**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

##### **FORM10-Q**

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

 

**FOR THETRANSITION PERIODFROM            TO            .**

**COMMISSIONFILE NUMBER 1-13627**

###### **APEXSILVER MINES LIMITED**

(EXACT NAME OFREGISTRANT 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’STELEPHONE 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 ACCELERATEDFILER o   ACCELERATEDFILER x   NON-ACCELERATED FILER o

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

AT NOVEMBER 3, 2006,58,439,500 ORDINARY SHARES, $0.01 PAR VALUE PER SHARE, WERE ISSUED ANDOUTSTANDING.

 

----

APEX SILVER MINESLIMITEDFORM 10-QQUARTER ENDED SEPTEMBER 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

----

**PART I. FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

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

| ** **                                                                                                                                    | ** ** | **September 30,**                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2006**                                                  | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                    | ** ** | **(in thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                    | ** ** | ** **                                                | ** ** | ** **            | ** ** |
| Current assets                                                                                                                                |       |                                                      |       |                  |       |
| Cash and cash  equivalents                                                                                                                    |       | $                                                         | 138,097    |                  | $          | 4,808 |   |
| Restricted cash                                                                                                                               |       | 15,172                                                    |       | 135,182               |       |
| Investments                                                                                                                                   |       | 290,743                                                   |       | 132,000               |       |
| Restricted  investments                                                                                                                       |       | 101,133                                                   |       | 67,491                |       |
| Ore inventories                                                                                                                               |       | 444                                                       |       | —                |       |
| Materials and  supply inventory                                                                                                               |       | 4,124                                                     |       | —                |       |
| Prepaid expenses  and other assets                                                                                                            |       | 11,444                                                    |       | 5,824                 |       |
| Total current  assets                                                                                                                         |       | 561,157                                                   |       | 345,305               |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Property, plant and  equipment, net                                                                                                           |       | 583,168                                                   |       | 379,138               |       |
| Ore inventories                                                                                                                               |       | 16,498                                                    |       | —                |       |
| Deferred financing  costs                                                                                                                     |       | 19,988                                                    |       | 21,604                |       |
| Value added tax  recoverable                                                                                                                  |       | 45,537                                                    |       | 20,052                |       |
| Investments                                                                                                                                   |       | 4,000                                                     |       | —                |       |
| Restricted investments                                                                                                                        |       | —                                                    |       | 12,392                |       |
| Other                                                                                                                                         |       | 2,109                                                     |       | 2,020                 |       |
| Total assets                                                                                                                                  |       | $                                                         | 1,232,457  |                  | $          | 780,511 |   |
|                                                                                                                                          |       |                                                      |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                | ** ** | ** **                                                | ** ** | ** **            | ** ** |
| Current liabilities                                                                                                                           |       |                                                      |       |                  |       |
| Accounts payable  and other accrued liabilities                                                                                               |       | $                                                         | 66,048     |                  | $          | 74,487 |   |
| Accrued interest  payable                                                                                                                     |       | 799                                                       |       | 3,096                 |       |
| Derivatives                                                                                                                                   |       | 14,101                                                    |       | 5,652                 |       |
| Current portion  of long term debt                                                                                                            |       | 2,993                                                     |       | 2,270                 |       |
| Total current  liabilities                                                                                                                    |       | 83,941                                                    |       | 85,505                |       |
| Long term debt                                                                                                                                |       | 434,117                                                   |       | 320,021               |       |
| Derivatives                                                                                                                                   |       | 168,140                                                   |       | 50,621                |       |
| Deferred gain on sale  of asset                                                                                                               |       | 1,400                                                     |       | —                |       |
| Asset retirement  obligation                                                                                                                  |       | 5,394                                                     |       | 2,003                 |       |
| Total  liabilities                                                                                                                            |       | 692,992                                                   |       | 458,150               |       |
| Minority interest in  subsidiaries                                                                                                            |       | 88,403                                                    |       | 34                    |       |
| Commitments and  contingencies (Note 12)                                                                                                      |       |                                                      |       |                  |       |
|                                                                                                                                          |       |                                                      |       |                  |       |
| Shareholders’ equity                                                                                                                     |       |                                                      |       |                  |       |
| Ordinary Shares,  $.01 par value, 175,000,000 shares authorized; 58,435,200 and 50,444,890  shares issued and outstanding at respective dates |       | 584                                                       |       | 504                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                |       | 160                                                       |       | (243                  | )          |
| Additional paid  in capital                                                                                                                   |       | 666,291                                                   |       | 486,762               |       |
| Accumulated  deficit during development stage                                                                                                 |       | (215,973                                                  | )          | (164,696              | )          |
| Total  shareholders’ equity                                                                                                              |       | 451,062                                                   |       | 322,327               |       |
| Total liabilities and  shareholders’ equity                                                                                              |       | $                                                         | 1,232,457  |                  | $          | 780,511 |   |

