derivative positions and concluded that theadditional market information is a more reliable indicator of fair value thanthe independent third party price projections we previously used.

Based on the reassessment,we concluded that we had understated the liability related to the openderivative positions commencing with the quarter ended September 30, 2005. Thecumulative liability for our open derivative positions was understated by$226.0 million at June 30, 2006.

As a result, wehave concluded that our financial statements for the quarter ended September30, 2005, the year ended December 31, 2005 and the first three quarters of 2006should be restated. Use of the additional market information in calculating thefair value of our open derivative positions will likely result in increasedvolatility in our earnings during the next three years, the period over whichmost of the derivatives mature or expire. We intend to settle these derivativeswith revenues from San Cristobal production over the six-year periodcommencing in July 2007. Therefore, the cash effect of settling these hedgeswill be realized as higher or lower revenue over that six-year period andthe ultimate losses or gains from these derivatives will be determined basedupon market prices at the time of settlement.

The information contained in this Amendment, including the financialstatements and the notes thereto, amends only Items 1, 2, 3 and 4 of theoriginal filing, in each case to reflect only the restatement discussed herein.No other information in the original filing is amended hereby. Currently-datedcertifications from our Chief Executive Officer and our Chief Financial Officerhave been included as exhibits to this Amendment.  As discussed in Item 4, Controls andProcedures (as restated), management identified a control deficiency thatrelates to the restatement that, under the circumstances, constitutes amaterial weakness.

The foregoingitems have not been updated to reflect other events occurring after the filingdate of the original filing or to modify or update those disclosures affectedby subsequent events.  Except for theforegoing amended information, this Amendment continues to describe conditionsas of the date of the original filing, and we have not updated the disclosurescontained herein to reflect events that occurred at a later date.

We do not intendto amend our previously-filed Annual Report on Form 10-K or our QuarterlyReports on Form 10-Q for the periods affected by the restatement describedherein that ended prior to January 1, 2006.

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APEX SILVER MINESLIMITEDFORM 10-QQUARTER ENDED JUNE 30, 2006

INDEX
|                                     | ** ** | ** **                                                                                  | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
| PART I — FINANCIAL INFORMATION |       |                                                                                        |
|                                |       |                                                                                        |       |       |
| ITEM 1.                             |       | FINANCIAL STATEMENTS                                                                        |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 2.                             |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 3.                             |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK AND HEDGING ACTIVITIES          |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 4.                             |       | CONTROLS AND PROCEDURES                                                                     |       |       |
|                                |       |                                                                                        |       |       |
| PART II — OTHER INFORMATION    |       |                                                                                        |
|                                |       |                                                                                        |       |       |
| ITEM 1.                             |       | LEGAL PROCEEDINGS                                                                           |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 1A.                            |       | RISK FACTORS                                                                                |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 2.                             |       | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS                                |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 3.                             |       | DEFAULTS UPON SENIOR SECURITIES                                                             |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 4.                             |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 5.                             |       | OTHER INFORMATION                                                                           |       |       |
|                                |       |                                                                                        |       |       |
| ITEM 6.                             |       | EXHIBITS                                                                                    |       |       |
|                                |       |                                                                                        |       |       |
| SIGNATURES                          |       |                                                                                        |
|                                     |            |                                                                                             |            |            |  |  |

** **

2

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** **

**PART I. FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

# **APEXSILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED BALANCE SHEETS(Expressed in United States dollars)(Unaudited)**

| ** **                                                                                                                                    | ** ** | **June 30,**                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2006**                                                  | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                    | ** ** | **Restated**                                              | ** ** | ** **            | ** ** |
| ** **                                                                                                                                    | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                    |       |                                                      |       |                  |       |
| Current assets                                                                                                                                |       |                                                      |       |                  |       |
| Cash and cash  equivalents                                                                                                                    |       | $                                                         | 11,851     |                  | $          | 4,808 |   |
| Restricted cash                                                                                                                               |       | 37,934                                                    |       | 135,182               |       |
| Short term  investments                                                                                                                       |       | 113,165                                                   |       | 132,000               |       |
| Restricted  investments                                                                                                                       |       | 144,061                                                   |       | 67,491                |       |
| Materials and  supply inventory                                                                                                               |       | 3,495                                                     |       | —                |       |
| Prepaid expenses  and other assets                                                                                                            |       | 11,148                                                    |       | 5,824                 |       |
| Total current  assets                                                                                                                         |       | 321,654                                                   |       | 345,305               |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Property, plant and  equipment, net                                                                                                           |       | 505,741                                                   |       | 379,138               |       |
| Ore inventories                                                                                                                               |       | 8,909                                                     |       | —                |       |
| Deferred financing  costs                                                                                                                     |       | 20,134                                                    |       | 21,604                |       |
| Value added tax  recoverable                                                                                                                  |       | 34,881                                                    |       | 20,052                |       |
| Restricted investments                                                                                                                        |       | 77,258                                                    |       | 12,392                |       |
| Other                                                                                                                                         |       | 2,098                                                     |       | 2,020                 |       |
| Total assets                                                                                                                                  |       | $                                                         | 970,675    |                  | $          | 780,511 |   |
|                                                                                                                                          |       |                                                      |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                |       |                                                      |       |                  |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Current liabilities                                                                                                                           |       |                                                      |       |                  |       |
| Accounts payable  and other accrued liabilities                                                                                               |       | $                                                         | 56,060     |                  | $          | 74,487 |   |
| Accrued interest  payable                                                                                                                     |       | 3,267                                                     |       | 3,096                 |       |
| Derivatives at  fair value                                                                                                                    |       | 13,845                                                    |       | 5,652                 |       |
| Current portion  of long term debt                                                                                                            |       | 2,708                                                     |       | 2,270                 |       |
| Total current  liabilities                                                                                                                    |       | 75,880                                                    |       | 85,505                |       |
| Long term debt                                                                                                                                |       | 382,275                                                   |       | 320,021               |       |
| Derivatives at fair  value                                                                                                                    |       | 356,269                                                   |       | 145,719               |       |
| Asset retirement  obligation                                                                                                                  |       | 4,936                                                     |       | 2,003                 |       |
| Total liabilities                                                                                                                             |       | 819,360                                                   |       | 553,248               |       |
| Minority interest in  subsidiaries                                                                                                            |       | 41                                                        |       | 34                    |       |
| Commitments and  contingencies (Note 11)                                                                                                      |       |                                                      |       |                  |       |
| Shareholders’ equity                                                                                                                     |       |                                                      |       |                  |       |
| Ordinary Shares,  $.01 par value, 175,000,000 shares authorized; 58,406,400 and 50,444,890  shares issued and outstanding at respective dates |       | 584                                                       |       | 504                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                |       | 719                                                       |       | (243                  | )          |
| Additional paid  in capital                                                                                                                   |       | 664,679                                                   |       | 486,762               |       |
| Accumulated  deficit during development stage                                                                                                 |       | (514,708                                                  | )          | (259,794              | )          |
| Total shareholders’  equity                                                                                                              |       | 151,274                                                   |       | 227,229               |       |
| Total liabilities and  shareholders’ equity                                                                                              |       | $                                                         | 970,675    |                  | $          | 780,511 |   |

 

The accompanyingnotes form an integral part of these consolidated financial statements.

3

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(Expressed in United States dollars)(Unaudited)**
| ** **                                                      | ** ** | **Three Months Ended**                          | ** ** | **Six Months Ended** | ** ** | **For the Period  from December 22,  1994 (inception)** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                                         | ** ** | **June 30,**              | ** ** | **through**                                                                      | ** ** |
| ** **                                                      | ** ** | **2006**                                                  | ** ** | **2005**                       | ** ** | **2006**                                                                         | ** ** | **2005** | ** ** | **June 30, 2006** | ** ** |
| ** **                                                      | ** ** | **Restated**                                              | ** ** | ** **                     | ** ** | **Restated**                                                                     | ** ** | ** ** | ** ** | **Restated** | ** ** |
| ** **                                                      | ** ** | **(in thousands, except share data)** | ** ** |
| **Operating income and expenses:**                              |       |                                                      |       |                           |       |                                                                             |       |   |   |   |   |
| Exploration                                                     |       | $                                                         | (1,557     | )                              | $          | (1,435                                                                           | )          | $ | (3,007 | ) | $ | (2,761 | ) | $ | (76,438 | ) |
| Administrative                                                  |       | (5,686                                                    | )          | (4,917                         | )          | (10,999                                                                          | )          | (8,846 | ) | (80,857 | ) |
| Gain (loss) on  commodity derivatives                           |       | (78,143                                                   | )          | 2,430                          |       | (250,961                                                                         | )          | 2,056 | ** ** | (401,509 | ) |
| Gains (loss) on  foreign currency derivatives and transactions  |       | 123                                                       |       | (666                           | )          | 236                                                                              |       | (1,284 | ) | 964 |   |
| Other operating  expense (1)                                    |       | (94                                                       | )          | —                         |       | (142                                                                             | )          | — | ** ** | (142 | ) |
| Amortization and  depreciation                                  |       | (101                                                      | )          | (17                            | )          | (196                                                                             | )          | (33 | ) | (1,592 | ) |
| Total operating  expenses                                       |       | (85,458                                                   | )          | (4,605                         | )          | (265,069                                                                         | )          | (10,868 | ) | (559,574 | ) |
| **Other income and expenses:**                                  |       |                                                      |       |                           |       |                                                                             |       |   | ** ** | ** ** | ** ** |
| Interest and  other income                                      |       | 5,264                                                     |       | 3,643                          |       | 8,168                                                                            |       | 7,043 | ** ** | 42,840 |   |
| Gain on  extinguishment of debt                                 |       | —                                                    |       | —                         |       | 2,875                                                                            |       | — | ** ** | 9,640 |   |
| Interest expense  and other borrowing costs (2)                 |       | (255                                                      | )          | (1,872                         | )          | (774                                                                             | )          | (3,862 | ) | (11,696 | ) |
| Total other  income and expense                                 |       | 5,009                                                     |       | 1,771                          |       | 10,269                                                                           |       | 3,181 | ** ** | 40,784 |   |
| Loss before  minority interest and income taxes                 |       | (80,449                                                   | )          | (2,834                         | )          | (254,800                                                                         | )          | (7,687 | ) | (518,790 | ) |
| Income taxes                                                    |       | (53                                                       | )          | —                         |       | (107                                                                             | )          | — | ** ** | (486 | ) |
| Minority  interest in (income) loss of consolidated subsidiary  |       | —                                                    |       | 11                             |       | (7                                                                               | )          | 11 |   | 4,568 |   |
| Net loss                                                        |       | $                                                         | (80,502    | )                              | $          | (2,823                                                                           | )          | $ | (254,914 | ) | $ | (7,676 | ) | $ | (514,708 | ) |
| Other  comprehensive income:                                    |       |                                                      |       |                           |       |                                                                             |       |   | ** ** |   |   |
| Unrealized gain  (loss) on securities                           |       | $                                                         | 77         |                           | $          | (22                                                                              | )          | $ | 467 |   | $ | (157 | ) | $ | 224 |   |
| Reclassification  for loss on securities included in net income |       | —                                                    |       | —                         |       | 495                                                                              |       | — |   | 495 |   |
| Other  comprehensive gain (loss)                                |       | 77                                                        |       | (22                            | )          | 962                                                                              |       | (157 | ) | 719 |   |
| Comprehensive  loss                                             |       | $                                                         | (80,425    | )                              | $          | (2,845                                                                           | )          | $ | (253,952 | ) | $ | (7,833 | ) | $ | (513,989 | ) |
| **Net loss per Ordinary Share – basic and diluted (3)**    |       | $                                                         | (1.40      | )                              | $          | (0.06                                                                            | )          | $ | (4.68 | ) | $ | (0.16 | ) |   |   |
| **Weighted average  Ordinary Shares outstanding**               |       | 57,551,214                                                |       | 47,983,111                     |       | 54,483,319                                                                       |       | 47,831,454 | ** ** |   |   |

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(1)             Other operating expense is accretion expenseassociated with our asset retirement obligation at San Cristobal.