 

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

3

----

**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(Expressed in United States dollars)(Unaudited)**
| ** **                                                       | ** ** | **Three Months Ended**                          | ** ** | **Nine Months Ended** | ** ** | **For the Period from  December 22, 1994  (inception)** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **September 30,**                                    | ** ** | **September 30,**          | ** ** | **through**                                                                      | ** ** |
| ** **                                                       | ** ** | **2006**                                                  | ** ** | **2005**                        | ** ** | **2006**                                                                         | ** ** | **2005** | ** ** | **Sept. 30, 2006** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except share data)** | ** ** |
| **Operating  income and expenses:**                              | ** ** | ** **                                                | ** ** | ** **                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exploration                                                      |       | $                                                         | (2,155     | )                               | $          | (1,097                                                                           | )          | $ | (5,162 | ) | $ | (3,858 | ) | $ | (78,593 | ) |
| Administrative                                                   |       | (4,123                                                    | )          | (4,814                          | )          | (15,122                                                                          | )          | (13,660 | ) | (84,980 | ) |
| Gain (loss) on  commodity derivatives                            |       | (45,432                                                   | )          | (9,640                          | )          | (165,487                                                                         | )          | (7,584 | ) | (220,937 | ) |
| Gain (loss) on  foreign currency derivatives and transactions    |       | 203                                                       |       | 474                             |       | 439                                                                              |       | (810 | ) | 1,167 |   |
| Other operating  expense (1)                                     |       | (134                                                      | )          | —                          |       | (276                                                                             | )          | — |   | (276 | ) |
| Amortization and  depreciation                                   |       | (100                                                      | )          | (81                             | )          | (296                                                                             | )          | (114 | ) | (1,692 | ) |
| Total operating  expenses                                        |       | (51,741                                                   | )          | (15,158                         | )          | (185,904                                                                         | )          | (26,026 | ) | (385,311 | ) |
| ** **                                                       | ** ** | ** **                                                | ** ** | ** **                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other income and expenses:**                                   | ** ** | ** **                                                | ** ** | ** **                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  other income                                       |       | 4,469                                                     |       | 5,700                           |       | 12,637                                                                           |       | 12,743 |   | 47,309 |   |
| Gain on sale of  interest in subsidiary                          |       | 119,800                                                   |       | —                          |       | 119,800                                                                          |       | — |   | 119,800 |   |
| Gain on  extinguishment of debt                                  |       | —                                                    |       | —                          |       | 2,875                                                                            |       | — |   | 9,640 |   |
| Interest expense  and other borrowing costs (2)                  |       | —                                                    |       | (2,639                          | )          | (774                                                                             | )          | (6,501 | ) | (11,696 | ) |
| Total other  income and expense                                  |       | 124,269                                                   |       | 3,061                           |       | 134,538                                                                          |       | 6,242 |   | 165,053 |   |
| Income (loss)  before minority interest and income taxes         |       | 72,528                                                    |       | (12,097                         | )          | (51,366                                                                          | )          | (19,784 | ) | (220,258 | ) |
| Income taxes                                                     |       | (54                                                       | )          | —                          |       | (161                                                                             | )          | — |   | (540 | ) |
| Minority  interest in (income) loss of consolidated subsidiaries |       | 257                                                       |       | 1                               |       | 250                                                                              |       | 12 |   | 4,825 |   |
| Net income  (loss)                                               |       | $                                                         | 72,731     |                            | $          | (12,096                                                                          | )          | $ | (51,277 | ) | $ | (19,772 | ) | $ | (215,973 | ) |
| Other  comprehensive income:                                     |       |                                                      |       |                            |       |                                                                             |       |   |   |   |   |
| Unrealized gain  (loss) on securities                            |       | $                                                         | (42        | )                               | $          | 30                                                                               |       | $ | 160 |   | $ | (127 | ) | $ | (83 | ) |
| Reclassification  for loss on securities included in net income  |       | (518                                                      | )          | —                          |       | 243                                                                              |       | — |   | 243 |   |
| Other  comprehensive income (loss)                               |       | (560                                                      | )          | 30                              |       | 403                                                                              |       | (127 | ) | 160 |   |
| Comprehensive  income (loss)                                     |       | $                                                         | 72,171     |                            | $          | (12,066                                                                          | )          | $ | (50,874 | ) | $ | (19,899 | ) | $ | (215,813 | ) |
| **Net  Income (loss) per Ordinary Share – basic**           |       | $                                                         | 1.25       |                            | $          | (0.25                                                                            | )          | $ | (0.92 | ) | $ | (0.41 | ) |   |   |
| **Net  Income (loss) per Ordinary Share – diluted**         |       | $                                                         | 1.23       |                            | $          | (0.25                                                                            | )          | $ | (0.92 | ) | $ | (0.41 | ) |   |   |
| **Weighted  average Ordinary Shares outstanding - basic**        |       | 58,417,387                                                |       | 48,781,621                      |       | 55,816,488                                                                       |       | 48,047,071 |   |   |   |
| **Weighted  average Ordinary Shares outstanding - diluted**      |       | 58,989,561                                                |       | 48,781,621                      |       | 55,816,488                                                                       |       | 48,047,071 |   |   |   |