(2)             Interest expense and other borrowing costs arenet of $6.4 million and $11.0 million capitalized for the three and six monthperiods ended June 30, 2006, respectively and $1.4 million and $2.5 million forthe three and six month periods ended June 30, 2005, respectively and $20.3million for the inception to date period ended June 30, 2006.

(3)             Diluted earnings per share were anti-dilutivefor all periods presented.

The accompanyingnotes form an integral part of these consolidated financial statements.

4

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in United States dollars)(Unaudited)**
| ** **                                                                                                                  | ** ** | **Six Months Ended** | ** ** | **For the period from  December 22, 1994  (inception)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **June 30,**              | ** ** | **through**                                                                      | ** ** |
| ** **                                                                                                                  | ** ** | **2006**                       | ** ** | **2005**                                                                         | ** ** | **June 30, 2006** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands)**        | ** ** |
| Cash flows from  operating activities:                                                                                      |       |                           |       |                                                                             |       |   |   |
| Net cash used in  operating activities                                                                                      |       | $                              | (33,780    | )                                                                                | $          | (9,935 | ) | $ | (140,657 | ) |
| Cash flows from  investing activities:                                                                                      |       |                           |       |                                                                             |       |   |   |
| Purchase of  available for sale investments                                                                                 |       | (188,212                       | )          | (330,112                                                                         | )          | (1,381,404 | ) |
| Sale of  available for sale investments                                                                                     |       | 126,388                        |       | 408,165                                                                          |       | 1,190,340 |   |
| Purchase of  held-to-maturity investments                                                                                   |       | —                         |       | (17,524                                                                          | )          | (239,207 | ) |
| Sale of  held-to-maturity investments                                                                                       |       | 1,003                          |       | 89,702                                                                           |       | 188,010 |   |
| Purchase of  available for sale restricted investments                                                                      |       | (226,080                       | )          | —                                                                           |       | (241,030 | ) |
| Sale of  available for sale restricted investments                                                                          |       | 181,900                        |       | —                                                                           |       | 181,900 |   |
| Purchase of  held-to-maturity restricted investments                                                                        |       | (46,862                        | )          | —                                                                           |       | (74,205 | ) |
| Sale of  held-to-maturity restricted investments                                                                            |       | 30,819                         |       | 1,868                                                                            |       | 45,595 |   |
| Payment of  derivative premiums & settlements, net                                                                      |       | (32,219                        | )          | —                                                                           |       | (32,320 | ) |
| Advances for  construction of port facility                                                                                 |       | —                         |       | —                                                                           |       | (2,000 | ) |
| Advances to  suppliers and contractors                                                                                      |       | (4,089                         | )          | (1,296                                                                           | )          | (7,964 | ) |
| Release from  (transfer to) restricted cash to collateralize credit facility, letters of  credit and interest payments, net |       | 97,247                         |       | (96,892                                                                          | )          | (40,897 | ) |
| Capitalized  property, plant and equipment                                                                                  |       | (135,903                       | )          | (55,733                                                                          | )          | (418,833 | ) |
| Net cash used in  investing activities                                                                                      |       | (196,008                       | )          | (1,822                                                                           | )          | (832,015 | ) |
| Cash flows from  financing activities:                                                                                      |       |                           |       |                                                                             |       |   |   |
| Proceeds from  issuance of Ordinary Shares net of offering costs of $4.8 million                                            |       | 156,795                        |       | 5,343                                                                            |       | 580,358 |   |
| Proceeds from  issuance of convertible notes                                                                                |       | —                         |       | —                                                                           |       | 339,987 |   |
| Payment of debt  issuance costs                                                                                             |       | (209                           | )          | (3,375                                                                           | )          | (24,530 | ) |
| Payments of  notes payable and long term debt                                                                               |       | (1,204                         | )          | —                                                                           |       | (4,480 | ) |
| Borrowings under  project finance facility                                                                                  |       | 80,000                         |       | —                                                                           |       | 80,000 |   |
| Proceeds from  exercise of stock options and warrants                                                                       |       | 1,449                          |       | 91                                                                               |       | 13,188 |   |
| Net cash  provided by financing activities                                                                                  |       | 236,831                        |       | 2,059                                                                            |       | 984,523 |   |
| Net increase (decrease)  in cash and cash equivalents                                                                       |       | 7,043                          |       | (9,698                                                                           | )          | 11,851 |   |
| Cash and cash  equivalents - beginning of period                                                                            |       | 4,808                          |       | 27,740                                                                           |       | — |   |
| Cash and cash equivalents - end of period                                                                                   |       | $                              | 11,851     |                                                                             | $          | 18,042 |   | $ | 11,851 |   |

 

See Note 13 forsupplemental cash flow information.

The accompanying notes form an integral part of theseconsolidated financial statements.

 

5

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**APEX SILVER MINES LIMITEDAn Exploration and Development Stage Company**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Expressed in United States dollars)**

**1.****               Basis ofPreparation of Financial Statements**

These unaudited interim consolidated financial statementsof Apex Silver Mines Limited (the “Company”) and its subsidiaries have beenprepared in accordance with the rules and regulations of the Securities andExchange Commission (“SEC”).  Such rulesand regulations allow the omission of certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles in the United States of America,so long as such omissions do not render the financial statements misleading.  Certain prior period amounts have beenreclassified to conform to the current period presentation.

In the opinion of management, these financialstatements reflect all adjustments that are necessary for a fair statement ofthe results for the periods presented.  Alladjustments were of a normal recurring nature. These interim financial statements should be read in conjunction withthe annual financial statements of the Company included in its 2005 AnnualReport on Form 10-K.

**2.****              SignificantAccounting Policies**

Effective January1, 2006 the Company adopted Financial Accounting Standards No. 123R, “Share-BasedPayment” (“FAS No. 123R”), using the modified prospective approach, whichrevised Statement of Financial Accounting Standards No. 123,  “Accounting for Stock-Based Compensation” (“FASNo. 123”), and superseded Accounting Principles Board (“APB”) Opinion 25, “Accountingfor Stock Issued to Employees” and its related implementation guidance. TheCompany is currently evaluating whether it will adopt the short-cut method forcalculating the pool of windfall tax benefits as allowed by FinancialAccounting Standards Board (“FASB”) Statement of Position FAS No. 123R-3. TheCompany had previously adopted FAS No. 123 effective January 1, 2004. FAS No.123R requires measurement and recording in the financial statements of thecosts of employee services received in exchange for an award of equityinstruments based on the grant-date fair value of the award, recognized overthe period during which an employee is required to provide services in exchangefor the award.  Additionally, FAS No.123R requires companies that did not previously include the effects ofestimated forfeitures in the FAS No. 123 expenses they reported, to record acumulative adjustment to the income statements presented in the period ofadoption of FAS No. 123R in order to reflect the effect of the estimatedforfeitures.  The forfeiture rate used bythe Company prior and subsequent to the adoption of FAS No. 123R has notchanged and, therefore, the Company did not record a cumulative effectadjustment related to prior period estimated forfeitures. The adoption of FASNo. 123R did not have a material impact on the Company’s financial position orresults of operations and is not expected to have a material impact in thefuture (see Note 10).

During March 2005,a committee of the Emerging Issues Task Force (“EITF”) reached a consensus(EITF Issue No. 04-6) that stripping costs incurred during the production phaseof a mine are variable production costs that should be included in the costs ofinventory produced during the period that the stripping costs areincurred.  The FASB ratified the EITFconsensus.  The EITF consensus iseffective for the first reporting period in fiscal years beginning afterDecember 15, 2005.  In January 2006, theEITF issued additional guidance defining the commencement of production as theperiod when saleable minerals are first extracted in greater than *de minimis* amounts. During the first quarter 2006, the Company began mining significantamounts of oxide ore reserves at its San Cristobal project, which have beenplaced in stockpiles for future processing. The quantity and value of the minerals mined were sufficient to declarethe start of ore production according to the EITF consensus.  The Company has included the costs associatedwith the oxide ore production as ore inventories on its financialstatements.  The Company expects themining and stockpiling of significant amounts of oxide ore to continuethroughout the year, with the commencement of sulfide ore mining andstockpiling in the third quarter of the year.

TheCompany records costs related to production activities as inventory held forsale in the ordinary course of business or work in process for such sale.  Work-in-process inventories include oreproduced and 

6

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stockpiled forwhich further processing is necessary before a product is ready for sale.  The Company uses the average cost method toassign costs to the units of ore stockpiled during the period.  Inventories are carried at the lower of costor the current net realizable value.  Ifcosts held in inventory exceed their net realizable value, the excess cost isrecognized as a loss in the current period. Net realizable value reflects the gross realizable value (“estimatedselling price”) reduced by estimated costs of completion and disposal as of thebalance sheet date.  Gross realizablevalue reflects the anticipated average realization that the inventory willgenerate when it is sold.

*NewAccounting Standards*

In March 2006 theEITF reached a tentative consensus (EITF Issue No. 05-1) that the issuance ofequity securities to settle an instrument that becomes convertible upon theissuer’s exercise of a call option should be accounted for as a conversion (asopposed to an extinguishment) if, at issuance, the debt instrument contains asubstantive conversion feature other than the issuer’s call option.  The EITF concluded that if an instrument isdeemed convertible at issuance, then a subsequent conversion of the instrumentis in accordance with a “conversion privilege that existed at issuance” and is,therefore, outside the scope of APB Opinion No. 26, “Early Extinguishment ofDebt.”  Therefore, the issuance of sharesto settle the debt pursuant to the original terms of the instrument should beafforded conversion treatment.  If theinstrument does not contain a substantive conversion feature at issuance, theissuance of equity securities to settle the instrument should be recognized as adebt extinguishment.  EITF Issue No. 05-1became effective for interim or annual reporting periods beginning after June28, 2006, following its ratification during June 2006. The Company previouslyaccounted for two transactions involving the buy-back of its convertible debtas an extinguishment under APB Opinion No. 26. Ratification of EITF Issue No. 05-1 will require similar futuretransactions to be accounted for as conversions.

FinancialAccounting Standards No. 154, “Accounting Changes and Error Corrections — areplacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS No. 154”) iseffective for years beginning after December 15, 2005.   FAS No. 154 changes the requirements for theaccounting and reporting of a change in accounting principle.  The statement applies to voluntary changes aswell as changes required by accounting pronouncements which do not otherwiseprovide specific transition provisions, requiring retrospective application toprior period’s financial statements where practical.  FAS No. 154 did not have a material impact onthe Company’s financial position or results of operations for the period and isnot expected to have a material impact in the future.

In June 2006, theFASB issued Financial Accounting Standards Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FinancialAccounting Standards Statement No. 109, “Accounting for Income Taxes.” FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. The Interpretation requires that the Company recognizein the financial statements, the impact of a tax position, if that position ismore likely than not of being sustained on audit, based on the technical meritsof the position. FIN 48 also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods anddisclosure. The provisions of FIN 48 are effective beginning January 1, 2007with the cumulative effect of the change in accounting principle recorded as anadjustment to the opening balance of retained earnings. The Company iscurrently evaluating the impact of adopting FIN 48 but does not believe it willhave a material impact on its financial position or results of operations.

*Correction of an Error Related tothe Valuation of Open Derivative positions*

Pursuant to therequirements of the lenders of its $225 million project finance facility, theCompany was required to provide price protection for a portion of its plannedproduction from the San Cristobal project. In the third quarter 2005, theCompany entered into silver, zinc and lead derivative positions utilizingprimarily forward sales, but also puts and calls, to comply with thisrequirement. As discussed above, the Company records its open derivativepositions at their estimated fair value on its balance sheet and records thechange in estimated fair value in earnings at the end of each reporting period.

The Company’sderivative positions mature or expire on various dates over an approximatesix-year period commencing in July 2007. Many of the derivative positionsmature or expire beyond the periods covered by the major commodity priceindices such as LME or COMEX, or expire in future periods covered by thoseindices with respect to which only limited trading activity has occurred. Ininstances where only limited market activity exists, the Company hadhistorically used price projections to estimate a forward price curve providedby an independent third party employing statistical analysis and models toestimate the fair value of its open derivative positions. The models used bythe independent third party relied on commodity price indices out to threemonths and mean reversion statistical estimates beyond the three-month period.Recently, the Company reassessed the market information reflected in thecommodities prices indices out to twenty-seven months and quoted prices fromthe counterparties holding our derivative positions and concluded that theadditional market information is a more reliable indicator of fair value thanthe independent third party price projections previously used. Accordingly, theCompany concluded the derivative liability related to its open derivativepositions was understated at June 30, 2006 by $226.0 million ($4.15 per share)and December 31, 2005 by $95.1 million ($1.96 per share).

7

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The followingtable summarizes the impact of the restatement on the historical balancesreported on the Company’s consolidated balance sheets for the periods endedJune 30, 2006:
|                                  | ** ** | **June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| Derivatives at  fair value       |       |                        |       |
|  As previously  reported    |       | $                           | 130,265    |   |
|  Adjustment                 |       | 226,004                     |       |
|  As restated                |       | 356,269                     |       |
| Total  liabilities               |       |                        |       |
|  As previously  reported    |       | $                           | 593,356    |   |
|  Adjustment                 |       | 226,004                     |       |
|  As restated                |       | 819,360                     |       |
| Accumulated  deficit             |       |                        |       |
|  As previously  reported    |       | $                           | (288,704   | ) |
|  Adjustment                 |       | (226,004                    | )          |
|  As restated                |       | (514,708                    | )          |
| Total  shareholders’ equity |       |                        |       |
|  As previously  reported    |       | $                           | 377,278    |   |
|  Adjustment                 |       | (226,004                    | )          |
|  As restated                |       | 151,274                     |       |

 

8

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The following table summarizes the impact of therestatement on the historical amounts reported on the Company’s consolidatedstatement of operations for the three and six months ended June 30, 2006 andthe inception to date period through June 30, 2006:
| ** **                                      | ** ** | ** **                                                                     | ** ** | ** **                | ** ** | **For the Period from** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | ** **                                                                     | ** ** | ** **                | ** ** | **December 22, 1994**        | ** ** |
| ** **                                      | ** ** | **For the Three**                                                    | ** ** | **For the Six** | ** ** | **(Inception)**                        | ** ** |
| ** **                                      | ** ** | **Months Ended**                                                          | ** ** | **Months Ended**     | ** ** | **Through June 30,**         | ** ** |
| ** **                                      | ** ** | **June 30, 2006**                                                    | ** ** | **2006**                  | ** ** |
| ** **                                      | ** ** | **(amounts in thousands except per share data)** | ** ** |
| Losses on  commodity derivatives                |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (61,076    | )                         | $          | (120,055                               | )          | $ | (175,505 | ) |
|  Adjustment                                |       | (17,067                                                                        | )          | (130,906                  | )          | (226,004                               | )          |
|  As restated                               |       | (78,143                                                                        | )          | (250,961                  | )          | (401,509                               | )          |
| Total operating  expenses                       |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (68,391    | )                         | $          | (134,163                               | )          | $ | (333,570 | ) |
|  Adjustment                                |       | (17,067                                                                        | )          | (130,906                  | )          | (226,004                               | )          |
|  As restated                               |       | (85,458                                                                        | )          | (265,069                  | )          | (559,574                               | )          |
| Loss before  minority interest and income taxes |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (63,382    | )                         | $          | (123,894                               | )          | $ | (292,786 | ) |
|  Adjustment                                |       | (17,067                                                                        | )          | (130,906                  | )          | (226,004                               | )          |
|  As restated                               |       | (80,449                                                                        | )          | (254,800                  | )          | (518,790                               | )          |
| Net Loss                                        |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (63,435    | )                         | $          | (124,008                               | )          | $ | (288,704 | ) |
|  Adjustment                                |       | (17,067                                                                        | )          | (130,906                  | )          | (226,004                               | )          |
|  As restated                               |       | (80,502                                                                        | )          | (254,914                  | )          | (514,708                               | )          |
| Comprehensive Loss                              |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (63,358    | )                         | $          | (123,046                               | )          | $ | (287,985 | ) |
|  Adjustment                                |       | (17,067                                                                        | )          | (130,906                  | )          | (226,004                               | )          |
|  As restated                               |       | (80,425                                                                        | )          | (253,952                  | )          | (513,989                               | )          |
| Net Loss per  Ordinary                          |       |                                                                           |       |                      |       |                                   |       |
| Share - basic and diluted                       |       |                                                                           |       |                      |       |                                   |       |
|  As previously  reported                   |       | $                                                                              | (1.10      | )                         | $          | (2.28                                  | )          |   |   |
|  Adjustment                                |       | (0.30                                                                          | )          | (2.40                     | )          |                                   |       |
|  As restated                               |       | (1.40                                                                          | )          | (4.68                     | )          |                                   |       |

** **

The restatementshad no impact on the Company’s cash or investment balances or cash flows.

**3.****              Investments**

The Companyconsiders all highly liquid investments with a maturity of three months or lesswhen purchased to be cash equivalents. Short-term investments include investments with maturities greater thanthree months, but not exceeding twelve months. Long-term investments include investments with maturities greater thantwelve months.

9

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The Companydetermines the appropriate classification of its investments in debt and equitysecurities at the time of purchase and re-evaluates classifications at eachbalance sheet date. Debt securities are classified as held to maturity when theCompany has the intent and ability to hold the securities to maturity.  Held to maturity debt securities are statedat amortized cost and include government agency and corporate obligations.  Available for sale investments are marked tomarket at each reporting period with changes in value recorded as a componentof other comprehensive income. If declines in value are deemed other thantemporary, a charge is made to net loss for the period.

The Companygenerally records its investments as short term or long term based on theunderlying maturity date of the investments held.  However, in certain instances the Company hasbeen required to place investment funds in escrow where the restrictions on theuse of such funds expire beyond the maturity dates of the underlyinginvestments.  In this instance, where theexpiration date of the restriction is greater than one year, the Companyclassifies the investment as long term. At June 30, 2006, as required by the project financing facility, theCompany placed $71.1 million of investments in escrow to fund possible overrunsof the San Cristobal Project.  Theunderlying investments in this escrow account have maturity dates of less thantwelve months, however, because the escrow account will not be released untilafter completion of the San Cristobal project, the Company classified theseinvestments as long term. (See Note 11 for additional discussion of restrictedinvestments)

The Companyinvests only in government and corporate securities rated “investment grade” orbetter. The following tables, based on quoted market prices, summarizes theCompany’s investments at June 30, 2006 and December 31, 2005:
| **June 30, 2006** | ** ** | **Cost**                | ** ** | **Market** | ** ** | **Balance** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------|------------|-------------|------------|
| ** **                  | ** ** | **(in Thousands)** | ** ** |
| Short-term  investments     |       |                    |       |       |       |        |       |
| Available for sale          |       |                    |       |       |       |        |       |
| Auction rate securities     |       | $                       | 111,500    |       | $          | 111,500     |       | $ | 111,500 |   |
| Common stock                |       | 946                     |       | 1,665      |       | 1,665       |       |
| Total short term            |       | $                       | 112,446    |       | $          | 113,165     |       | $ | 113,165 |   |
| Restricted  Investments:    |       |                    |       |       |       |        |       |
| Short-term                  |       |                    |       |       |       |        |       |
| Available for sale          |       |                    |       |       |       |        |       |
| Auction rate securities     |       | $                       | 115,880    |       | $          | 115,880     |       | $ | 115,880 |   |
| Total available for sale    |       | 115,880                 |       | 115,880    |       | 115,880     |       |
| Held to maturity            |       |                    |       |       |       |        |       |
| Corporate notes             |       | 2,242                   |       | 2,239      |       | 2,242       |       |
| Government bonds            |       | 25,939                  |       | 25,822     |       | 25,939      |       |
| Total held to maturity      |       | 28,181                  |       | 28,061     |       | 28,181      |       |
| Total short term            |       | $                       | 144,061    |       | $          | 143,941     |       | $ | 144,061 |   |
| Long-term                   |       |                    |       |       |       |        |       |
| Available for sale          |       |                    |       |       |       |        |       |
| Auction rate securities     |       | $                       | 23,400     |       | $          | 23,400      |       | $ | 23,400 |   |
| Total available for sale    |       | 23,400                  |       | 23,400     |       | 23,400      |       |
| Held to maturity            |       |                    |       |       |       |        |       |
| Corporate notes             |       | 3,559                   |       | 3,550      |       | 3,559       |       |
| Government bonds            |       | 50,299                  |       | 49,974     |       | 50,299      |       |
| Total held to maturity      |       | 53,858                  |       | 53,524     |       | 53,858      |       |
| Total long term             |       | $                       | 77,258     |       | $          | 76,924      |       | $ | 77,258 |   |

 