 

----

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

(2)          Interest expense and other borrowing costs arenet of $7.7 million and $18.7 million capitalized for the three and nine monthperiods ended September 30, 2006, respectively and $1.8 million and $4.3million for the three and nine month periods ended September 30, 2005,respectively and $28.1 million for the inception to date period ended September30, 2006.

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

4

----

**APEX SILVER MINES LIMITEDAn Exploration and Development Stage CompanyCONSOLIDATED STATEMENTS OF CASH FLOWS(Expressed in United States dollars)(Unaudited)**
| ** **                                                                                                                  | ** ** | **Nine Months Ended** | ** ** | **For the period from  December 22, 1994  (inception)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **September 30,**          | ** ** | **through**                                                                      | ** ** |
| ** **                                                                                                                  | ** ** | **2006**                        | ** ** | **2005**                                                                         | ** ** | **September 30, 2006** | ** ** |
| ** **                                                                                                                  | ** ** | **(in thousands)**         | ** ** |
| Cash flows from  operating activities:                                                                                      |       |                            |       |                                                                             |       |   |   |
| Net cash used in operating activities                                                                                       |       | $                               | (58,417    | )                                                                                | $          | (16,491 | ) | $ | (165,294 | ) |
| Cash flows from  investing activities:                                                                                      |       |                            |       |                                                                             |       |   |   |
| Purchase of available for sale investments                                                                                  |       | (385,104                        | )          | (404,500                                                                         | )          | (1,578,296 | ) |
| Sale of available for sale investments                                                                                      |       | 183,172                         |       | 521,798                                                                          |       | 1,247,124 |   |
| Purchase of held-to-maturity investments                                                                                    |       | (24,662                         | )          | (17,524                                                                          | )          | (263,869 | ) |
| Sale of held-to-maturity investments                                                                                        |       | 8,000                           |       | 95,770                                                                           |       | 195,007 |   |
| Purchase of available for sale restricted  investments                                                                      |       | (233,200                        | )          | —                                                                           |       | (248,150 | ) |
| Sale of available for sale restricted investments                                                                           |       | 246,400                         |       | —                                                                           |       | 246,400 |   |
| Purchase of held-to-maturity restricted investments                                                                         |       | (22,199                         | )          | —                                                                           |       | (49,542 | ) |
| Sale of held-to-maturity restricted investments                                                                             |       | 45,882                          |       | 4,668                                                                            |       | 60,658 |   |
| Payment of derivative premiums & settlements,  net                                                                      |       | (39,519                         | )          | (1,889                                                                           | )          | (39,620 | ) |
| Advances for construction of port facility                                                                                  |       | —                          |       | —                                                                           |       | (2,000 | ) |
| Advances to suppliers and contractors                                                                                       |       | (1,480                          | )          | (1,296                                                                           | )          | (5,355 | ) |
| Released from (transfer to) restricted cash to collateralize  credit facility, letters of credit and interest payments, net |       | 120,010                         |       | (96,892                                                                          | )          | (18,134 | ) |
| Proceeds from the sale of interest in subsidiary                                                                            |       | 224,000                         |       | —                                                                           |       | 224,000 |   |
| Capitalized costs and acquisitions of property, plant  and equipment                                                        |       | (207,283                        | )          | (101,301                                                                         | )          | (490,213 | ) |
| Net cash used in investing activities                                                                                       |       | (85,983                         | )          | (1,166                                                                           | )          | (721,990 | ) |
| Cash flows from  financing activities:                                                                                      |       |                            |       |                                                                             |       |   |   |
| Proceeds from issuance of Ordinary Shares (net of  offering costs of $4.8 million in 2006)                                  |       | 156,795                         |       | 16,639                                                                           |       | 580,358 |   |
| Proceeds from issuance of convertible notes                                                                                 |       | —                          |       | —                                                                           |       | 339,987 |   |
| Payment of debt issuance costs                                                                                              |       | (671                            | )          | (3,778                                                                           | )          | (24,992 | ) |
| Payments of notes payable and long term debt                                                                                |       | (1,607                          | )          | (2,142                                                                           | )          | (4,883 | ) |
| Proceeds from note to power line contractor                                                                                 |       | 1,407                           |       | —                                                                           |       | 1,407 |   |
| Borrowings under project finance facility                                                                                   |       | 120,000                         |       | —                                                                           |       | 120,000 |   |
| Proceeds from exercise of stock options and warrants                                                                        |       | 1,765                           |       | 107                                                                              |       | 13,504 |   |
| Net cash provided by financing activities                                                                                   |       | 277,689                         |       | 10,826                                                                           |       | 1,025,381 |   |
| Net increase  (decrease) in cash and cash equivalents                                                                       |       | 133,289                         |       | (6,831                                                                           | )          | 138,097 |   |
| Cash and cash  equivalents - beginning of period                                                                            |       | 4,808                           |       | 27,740                                                                           |       | — |   |
| Cash and cash equivalents  - end of period                                                                                  |       | $                               | 138,097    |                                                                             | $          | 20,909 |   | $ | 138,097 |   |