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| **December 31, 2005** | ** ** | **Cost**                | ** ** | **Market** | ** ** | **Balance** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------|------------|-------------|------------|
| ** **                      | ** ** | **(in Thousands)** | ** ** |
| Short-term  investments         |       |                    |       |       |       |        |       |
| Available for sale              |       |                    |       |       |       |        |       |
| Common stock                    |       | $                       | 434        |       | $          | 686         |       | $ | 686 |   |
| Bond funds                      |       | 3,381                   |       | 2,885      |       | 2,885       |       |
| Auction rate securities         |       | 127,426                 |       | 127,426    |       | 127,426     |       |
| Total available for sale        |       | 131,241                 |       | 130,997    |       | 130,997     |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Corporate notes                 |       | 1,003                   |       | 998        |       | 1,003       |       |
| Total held to maturity          |       | 1,003                   |       | 998        |       | 1,003       |       |
| Total short term                |       | $                       | 132,244    |       | $          | 131,995     |       | $ | 132,000 |   |
| Restricted  Investments:        |       |                    |       |       |       |        |       |
| Short-term                      |       |                    |       |       |       |        |       |
| Available for sale              |       |                    |       |       |       |        |       |
| Auction rate securities         |       | $                       | 14,950     |       | $          | 14,950      |       | $ | 14,950 |   |
| Total available for sale        |       | 14,950                  |       | 14,950     |       | 14,950      |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Corporate notes                 |       | 2,003                   |       | 2,004      |       | 2,003       |       |
| Government bonds                |       | 50,538                  |       | 50,191     |       | 50,538      |       |
| Total held to maturity          |       | 52,541                  |       | 52,195     |       | 52,541      |       |
| Total short term                |       | $                       | 67,491     |       | $          | 67,145      |       | $ | 67,491 |   |
| Long-term                       |       |                    |       |       |       |        |       |
| Held to maturity                |       |                    |       |       |       |        |       |
| Government bonds                |       | $                       | 12,392     |       | $          | 12,173      |       | $ | 12,392 |   |

 

To fulfill therequirements of the San Cristobal project finance facility the Companyliquidated prior to their maturity dates approximately $34.0 million ofinvestments in the fourth quarter of 2005 and $12.0 million of investments inthe first quarter of 2006, which were previously recorded as held-to-maturity(“HTM”) securities.  The Companyrecognized a $0.2 million and $0.1 million loss on the liquidation for thefourth quarter of 2005 and first quarter of 2006, respectively.  The liquidation was necessitated by the termsof the project finance facility which required the Company to transfer substantiallyall of its cash and/or investments to collateral accounts to restrict fundsnecessary to complete the San Cristobal project.  Certain covenants related to the projectfinance facility restricted the maturity dates of investments held in thecollateral accounts to less than one year. A portion of the Company’s HTMportfolio had maturity dates slightly beyond the one year limitation. As aresult, prior to transferring the securities to the project finance collateralaccounts, those HTM securities with maturities greater than one year wereliquidated and reinvested in instruments with maturities less than one year.  During the full year 2005 and for the sixmonth period ended June 30, 2006 the Company recorded as an investing cashinflow an additional $126.3 million and $19.8 million respectively related toHTM securities that matured on their maturity dates.  The Company believes the project financingrequirements which caused the Company to liquidate a portion of its HTMinvestments prior to their maturity dates represent an isolated, unanticipatedevent that does not change the Company’s ability or intent to hold itsremaining HTM investments until their maturity dates.

11

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**4.   Prepaid expenses and other assets**

Prepaid expensesand other assets consist of the following:

|                                           | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Prepaid insurance                         |       | $                       | 538        |                        | $          | 824 |   |
| Prepaid bank  fees                        |       | 146                     |       | -                           |       |
| Accrued interest  receivable              |       | 1,652                   |       | 758                         |       |
| Prepaid  consulting & contractor fees |       | 7,953                   |       | 3,874                       |       |
| Receivables,  travel advances and other   |       | 419                     |       | 118                         |       |
| Withholding  taxes receivable             |       | 440                     |       | 250                         |       |
|                                      |       | $                       | 11,148     |                        | $          | 5,824 |   |

 

The prepaidconsulting and contractor fees consist primarily of advance payments made tocontractors for work being performed for the San Cristobal Project.

**5.   Value Added Tax Recoverable**

The Company hasrecorded value added tax (“VAT”) paid in Bolivia as a recoverable asset.  Current Bolivian tax law states that VAT paidprior to production is recoverable as a credit against Bolivian taxes arisingfrom production, including income tax. The VAT paid in Bolivia is expected tobe recovered through production from the proven and probable reserves at theSan Cristobal Project that the Company is developing.  Future changes to Bolivian tax law shouldthey occur, could have an adverse effect on the Company’s ability to recoverthese taxes.  At June 30, 2006 andDecember 31, 2005 the recoverable VAT recorded for Bolivia is $34.9 million and$20.1 million, respectively.

In addition, theCompany incurred VAT related to various exploration activities outside of theSan Cristobal project in Bolivia and other countries. Because of theuncertainty of the recoverability of these taxes they are charged to expense asincurred.

**6.   Property, Plant and Equipment**

The components of property, plant and equipment were as follows:

|                                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
| Mineral  properties             |       | $                       | 117,072    |                        | $          | 117,103 |   |
| Construction in  progress       |       | 351,995                 |       | 232,288                     |       |
| Buildings                       |       | 10,667                  |       | 8,423                       |       |
| Mining equipment  and machinery |       | 12,595                  |       | 10,127                      |       |
| Equipment under  capital lease  |       | 18,824                  |       | 14,928                      |       |
| Other furniture  and equipment  |       | 2,910                   |       | 1,966                       |       |
|                            |       | 514,063                 |       | 384,835                     |       |
| Less:  Accumulated depreciation |       | (8,322                  | )          | (5,697                      | )          |
|                            |       | $                       | 505,741    |                        | $          | 379,138 |   |

 

For the six monthperiods ended June 30, 2006 and 2005 the Company recorded depreciation expenseof $196,000 and $33,000, respectively. Also, for the six month periods ended June 30, 2006 and 2005 the Companycapitalized depreciation associated with the San Cristobal Project in theamounts of $2.4 million and $0.6 million respectively.

12

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The June 30, 2006and December 31, 2005 construction in progress balances include $20.3 and $9.4million of capitalized interest respectively.

**7.   Debt**

The Company’s debtconsists of the following:

|                                                        | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **Current**                 | ** ** | **Long term**              | ** ** | **Current** | ** ** | **Long term** | ** ** |
| ** **                                             | ** ** | **(in thousands)**     | ** ** |
| 2.875%  Convertible Senior Subordinated Notes due 2024 |       | $                           | —     |                            | $          | 180,000 |   | $ | — |   | $ | 180,000 |   |
| 4.0% Convertible  Senior Subordinated Notes due 2024   |       | —                      |       | 109,987                         |       | — |   | 129,987 |   |
| Project finance  facility                              |       | —                      |       | 80,000                          |       |   |   |   |   |
| Capital lease  obligations                             |       | 2,708                       |       | 12,288                          |       | 2,270 |   | 10,034 |   |
|                                                   |       | $                           | 2,708      |                            | $          | 382,275 |   | $ | 2,270 |   | $ | 320,021 |   |

 

In December 2005the Company closed on a $225 million project finance facility, arranged by BNPParibas and Barclays Capital, and funded by a group of international financialinstitutions including banks, export credit agencies and the Andean DevelopmentCorporation, a multilateral financial agency that promotes sustainabledevelopment in South America.  Borrowingsfrom the facility are being used to complete the development of the Company’sSan Cristobal Project. During the six months ended June 30, 2006 the Companyborrowed $80.0 million under the facility. The Company is required to pay a1.0% annual commitment fee on the undrawn amount of the facility.  Interest on the outstanding amounts drawnunder the facility is based on LIBOR plus a credit spread.  Covenants related to the facility require theCompany to maintain certain security interests, financial ratios, insurancecoverage, minimum sales contracts and metal price protection contracts as wellas other requirements.

During the sixmonths ended June 30, 2006 the Company placed in service $3.9 million ofadditional mining equipment to be used in stripping and future mine production,and recorded the transaction as a capital lease, resulting in total capitallease obligations of $15.0 million. During the six months ended June 30, 2006the Company made payments of $1.4 million related to capital lease obligationsand will be required to make additional payments of $1.4 million for theremainder of 2006, $2.7 million during each of 2007 and 2008, $2.1 millionduring 2009, $1.4 million during 2010 and $4.7 million thereafter.

During the sixmonths ended June 30, 2006 the Company issued approximately 1.1 millionOrdinary Shares valued at $17.1 million and $0.3 million of cash for unpaidinterest to complete the purchase of $20.0 million principal amount of theCompany’s 4.0% Convertible Senior Subordinated Notes due 2024 in a privatelynegotiated exchange transaction. The transaction resulted in the recognition ofa $2.9 million gain on extinguishment of debt. The Company canceled the notes purchased in the transaction.

Pursuant to theagreement related to the 4% Notes and certain provisions of the project financefacility, the Company is required to maintain restricted investments to coverthe payment of interest on the Notes through 2007.  The amount invested will at maturity equalthe interest payments due.  As of June30, 2006, $16.1 million of restricted investments were designated for thispurpose, including $9.8 million in investments classified as current and $6.3million in investments classified as long-term.

**8.   SalesContracts and Derivative Instruments**

Certain covenantsrelated to the project finance facility required the Company to provide priceprotection for a portion of its planned production of metals from SanCristobal.  During the third quarter2005, the Company entered into positions utilizing primarily forward sales, butalso puts and calls, to comply with the project finance facility covenants. Inorder to maintain leverage to silver market prices, the Company entered intoproportionally more zinc and lead positions than silver positions. Non-cashmark-to-market gains and losses from these outstanding metal derivativepositions may fluctuate substantially from period to period based on spot andforward prices and option volatilities.

13

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In addition, theCompany made limited investments in shorter duration put and call options andother metals derivatives not required by the project financing facility. Duringthe second quarter of 2006, the Company made $29.1 million of net cash paymentsto settle the majority of these discretionary derivative contracts. Theremaining liability for these discretionary derivative positions on amark-to-market basis as of June 30, 2006 was $13.8 million. Subsequent to June30, 2006 the Company has taken steps to cap a significant portion of the exposureon the remaining discretionary derivatives by purchasing offsetting positions.

The Company marksits open derivative positions to estimated fair value at the end of eachaccounting period with the related change in estimated fair value recorded toearnings. For the quarter and year to date periods ended June 30, 2006 theCompany recorded non-cash mark to market losses of $49.0 million and$221.9 million and realized losses of $29.1 million and $29.1 million comparedto a $2.4 million and $2.1 million non-cash mark to market gain andrealized gains or losses of $nil and $nil for the quarter and year to dateperiods ended June 30, 2005 and a non-cash mark-to-marketgain of $0.8 million and realized gains or losses of $nil recorded for the yearended December 31, 2004. The 2006 and 2005 losses are the result of continuinghigh spot and forward prices for silver, zinc and lead. The actual financialimpact of the required project financing facility derivative positions will notbe known until the positions are closed on their future settlement dates. TheCompany does not intend to settle the open derivatives position contractsrelating to the project financing facility prior to their settlement dateswhich begin during the second half of 2007. At the time of final settlement,the gain or loss recorded will exclude previously recognized non-cashmark-to-market gains or losses.

The followingtable sets forth the Company’s open derivative positions at June 30, 2006.  The contracts with open maturity dates ofless than one year represent the discretionary derivatives while those withmaturities greater than one year are all related to the requirements of the projectfinancing and will be settled for cash based on monthly average prices for eachmetal in the period indicated.
| ** **                        | ** ** | **Current Maturity Date** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **Year 1**                     | ** ** | **Years 2 and 3** | ** ** | **Years 3 and 4** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| **Forward Contracts**             | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | —                              |       | 230 |   | 185 |   | 200 |   | 615 |   |
| Average price (per ounce)         |       | $                                   | —     |   | $ | 7.27 |   | $ | 7.21 |   | $ | 7.13 |   | $ | 7.21 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                 |       | —                              |       | 370,757 |   | 365,357 |   | 39,683 |   | 775,797 |   |
| Average price (per pound)         |       | $                                   | —     |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.48 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                 |       | —                              |       | 226,850 |   | 96,120 |   | — |   | 322,970 |   |
| Average price (per pound)         |       | $                                   | —     |   | $ | 0.30 |   | $ | 0.29 |   | $ | — |   | $ | 0.30 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Put Option Contracts Owned**    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | —                              |       | 1,150 |   | 2,790 |   | 5,160 |   | 9,100 |   |
| Average price (per ounce)         |       | $                                   | —     |   | $ | 5.43 |   | $ | 5.71 |   | $ | 5.89 |   | $ | 5.78 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                 |       | 24,251                              |       | — |   | — |   | — |   | 24,251 |   |
| Average price (per pound)         |       | $                                   | 0.57       |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.57 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| **Call Option Contracts Written** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)               |       | 1,285                               |       | 4,700 |   | 4,590 |   | 510 |   | 11,085 |   |
| Average price (per ounce)         |       | $                                   | 15.24      |   | $ | 8.38 |   | $ | 8.16 |   | $ | 9.21 |   | $ | 9.12 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                 |       | 17,086                              |       | 10,472 |   | 3,307 |   | — |   | 30,864 |   |
| Average price (per pound)         |       | $                                   | 0.88       |   | $ | 0.57 |   | $ | 0.57 |   | $ | — |   | $ | 0.74 |   |
|                              |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                 |       | 4,409                               |       | 20,944 |   | 6,614 |   | — |   | 31,967 |   |
| Average price (per pound)         |       | $                                   | 0.70       |   | $ | 0.39 |   | $ | 0.39 |   | $ | — |   | $ | 0.43 |   |

 

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The following table sets forth the fair value of theCompany’s open derivative positions based on indices such as the LME and COMEXand valuations from counterparties holding the Company’s derivative positionsat June 30, 2006 and December 31, 2005 and the change for the six months endedJune 30, 2006.
| ** **            | ** ** | **Amount To Be Realized In** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| **Period Ended** | ** ** | **Less Than  1 Year**                  | ** ** | **2 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **(in thousands)**                          | ** ** |
| 12/31/2005            |       | $                                                | 5,652      |   | $ | 62,268 |   | $ | 77,584 |   | $ | 5,867 |   | $ | 151,371 |   |
| 6/30/2006  Restated   |       | $                                                | 13,845     |   | $ | 229,922 |   | $ | 122,113 |   | $ | 4,235 |   | $ | 370,114 |   |
| 2006 Change           |       | $                                                | 8,193      |   | $ | 167,654 |   | $ | 44,529 |   | $ | (1,632 | ) | $ | 218,743 |   |

 

During 2005, the Company recognized a $0.9 millionmark-to-market loss on a foreign currency collar transaction utilizing puts andcalls that were put in place during 2004 to hedge currency fluctuations relatedto payments required on certain long-lead equipment purchased for the SanCristobal project that was denominated in Euros. The transaction resulted in arealized gain of $0.5 million during the two years it was in place. No suchgains or losses were recognized during the six months ended June 30, 2006 and theCompany did not have any foreign currency derivative positions.

The Company’s 2.875% and 4.0% Convertible SeniorSubordinated Notes Due 2024 have several embedded derivatives that have beendetermined to have no value.

*Credit Risk and Risks Relating tothe Use of Derivatives*

Credit risk is the risk that a third party might failto fulfill its performance obligations under the terms of a financialinstrument. For derivatives, when the fair value of a derivative is negative,as in the Company’s case at June 30, 2006, we assume no credit risk. However,should the Company’s derivative positions become positive, the Company wouldbecome exposed to credit risk. All of the Company’s derivative positions atJune 30, 2006 are required by the project finance facility and per the terms ofthe facility are concentrated with two counterparties. The two counterpartiesare of high credit-quality and the Company monitors their financialcondition at regular intervals. Under the terms of the derivative agreements,the counterparties cannot require the Company to immediately settle outstandingderivatives, except upon the occurrence of customary events of default such ascovenant breaches, including financial covenants, insolvency or bankruptcy.

**9.   Asset Retirement Obligations**

The Company has developed an asset retirement plan forits San Cristobal Project which is currently under construction and is expectedto begin producing in the third quarter of 2007. The plan includes estimatedreclamation, remediation and closure requirements based on Bolivian governmentrequirements, World Bank financing requirements and the Company’spolicies.  Beginning in the third quarter2005 the Company has been conducting activities at its San Cristobal Propertyincluding earthworks and plant construction that fall within the scope of theasset retirement plan and as such will require future reclamation and closureexpenditures.

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Per the guidance of Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations” (“FAS No. 143”),the fair value of the asset retirement obligation (“ARO”) associated with theSan Cristobal Project is calculated by first estimating the cash flows requiredto settle an estimated $26.7 million ARO obligation in future periods using aninflation rate of 1.6 percent and then discounting the future cash flows usingthe Company’s credit-adjusted risk-free rate of 9.8 percent.

The following table reconciles the beginning andending balance for the Company’s asset retirement obligations (in thousands):

| Balance at December 31, 2005    |   | $      | 2,003  |   |
|---------------------------------|--------|--------|--------|--------|
|                            |   |   |   |
| Additions                       |   | 2,791  |   |
| Changes in estimates, and other |   | — |   |
| Liabilities settled             |   | — |   |
| Accretion expense               |   | 142    |   |
|                            |   |   |   |
| Balance at June 30,  2006       |   | $      | 4,936  |   |

 

**10.   Shareholders’ Equity**

The followingtable sets forth the changes in shareholders’ equity during the first sixmonths of 2006:
| ** **                                        | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** **   | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|--------------|------------|------------|
| ** **                                        | ** ** | ** **                                               | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**              | ** **   | **Total**  | ** ** |
| ** **                                        | ** ** | **Common Stock**                                    | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** **   |
| ** **                                        | ** ** | **Shares**                                               | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **income**             | ** **   | **Equity** | ** ** |
| ** **                                        | ** ** | **(in thousands except share data)** | ** ** |
| **Balance,  December 31, 2005**                   | ** ** | **50,444,890**                                           |       | **$**       | **504.4**  |            | **$**      | **486,762**       | ** ** | **$**                  | **(259,794** | **)**      | **$**      | **(243** | **)** | **$** | **227,229** | ** ** |
| Stock to  construct power line ($15.09 per share) |       | 369,033                                                  |       | 3.7         |       | 5,724           |       | —            |       | —                 |         | 5,728      |       |
| Shares issued to  retire debt, ($15.77 per share) |       | 1,086,653                                                |       | 10.9        |       | 17,114          |       | —            |       | —                 |         | 17,125     |       |
| Stock to  consultants ($15.90 per share)          |       | 1,699                                                    |       | —      |       | 27              |       | —            |       | —                 |         | 27         |       |
| Stock  compensation accrued                       |       | —                                                   |       | —      |       | 2,602           |       | —            |       | —                 |         | 2,602      |       |
| Stock options  exercised ($12.92 per share)       |       | 112,125                                                  |       | 1.1         |       | 1,447           |       | —            |       | —                 |         | 1,448      |       |
| Stock granted as  compensation ($19.30 per share) |       | 17,000                                                   |       | 0.2         |       | —          |       | —            |       | —                 |         | —     |       |
| Sale of Ordinary  Shares, net ($23.70 per share)  |       | 6,375,000                                                |       | 63.8        |       | 151,003         |       | —            |       | —                 |         | 151,067    |       |
| Unrealized gain  on marketable equity securities  |       | —                                                   |       | —      |       | —          |       | —            |       | 962                    |         | 962        |       |
| Net loss  Restated                                |       | —                                                   |       | —      |       | —          |       | (254,914          | )          | —                 |         | (254,914   | )          |
| **Balance, June 30, 2006 Restated**               | ** ** | **58,406,400**                                           |       | **$**       | **584.1**  |            | **$**      | **664,679**       | ** ** | **$**                  | **(514,708** | **)**      | **$**      | **719** | ** ** | **$** | **151,274** | ** ** |

 

*Ordinary Share Issuances* —During January 2006, the Company issued 369,033 of its Ordinary Shares, valuedat $5.7 million, as the last of four agreed upon advances to SC TESA for theconstruction of the power line to the San Cristobal project. The Company hadpreviously issued 1,134,799 of its Ordinary Shares, valued at $16.6 million,during 2005, as the first three advances to SC TESA. Proceeds in excess ofconstruction costs of approximately $0.1 million received by SC TESA from thesale of the shares will be added to the advances to be repaid to the Companywith interest through credits against charges for future delivery of power.

In January and February 2006 the Company issuedapproximately 1.1 million Ordinary Shares valued at $17.1 million and paid $0.3million for interest to complete the purchase of $20.0 million principal amountof the Company’s 4.0% Convertible Senior Subordinated Notes due 2024 in aprivately negotiated exchange transaction. The Company canceled the notespurchased in the transaction.

During the second quarter of 2006, the Companycompleted the public offering of 6,375,000 of its Ordinary Shares at $24.45 pershare ($23.70 per share net of commissions) registered under its shelfregistration statement.  The Companyintends to use the net proceeds of approximately $151.1 million to 

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continuefurther evaluation, exploration, advancement and expansion of its portfolio ofexploration properties and for other general corporate purposes.

*Stock Option Plans* — TheCompany established a plan to issue share options and other share awards forofficers, employees, consultants and agents of the Company and its subsidiaries(the ‘‘Plan’’). Option awards are granted with an exercise price equal to themarket price of the Company’s stock at the date of grant. Options typicallyvest ratably over periods of up to four years with the first tranche vesting onthe date of grant or the first anniversary of the date of grant. Unexercisedoptions expire typically ten years after the date of grant.  The options and other awards provide foraccelerated vesting if there is a change in control as defined in the Plan.

TheCompany also established a share option plan for its non-employee directors(the “Director Plan”).   Options grantedunder the Director Plan vest on the date of the grant and expire ten yearsafter the date of the grant or three years after the date that a non-employeedirector ceases to be a director of the Company.  Options granted under the Director Plan aretransferable only in limited circumstances.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option-pricing model that uses the assumptions noted in thefollowing table.  Expected volatilitiesare based on historical volatility of the entity’s stock.  The Company uses historical data to estimateoption exercise and employee termination within the Black-Scholes model.  The expected term of options grantedrepresents the period of time that options granted are expected to beoutstanding, based on past experience and future estimates and includes datafrom both the Plan and the Directors Plan. The risk-free rate for periods within the contractual life of the optionis based on the U.S. Treasury yield curve in effect at the time of grant.