 

See Note 14 forsupplemental cash flow information.

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

5

----

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

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

**1.****              Basis of Preparationof Financial Statements and Nature of Operations**

These unaudited interim consolidated financialstatements of Apex Silver Mines Limited (the “Company”) and its subsidiarieshave been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles in the United Statesof America, so long as such omissions do not render the financial statementsmisleading.  Certain prior period amountshave been reclassified 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. All adjustments were of a normal recurring nature.  These interim financial statements should beread in conjunction with the annual financial statements of the Companyincluded in its 2005 Annual Report on Form 10-K as amended.

The Company is a mining exploration and developmentcompany that holds a portfolio of exploration and development propertiesprimarily in South America and Central America. The Company currently focusesits resources primarily on the development of its San Cristobal Project inBolivia. At present, none of the Company’s properties are in production and,consequently, the Company does not have current operating income.

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

On September 25, 2006 the Company sold a 35% interestin the subsidiaries holding its San Cristobal Project to Sumitomo Corporation (“Sumitomo”)for $224 million in cash and the retention of certain interests in futuresilver and zinc production.  Pursuant tothe Company’s principles of consolidation under which it consolidatesmore-than-50%-owned subsidiaries that it controls and entities over whichcontrol is achieved through means other than voting rights, the Company fullyconsolidates the results of operations of its San Cristobal Project and reportsSumitomo’s participation as a minority interest. (See Note 11 for furtherdetails of the transaction).

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 forStock-Based Compensation” (“FAS No. 123”), and superseded Accounting PrinciplesBoard (“APB”) Opinion 25, “Accounting for Stock Issued to Employees” and itsrelated implementation guidance. The Company is currently evaluating whether itwill adopt the short-cut method for calculating the pool of windfall taxbenefits as allowed by FAS No. 123R-3. The Company had previously adopted FASNo. 123 effective January 1, 2004. FAS No. 123R requires measurement andrecording in the financial statements of the costs of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award, recognized over the period during which an employee isrequired to provide services in exchange for the award.  Additionally, FAS No. 123R requires companiesthat did not previously include the effects of estimated forfeitures in the FASNo. 123 expenses they reported, to record a cumulative adjustment to the incomestatements presented in the period of adoption of FAS No. 123R in order toreflect the effect of the estimated forfeitures.  The forfeiture rate used by the Company priorand subsequent to the adoption of FAS No. 123R has not changed and, therefore,the Company did not record a cumulative effect adjustment related to priorperiod estimated forfeitures. The adoption of FAS No. 123R did not have amaterial impact on the Company’s financial position or results of operations(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

6

----

stripping costs are incurred. The Financial Accounting Standards Board (“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, and placed the orein stockpiles for future processing.  Thequantity and value of the minerals mined were sufficient to declare the startof ore production according to the EITF consensus.  The Company has commenced the mining and stockpilingof significant amounts of ore at its San Cristobal Project and has included theassociated costs as ore inventories on its financial statements.