Forpurposes of calculating the fair value of options, volatility for the periodspresented is based on the historical volatility of the Company’s OrdinaryShares.  The Company currently does notforesee the payment of dividends in the near term. The fair value for theseoptions was estimated at the date of grant using the Black-Scholesoption-pricing model with the following assumptions:

|                              | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Expected  volatility         |       | 43.8% - 45.3                                      | %          | 42.6% - 43.8 | % |
| Weighted average  volatility |       | 44.9                                              | %          | 43.2 | % |
| Expected  dividend yield     |       | —                                            |       | — |   |
| Expected term  (in years)    |       | 3.03                                              |       | 3.79 |   |
| Risk-free rate               |       | 4.90                                              | %          | 3.69 | % |

 

A summary of theCompany’s stock options at June 30, 2006 and changes during the six months thenended is presented in the following table:

| Options                                    | ** ** | **Number**

**of Shares** | ** ** | **Weighted  Average  Exercise  Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  beginning of period        |       | 2,859,781                      |       | $                                                      | 14.42      |                                                | 6.4 Years  |                            | $          | 4,232,476 |   |
| Granted during  period                     |       | 111,377                        |       | $                                                      | 16.00      |                                                | 9.9 Years  |                            | $          | — |   |
| Forfeited or  expired during period        |       | (47,000                        | )          | $                                                      | 16.64      |                                                |       |                            | $          | (74,730 | ) |
| Exercised during  period                   |       | (112,125                       | )          | $                                                      | 12.92      |                                                |       |                            | $          | 238,826 |   |
| Outstanding at  end of period              |       | 2,812,033                      |       | $                                                      | 14.50      |                                                | 6.0 Years  |                            | $          | 1,546,618 |   |
| Exercisable at  end of period              |       | 1,955,857                      |       | $                                                      | 13.29      |                                                | 4.9 Years  |                            | $          | 3,442,308 |   |
| Expected to vest at the  end of the period |       | 856,176                        |       | $                                                      | 17.28      |                                                | 8.6 Years  |                            | $          | (1,909,272 | ) |

 

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Duringthe six months ended June 30, 2006 and June 30, 2005, the Company grantedequity awards with weighted average grant date fair values of $0.6 million and$0.7 million, respectively; options were exercised with total intrinsic valuesof $1.0 million and $0.1 million, respectively; and the total fair value ofshares vested during the six months was $1.7 million and $0.4 million,respectively.

Asof June 30, 2006, total unrecognized compensation cost related to thenon-vested stock options granted pursuant to the Plan was $2.2 million whichthe Company expects will be recognized over a weighted average period of 1.0year.

Asummary of the status of the Company’s non-vested restricted stock grants atJune 30, 2006 and changes during the six months then ended is presented in thefollowing table:

| Nonvested Shares             | ** ** | **Number  of Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Nonvested at  beginning of period |       | 170,700                    |       | $                                                                               | 18.41      |   |
| Granted during  period            |       | 25,000                     |       | $                                                                               | 13.75      |   |
| Vested during  period             |       | (14,500                    | )          | $                                                                               | 17.70      |   |
| Forfeited during  period          |       | (3,000                     | )          | $                                                                               | 16.03      |   |
| Nonvested at end of  period       |       | 178,200                    |       | $                                                                               | 17.85      |   |

 

Asof June 30, 2006, total unrecognized compensation cost related to thenon-vested restricted shares granted pursuant to the Plan was $2.2million.  The Company expects that thetotal unrecognized cost will be recognized over a weighted-average period of1.3 years.

During2005 the Company granted stock-based performance bonuses under the Plan,related to certain budget targets and completion date targets for the SanCristobal Project.  The following tablesummarizes the stock-based performance bonus plan at June 30, 2006 and changesduring the first six months of 2006:

| Nonvested Shares             | ** ** | **Number  of Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Nonvested at  beginning of period |       | 32,000                     |       | $                                                                               | 15.41      |   |
| Granted during  period            |       | —                     |       | $                                                                               | —     |   |
| Vested during  period             |       | —                     |       | $                                                                               | —     |   |
| Forfeited during  period          |       | (6,000                     | )          | $                                                                               | 16.25      |   |
| Nonvested at end of  period       |       | 26,000                     |       | $                                                                               | 15.21      |   |

 

Asof June 30, 2006, total unrecognized compensation cost related to thenon-vested performance bonuses granted pursuant to the Plan was $0.1million.  The Company expects that thetotal unrecognized cost will be recognized over a weighted-average period of0.9 years.

Totalcompensation costs recognized for all stock-based employee compensation awards,including amounts capitalized, were $2.6 million and $1.2 million for the sixmonths ended June 30, 2006 and 2005, respectively.

**11.   Commitments and Contingencies**

*Letters of Credit* — At June30, 2006, the Company had outstandingirrevocable standby letters of credit related to the San Cristobal Project inthe aggregate amount of $14.1 million. The letters of credit include$11.0 million associated with the rail contract to transport metal concentratesto the port facilities, $2.0 million associated with the constructionmanagement contract and $1.1 million associated with the power lineconstruction.  At June 30, 2006 theCompany had deposited $13.0 million to collateralize certain

 

18

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of the letters of credit and has recorded that amountto restricted cash.  Per the terms of theletters of credit the required amounts may be reduced from time to time undercertain circumstances.

*Escrow and Other RestrictedAmounts*— At June 30, 2006 the Company placed $12.0million in an account to cover the liability related to its discretionarymetals trading program.  In addition, theCompany placed $4.1 million in an escrow account to provide for certain requirementsrelated to the development of the port facility for the San CristobalProject.  At June 30, 2006 the $16.1million in these two accounts was recorded as restricted cash.

*Project Financing*— Per the terms and conditions of the San Cristobal Project finance facilitythe Company was required to deposit cash and investments in a fund the use ofwhich is restricted to the development of the San Cristobal Project. At June30, 2006 the remaining balance in the account was $142.5 million of which $11.7million was recorded to restricted cash and $130.8 million recorded torestricted investments. In addition, per the terms of the project financefacility the Company placed $71.1 million of investments in an account toprovide over-run funding for the San Cristobal Project if necessary.  At June 30, 2006 the amounts were recorded torestricted investments and will be released upon certain project completionrequirements being met or to fund over-runs should they occur.

*Capital Commitments*— The Company entered into agreements with certain service providers and placedorders for certain long-lead equipment and construction materials for its SanCristobal project resulting in open commitments totaling approximately $99.8million at June 30, 2006.  If the Companyhad cancelled all of these agreements or orders at June 30, 2006, it would haveincurred cancellation fees totaling approximately $19.7 million.

*Taxes*— TheCompany is receiving certain tax and duty benefits on a portion of theequipment it is importing for its San Cristobal Project. The benefits arecontingent upon fulfilling certain expenditure commitments within a specifiedperiod of time and returning certain equipment off shore within a specifiedperiod of time. Failing to comply with these commitments would obligate theCompany to refund all or a portion of the benefits received.

*Other Contingencies*—The Company reported in its 10-K filing for the period ended December 31, 2005that it had concluded an internal investigation regarding impermissiblepayments made to government officials by several senior employees of one of itsSouth American subsidiaries during 2003 and 2004.  The Company reported at that time that theSEC had commenced an investigation with respect to these matters includingpossible violations of the Foreign Corrupt Practices Act. The Company iscooperating fully with the SEC investigation and will cooperate with anyinvestigation by the U. S. Department of Justice.  The Company cannot predict with any certaintyat this time the final outcome of any investigations that may take placeincluding any fines or penalties that may be imposed.

**12.   Foreign Currency**

Gains and losseson foreign currency derivatives and translation consist of the following:

|                                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**          | ** ** | **(in thousands)**        | ** ** |
| Loss on Euro  derivatives                                                              |       | $                                | —     |                           | $          | (248 | ) | $ | — |   | $ | (866 | ) |
| Gain (loss) on  re-measurement of monetary assets denominated in other that US dollars |       | $                                | 123        |                           | $          | (418 | ) | $ | 236 |   | $ | (418 | ) |
| Total                                                                                  |       | $                                | 123        |                           | $          | (666 | ) | $ | 236 |   | $ | (1,284 | ) |

 

The re-measurement ofmonetary assets is related to certain taxes receivable and other accountsdenominated in Bolivia’s local currency.

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The loss on theEuro derivatives during 2005 is related to the marking to market of open Euroderivative positions held by the Company related to certain capital equipmentpurchased for San Cristobal for which the price was denominated in Euros.  The Company held no such derivative positionsduring 2006.

**13.   Supplemental cash flow information**

Thefollowing table sets forth supplemental cash flow information and non-cashtransactions:

|                                                        | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **Restated**                   | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **(in thousands)**        | ** ** |
| **Supplemental  disclosure:**                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest paid                                          |       | $                              | 9,455      |   | $ | 5,208 |   |
|                                                   |       |                           |       |   |   |
| **Supplemental  disclosure of non-cash transactions:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Depreciation expense capitalized                       |       | $                              | 2,351      |   | $ | 636 |   |
| Accrued interest capitalized                           |       | $                              | 3,267      |   | $ | 1,691 |   |
| Stock issued as compensation to consultants            |       | $                              | 27         |   | $ | 180 |   |
| Mark-to-market gain (loss) on derivatives              |       | $                              | 221,910    |   | $ | 2,430 |   |
| Accrued property plant & equipment                 |       | $                              | (18,713    | ) | $ | 34,604 |   |
| Capitalized leases                                     |       | $                              | 3,897      |   | $ | 8,261 |   |
| Stock issued to  purchase debt                         |       | $                              | 17,125     |   | $ | — |   |

 

**14.  Subsequent Events**

DuringJuly 2006 the Company borrowed an additional $20 million against the $225million project finance facility, bringing to $100 million the total borrowingsagainst the facility. The funds are restricted to the development of the SanCristobal Project.

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**Item 2:  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**General**

The followingdiscussion and analysis summarizes the results of operations of Apex SilverMines Limited (“Apex Silver” or “we”) for the three month and six month periodsended June 30, 2006 and changes in our financial condition from December 31,2005.  This discussion should be read inconjunction with the Management’s Discussion and Analysis included in ourAnnual Report on Form 10-K for the period ended December 31, 2005.

Apex Silver is amining exploration and development company that holds a portfolio ofexploration and development properties primarily in South America and CentralAmerica. We currently focus our resources primarily on the development of ourSan Cristobal Project in Bolivia. At present, none of our properties are inproduction and, consequently, we have no current operating income.

**Overview**

During the firstsix months of 2006 we continued to make significant progress on theconstruction of our San Cristobal Project in Bolivia with expenditures ofapproximately $136 million on equipment procurement, plant construction,infrastructure development, engineering and other costs. Significant progresswas made on construction of the primary crusher and the associated conveyorsystem, the installation of mills, concrete work and power line constructionduring the first six months of 2006.  AtJune 30, 2006 the project was estimated to be approximately 70% completed. We anticipatecommencement of production at the project in the third quarter of 2007.

We began miningoxide ores at the San Cristobal Project during the first quarter 2006. At June30, 2006 we had stockpiled approximately 1.6 million tonnes of work-in-processore inventories recorded at a cost of approximately $8.9 million.Work-in-process inventories include ore produced and stockpiled for whichfurther processing is necessary before a product is ready for sale. Finalprocessing of work-in-process ore inventories to a salable product is scheduledto begin during the third quarter of 2007.

During the firstquarter of 2006 we issued approximately 1.1 million Ordinary Shares valued at$17.1 million and paid $0.3 million for interest to complete the purchase of$20.0 million principal amount of our 4.0% Convertible Senior SubordinatedNotes due 2024 in a privately negotiated exchange transaction. The transactionresulted in the recognition of a $2.9 million gain on extinguishment ofdebt.  The Company canceled the notespurchased in the transaction.

During the first quarter of 2006 we initiated borrowing under the $225million San Cristobal project finance facility that we closed during December2005.  At June 30, 2006 we had borrowed$80.0 million under the facility.  DuringJuly 2006 we borrowed an additional $20 million bringing the total borrowingsagainst the facility to $100 million.

During the secondquarter of 2006 we completed the sale of 6,375,000 of our Ordinary Shares at$24.45 per share ($23.70 per share net of commissions). We intend to use thenet proceeds of approximately $151.1 million to continue further evaluation,exploration, advancement and expansion of our portfolio of explorationproperties and for other general corporate purposes.  With this additional available funding we areformulating plans to accelerate the evaluation of our current explorationportfolio and the expansion of new exploration opportunities.

Certain covenantsrelated to the project finance facility required the Company to provide priceprotection for a portion of its planned production of metals from SanCristobal.  During the third quarter2005, the Company entered into contracts utilizing forward sales, puts andcalls to comply with the project finance facility covenants.  In order to maintain leverage to silver marketprices, the Company entered into proportionally more zinc and lead contractsthan silver. In addition, the Company has made limited investments in shorterduration put and call options and other 

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metalsderivatives not required by the project financing. These discretionaryderivative positions typically have settlement dates less than one year andmanagement has the option to settle these positions in cash or roll themforward to a future date. During the second quarter 2006 the Company made $29.1million of net cash payments to settle the majority of these discretionaryderivative contracts not required by the project financing.  The remaining liability for thesediscretionary derivative positions on a mark-to-market basis as of June 30, 2006was $13.8 million. Subsequent to June 30, 2006 the Company has taken steps tocap a significant portion of the exposure on the remaining discretionaryderivatives by purchasing offsetting positions.

The Companycontinues to recognize losses on its total derivative position as a result ofthe continued escalation of spot and forward prices for silver, zinc and lead.During the first six months of 2006 the Company recorded losses of $251.0million. During the same period we made net cash payments of $29.1 million tosettle the majority of our discretionary positions not required by the projectfinancing facility.   While the finalfinancial impact of the required price protection program related to theproject financing will not be known until the positions are closed on theirfuture settlement dates, we do not intend to settle those open positions withcash prior to the settlement dates beginning in 2007.  At the time of final settlement, the gain orloss recorded will exclude previously recognized mark-to-market gains orlosses.  In addition, if the increasedsilver, zinc and lead prices continue into the production phase of the SanCristobal project, the increased revenue from metals sales for which price protectionwas not required would generate a significant benefit to future earnings andcash flows.  During the periods that themetal derivative positions are outstanding, gains and losses may fluctuatesubstantially from period to period in accordance with Statement of FinancialAccounting Standards No. 133, “Accounting for Derivative Instruments andHedging Activities” (“FAS 133”), based on spot prices, forward prices andquoted option volatilities. If current spot prices continue into future periodsthat include the settlement dates of the Company’s open derivative positions,the Company will report further mark-to-market losses in subsequent periods.

At June 30, 2006we have open contractual commitments of approximately $99.8 million related tocontractor agreements and material and equipment orders associated with theconstruction of our San Cristobal Project. During the remainder of the year weexpect to spend approximately $175 million on the above commitments and otherSan Cristobal Project construction and development. In addition, for the remainderof the year we expect to spend approximately $7 million on general corporatecosts and we will be required to make interest payments of approximately $11million on our outstanding debt. Our current plans call for expenditures ofapproximately $6 million on exploration efforts for the remainder of the yearwhich reflects an increase of $3 million over planned expenditures.

Withthe installation of the new government in Bolivia we continue to monitor thepolitical uncertainties that may affect our San Cristobal Project.  Newly elected Bolivian President Evo Moraleswho took office in January 2006 has issued a decree nationalizing the country’shydrocarbon industry.  To date, therehave been no formal proposals by the Bolivian government to nationalize themining industry but it is possible that the government may alter its currentpolicies with respect to the mining industry in the future.

With the advancement ofmining activities and with project construction well underway at San Cristobal,we commenced a review of the development plan. This review is expected to be completed by the end of 2006.  Findings to-date indicate that in the earlyyears of operation, San Cristobal is expected to experience higher annual ratesof production of zinc and lower annual rates of production of silver thanoriginally forecasted.  These findingsare not expected to have a significant effect on the project.

 

**Resultsof Operations — Three Months Ended June 30, 2006**

*Exploration.*  Exploration expense was $1.6 million for thesecond quarter 2006 compared to $1.4 million for the second quarter 2005.  Exploration expense was incurred primarily inBolivia, Peru, Argentina and Mexico with additional expenditures in Argentinaduring the second quarter of 2006.

*Administrative.*  Administrative expense was $5.7 million forthe second quarter 2006, compared to $4.9 million for the second quarter of2005.  The increase in administrativeexpense during 2006 is primarily the result of additional personnel and relatedindirect support costs associated with the advancement of our San CristobalProject and certain legal fees and other costs associated with theinvestigation of a possible violation of the Foreign Corrupt Practices Act aspreviously reported.

*Gainsand Losses - Commodity Derivatives*.  For the second quarter of 2006 we recordedlosses related to our metals derivative positions in the amount of $78.1million compared to a gain of $2.4 million on our derivative positions for thesecond quarter of 2005. During the same period of 2006 we made net cashpayments of $29.1 million to settle the majority of our discretionaryderivative positions not required by the 

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project financing facility. Continuing high spot and forward prices for silver, zinc and leadresulted in the losses for the 2006 period. Our open metals derivative positionfor the second quarter of 2005 was substantially smaller prior to the projectfinancing facility requirements as reflected in the smaller non-cashmark-to-market gain. (See “Overview” for additional discussion of the secondquarter 2006 derivative loss)

*Interestand other income.* Interest and other income was $5.3 millionfor the second quarter of 2006 compared to $3.6 million recorded during thesecond quarter of 2005.  The 2006increase is primarily the result of more interest earned because of higheraverage aggregate cash, cash equivalent and investment balances held during2006 as well as higher interest rates as compared to the same period of 2005.The higher average aggregate cash, cash equivalent and investment balances areprimarily the result of the proceeds from the equity offering completed duringthe quarter.

*Interestexpense and other borrowing costs.*  Interest and other borrowing costs were $0.3million and $1.9 million, net of approximately $6.4 million and $1.4 millioncapitalized, for the second quarter of 2006 and 2005, respectively. Theinterest expense for 2006 is primarily related to the Convertible SeniorSubordinated Notes Due 2024 and the project finance facility while the 2005interest expense is primarily related to the Convertible Senior SubordinatedNotes Due 2024.

*IncomeTaxes*.   For the secondquarter of 2006 we recorded approximately $0.1 million of income tax expenserelated to withholding taxes on certain services we provided to one of ourBolivian subsidiaries.  No such taxeswere incurred during the second quarter of 2005.

**Resultsof Operations — Six Months Ended June 30, 2006**

*Exploration.*  Exploration expense was $3.0 million for thefirst six months of 2006 compared to $2.8 million for the first six months of2005.  Exploration expense was incurredprimarily in Bolivia, Peru, Argentina and Mexico with additional expendituresin Argentina during the first half of 2006.

*Administrative.*  Administrative expense was $11.0 million forthe first six months of 2006, compared to $8.8 million for the first six monthsof 2005.  The increase in administrativeexpense during 2006 is primarily the result of additional personnel and relatedindirect support costs associated with the advancement of our San CristobalProject and certain legal fees and other costs associated with theinvestigation of a possible violation of the Foreign Corrupt Practices Act aspreviously reported.

*Gainsand Losses - Commodity Derivatives*.  For the first six months of 2006 we recordedlosses related to our metals derivative positions in the amount of $251.0million compared to a gain of $2.1 million on our derivative positions for thefirst six months of 2005. During the same period of 2006 we made net cashpayments of $29.1 million to settle the majority of our discretionaryderivative positions not required by the project financing facility. Continuinghigh spot and forward prices for silver, zinc and lead resulted in the lossesfor the 2006 period. Our open metals derivative position for the first half of2005 was substantially smaller prior to the project financing requirements asreflected in the smaller non-cash mark-to-market gain. (See “Overview” foradditional discussion of the first half of 2006 derivative loss)

*Interestand other income.*  Interestand other income was $8.2 million for the first six months of 2006 compared to$7.0 million recorded during the first six months of 2005.  The 2006 increase is primarily the result ofmore interest earned because of higher average aggregate cash, cash equivalentand investment balances held during 2006 as well as higher interest rates ascompared to the same period of 2005. The higher average aggregate cash, cashequivalent and investment balances are primarily the result of the proceedsfrom the equity offering completed during the second quarter of 2006.  Interest and other income for the 2006 periodincludes a $0.4 million loss on certain held to maturity investments that wereliquidated prior to their maturity dates as a requirement of the projectfinancing facility.

*Interestexpense and other borrowing costs.*  Interest and other borrowing costs were $0.8and $3.9 million, net of approximately $11.0 and $2.5 million capitalized, forthe first six months of 2006 and 2005, respectively. The 2006 interest expenseincludes a $0.5 million write off of deferred issuance costs related to theextinguishment of debt. The interest expense for 2006 is primarily related tothe Convertible Senior Subordinated Notes Due 2024 and the project financefacility while the 2005 interest expense is primarily related to theConvertible Senior Subordinated Notes Due 2024.

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*IncomeTaxes*.  For the firstsix months of 2006 we recorded approximately $0.1 million of income tax expenserelated to withholding taxes on certain services we provided to one of ourBolivian subsidiaries.  No such taxeswere incurred during the first six months of 2005.

**Liquidity and Capital Resources**

At June 30, 2006 our aggregate cash, restricted cash, short and long terminvestments and restricted investments totaled $384.3 million compared to anaggregate of $351.9 million in cash, restricted cash, short and long terminvestments and restricted investments at December 31, 2005.  The amounts held at June 30, 2006 include$11.9 million in cash and cash equivalents, $113.2 million in short terminvestments,  $37.9 million of cash thathas been restricted to collateralize outstanding letters of credit, thediscretionary metals hedge position and certain obligations related to theproject finance facility, and $221.3 million of short and long term investmentsincluding $201.9 million that is restricted to fund development and possibleover runs at our San Cristobal Project and $20.3 million that at maturity willprovide the amounts necessary to pay interest through September 2007 on the4.0% Convertible Senior Subordinated Notes Due 2024.

As of June 30, 2006, we had cash and cash equivalents of $11.9 million,compared to $4.8 million at December 31, 2005. The increase in our cash balance at June 30, 2006 is the result of a netdecrease in restricted cash of $97.2 million, $80.0 million of borrowingsagainst the project finance facility, $5.7 million of net proceeds from thesale of Ordinary Shares to fund the power line construction, $151.1million  of net proceeds from an equityoffering and $1.5 million of proceeds from employee stock options exercised,all partially offset by $135.9 million invested in property, plant andequipment related to the development of the San Cristobal Project, $33.8million used to fund operations, property holding costs and administrativecosts, net of interest and other income, the net purchase of $121.0 million ofinvestments, $32.2 million of net premiums and liquidation payments related toour discretionary derivative positions, $4.1 million paid to suppliers andcontractors related to our San Cristobal Project, $0.2 million paid to thebanks related to the credit facility and payments on long term debt (capital leasepayments) of $1.2 million.

Our estimate forthe total amount of project funding required for the San Cristobal Project fromJanuary 1, 2004 through the beginning of production scheduled for thethird quarter of 2007 is approximately $600 million.  This amount includes all estimated costsrequired to commence production at San Cristobal, including all engineering,procurement and construction costs, as well as estimates for constant-dollarescalation and contingencies.  Theestimate excludes $22 million advanced through the issuance of Ordinary Sharesto the company constructing the power line, $6 million advanced to or escrowedfor the company constructing the port facilities and $27 million of workingcapital.  Advances to the power line andport facility providers are expected to be recouped through credits appliedagainst payments for the contracted services. Including the power line and port advances, we have spent approximately$371 million on the Project through June 30, 2006.  In addition to the amounts above, we expectto incur interest and other financing costs related to the project financefacility of approximately $30 million.

During April 2006we completed the sale of 6,375,000 of our Ordinary Shares at $24.45 per share($23.70 per share net of commissions). We intend to use the net proceeds ofapproximately $151.1 million to continue further evaluation, exploration,advancement and expansion of our portfolio of exploration properties and forother general corporate purposes.

For the remainingsix months of 2006, we expect to spend about $175 million on the San CristobalProject including the purchase of equipment, construction materials, paymentsto contractors and other development costs already accrued or to be incurredduring the year.  Funds for this purposewill be provided by liquidating a portion of our restricted investments setaside for this purpose and drawing on additional funds from the projectfinancing facility.  In addition, for theremaining nine months of 2006 we expect to spend approximately $7 million ongeneral corporate costs and approximately $11 million on interest payments. Ourcurrent plans call for expenditures of approximately $6 million on explorationefforts for the remainder of the year reflecting an increase of $3 million overplanned expenditures. We plan to fund these project, operating and financingcash expenditures from our existing cash and investment balances and frominterest and other income.

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**Significant Accounting Policies**

Effective January 1, 2006, the Company adopted Financial AccountingStandards No. 123R, “Share-Based Payment” (“FAS No. 123R”) which revisedStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“FAS No. 123”), and superseded Accounting PrinciplesBoard (“APB”) Opinion 25, “Accounting for Stock Issued to Employees” and itsrelated implementation guidance. As the Company had previously adopted FAS No.123 effective January 1, 2004, the adoption of FAS No. 123R did not have amaterial impact on the Company’s financial position or results of operationsand is not expected to have a material impact in the future.

EffectiveJanuary 1, 2006 the Company adopted Emerging Issues Task Force IssueNo. 04-06 (“EITF 04-06”), “Accounting for Stripping Costs Incurred duringProduction in the Mining Industry.” In January 2006, the EITF issued additionalguidance defining the commencement of production as the period when saleableminerals are first extracted in greater than de minimis amounts. During thefirst quarter of 2006, the Company began mining significant amounts of oxideore reserves at its San Cristobal project, which have been placed in stockpilesfor future processing.  The quantity andvalue of the minerals mined were sufficient to declare the start of oreproduction according to the EITF consensus. At June 30, 2006 the Company hadrecorded ore inventories valued at $8.9 million.

See Item 1, Note 2for additional discussion of significant accounting policies and new accountingstandards.

## **ContractualObligations**

We have enteredinto agreements with certain service providers and placed orders for certainequipment and construction materials for our San Cristobal Project resulting incommitments totaling approximately $99.8 million at June 30, 2006.  If we had cancelled all of these agreementsor orders at June 30, 2006, we would have incurred cancellation fees totalingapproximately $19.7 million.

## **Forward-LookingStatements**

Some informationcontained in or incorporated by reference into this report may containforward-looking statements. These statements include comments regarding SanCristobal development and construction plans, capital and other costs, fundingand timing; the timing of completion of San Cristobal construction, start-upand commencement of operations; spending during 2006; the likely increasedvolatility in future earnings due to forward sales, derivative positions andmetals trading activity; and the timing and amounts of spending on theevaluation and expansion of our exploration portfolio. The use of any of thewords “anticipate,” “continues,” “estimate,” “expect,” “may,” “will,”“project,” “should,” “believe” and similar expressions are intended to identifyuncertainties.  We believe theexpectations reflected in those forward-looking statements are reasonable.  However, we cannot assure that theseexpectations will prove to be correct. Actual results could differ materially from those anticipated in theseforward-looking statements as a result of the factors set forth below and otherfactors set forth in, or incorporated by reference into this report:

·                  worldwideeconomic and political events affecting the supply of and demand for silver,zinc and lead;

·                  political unrestand economic instability in Bolivia including the communities located near theSan Cristobal Project and other countries in which we conduct business;

·                  future actionsof the Bolivian government with respect to nationalization of gas and othernatural resources;

·                  changes in themining policies of the Bolivian government;

·                  volatility inmarket prices for silver, zinc and lead;

·                  financial marketconditions;

·                  uncertaintiesassociated with developing a new mine, including potential cost overruns andthe unreliability of production and cost estimates in early stages of minedevelopment;

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·                  variations inore grade and other characteristics affecting mining, crushing, milling andsmelting operations and mineral recoveries;

·                  geological,technical, permitting, mining and processing problems;

·                  theavailability, terms, conditions and timing of required government permits andapprovals;

·                  uncertaintiesregarding future changes in applicable law or implementation of existing law,including Bolivian laws related to tax, mining, environmental matters andexploration; and

·                  the factorsdiscussed under “Risk Factors” in our Form 10-K for the period ended December31, 2005.

Many of those factors arebeyond our ability to control or predict. You should not unduly rely on these forward-looking statements. Thesestatements speak only as of the date of this report on Form 10-Q.  Except as required by law, we are notobligated to publicly release any revisions to these forward-looking statementsto reflect future events or developments.

## **Item3.    Quantitative and QualitativeDisclosures About Market Risk and Hedging Activities**

Currently ourmajor principal cash balances are held in U.S. dollars.  We maintain minimum cash balances in foreigncurrencies and therefore have a relatively low exposure to currencyfluctuations. We have previously engaged in a limited amount of currencyhedging activities primarily related to an equipment order for our SanCristobal Project that was denominated in Euros. In addition, because weconduct our activities mainly in Bolivia, as well as in several other foreigncountries, we may in the future engage in hedging activities to minimize therisk of exposure to currency and interest rate fluctuations.

We manage thetiming of the cash required to construct the San Cristobal Project, to fundgeneral corporate costs, exploration and other funding requirements and investfunds not immediately required in investments with varying maturities.   Our policy is to invest only in governmentand corporate securities rated “investment grade” or better.

To complete the project financing for San Cristobal,we were required to hedge a portion of our planned production from SanCristobal.  In addition, when SanCristobal enters production, we may sell forward a portion of our productionand use price hedging techniques to mitigate some of the risks associated withfluctuating metals prices.  We recordedlosses of $251.0 million on our derivative positions for the six months endedJune 30, 2006. During the same period we made net cash payments of $29.1million to settle the majority of our discretionary positions not required bythe project financing facility. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Results of Operations.”

# **Item 4. Controls and Procedures**

(a)   Background to the restatement

During the first quarter of 2007, we determined thatthe method used in the periods ended September 30, 2005 through September 30,2006 to estimate the fair value of our open metals derivative positions was notappropriate.  This resulted in arestatement of the Company’s 2005 annual consolidated financial statements;interim consolidated financial statements for the quarter ended September 30,2005 and for each of the first three quarters of 2006; and an audit adjustmentto the Company’s 2006 annual consolidated financial statements.

See explanatory note and Note 2 to the consolidatedfinancial statements included with this Quarterly Report on Form 10-Q/A for theperiod ended June 30, 2006, for a discussion and summary of the impact of therestatement on the previously issued financial statements.

(b)   Disclosure Controls and Procedures

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportswe file or submit under the Securities and Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to Apex Silver’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

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In connection with the original filing of report 10-Qfor the period ended June 30, 2006, under the supervision and with the participationof our Disclosure Committee and management (including the Chief ExecutiveOfficer and Chief Financial Officer) we carried out an evaluation of theeffectiveness and design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15(e) under the SecuritiesExchange Act of 1934. Based upon this evaluation, the Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this report.

Subsequent to the evaluation made in connection withthe filing of the original Form 10-Q and in connection with the restatementdiscussed above in the explanatory note to this Form 10-Q/A, our management,with the participation of our Disclosure Committee, Chief Executive Officer andChief Financial Officer, reevaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of June 30, 2006. Basedupon this evaluation and subject to the foregoing, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were not effective because of material weaknesses.  For a discussion of the material weaknesses,see Item 9A of our annual report on Form 10-K for the year ended December 31,2006. Based upon the substantial work performed during the restatement process,management has concluded that the Company’s unaudited consolidated financialstatements for the periods covered by and included in this Quarterly Report onForm 10-Q/A are fairly stated in all material respects.

(c)   Change in Internal Control over FinancialReporting

Apex Silver’s management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles (GAAP). Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance withpolicies and procedures may deteriorate.

In connection with the filing of the original Form10-Q for the period ended June 30, 2006, management concluded that therewere no changes in the Company’s internal control over financial reportingduring the fiscal quarter ended September 30, 2006, that had materiallyaffected, or were reasonably likely to materially affect, the Company’sinternal control over financial reporting.

Subsequent to the filing of the original Form 10-Q andas a result of the evaluation made in connection with the restatement discussedabove in the explanatory note to this Form 10-Q/A, management has concludedthat the material weaknesses described in Item 9A of our annual report on Form10-K, for the year ended December 31, 2006, existed at June 30, 2006.

For a further discussionon the material weaknesses and the actions we are planning to take to remediatethe material weaknesses, see Item 9A of our annual report on Form 10-K for theyear ended December 31, 2006.

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**PART II:OTHER INFORMATION**

**Item 6.     Exhibits**
| 1.1  | Underwriting Agreement, Dated April 6, 2006 between  the Company and Harris Nesbitt Corp.*                                                 |
|------|--------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1 | Separation Agreement and Release, dated June 9, 2006  between the Company and Mark A. Lettes*                                              |
| 10.2 | Form of Change of Control Agreement*                                                                                                       |
| 31.1 | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act                                                |
| 31.2 | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act                                                |
| 32   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the  Sarbanes-Oxley Act) |

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*              Previously filedwith the Form 10-Q filed on August 9, 2006.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report on Form 10-Q/A to be signed on behalf of theundersigned thereunto duly authorized.
|                         | APEX SILVER MINES LIMITED |
|-------------------------|---------------------------|
|                    |                      |   |
| Date: May 2,  2007 | By:                       | \s\ Jeffrey G. Clevenger |
|                    |                      | Jeffrey G. Clevenger |
|                    |                      | President and Chief Executive Officer |
|                    |                      |   |
| Date: May 2,  2007 | By:                       | \s\ Gerald J. Malys |
|                    |                      | Gerald J. Malys |
|                    |                      | Senior Vice President and Chief Financial Officer |

 

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