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 stockpiled for which further processing is necessary before aproduct is ready for sale.  The Companyuses the average cost method to assign costs to the units of ore stockpiledduring the period.  Inventories arecarried at the lower of cost or the current net realizable value.  If costs held in inventory exceed their netrealizable value, the excess cost is recognized as a loss in the currentperiod.  Net realizable value reflectsthe gross realizable value (“estimated selling price”) reduced by estimatedcosts of completion and disposal as of the balance sheet date.  Gross realizable value reflects theanticipated average realization that the inventory will generate when it issold.

*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 debt pursuant to the original terms of the debt 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 asa debt extinguishment.  EITF Issue No.05-1 became effective for interim or annual reporting periods beginning afterJune 28, 2006, following its ratification during June 2006. The Companypreviously accounted for two transactions involving the buy-back of itsconvertible debt as an extinguishment under APB Opinion No. 26.  Ratification of EITF Issue No. 05-1 willrequire similar future transactions 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, which applies to voluntarychanges as well as changes required by accounting pronouncements that do nototherwise provide specific transition provisions, requires retrospectiveapplication to prior 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 its 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.

7

----

During September2006 the FASB issued Financial Accounting Standards No. 157 “Fair ValueMeasurements” (“FAS No. 157”). FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. This Standardaddresses how companies should measure fair value when they are required to usea fair value measure for recognition or disclosure purposes under U.S. GAAP.Accordingly, this Standard does not require any new fair value measurements.FAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The Company does not expect the adoption of FAS No. 157 to have amaterial impact on its financial position or results of operations.

During September2006 the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) whichestablishes an approach to the quantification of unadjusted financial statementerrors based on the effects of the error on each of the company’s financialstatements and the related financial statement disclosures. This model iscommonly referred to as a “dual approach” because it essentially requiresquantification of unadjusted errors under both the iron-curtain and theroll-over methods.  SAB 108 permitscompanies to record the cumulative effect of initially applying the “dualapproach” in the first year ending after November 15, 2006 by recording thenecessary “correcting” adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings. The Company has nounadjusted errors and therefore does not expect the adoption of SAB 108 to havean impact on its financial position or results of operations.

**3.****              Investments**

The Company considers all highly liquid investmentswith a maturity of three months or less when purchased to be cashequivalents.  The Company accounts forits investments in auction rate securities in accordance with Statement ofFinancial Accounting Standards No. 115, “Accounting for Certain Investments inDebt and Equity Securities” such that if the underlying security of an auctionrate security has a stated or contractual maturity date in excess of 90 days,regardless of the frequency of the interest rate reset date, the security isclassified as a current available-for-sale investment. Short-term investmentsinclude investments with maturities greater than three months, but notexceeding twelve months and available for sale auction rate securities.  Long-term investments include investmentswith maturities greater than twelve months.

The Company determines the appropriate classificationof its investments in debt and equity securities at the time of purchase andre-evaluates classifications at each balance sheet date. Debt securities areclassified as held to maturity when the Company has the intent and ability tohold the securities to maturity.  Held tomaturity debt securities are stated at amortized cost and include governmentagency and corporate obligations. Available for sale investments are marked to market at each reportingperiod with changes in value recorded as a component of other comprehensiveincome. If declines in value are deemed other than temporary, a charge is madeto net loss for the period.

The Company invests only in government and corporatesecurities rated “investment grade” or better. The following tables, based onquoted market prices, summarize the Company’s investments at September 30, 2006and December 31, 2005:

8

----

 
| September 30, 2006 | ** ** | **Cost**                | ** ** | **Market** | ** ** | **Balance** | ** ** |
|------------------------------|------------|-------------------------|------------|------------|------------|-------------|------------|
| ** **                   | ** ** | **(in Thousands)** | ** ** |
| Investments:                 |       |                    |       |       |       |        |       |
| Short-term                   |       |                    |       |       |       |        |       |
| Available for sale           |       |                    |       |       |       |        |       |
| Auction rate securities      |       | $                       | 246,080    |       | $          | 246,094     |       | $ | 246,094 |   |
| Corporate notes              |       | 4,873                   |       | 5,000      |       | 5,000       |       |
| Government bonds             |       | 6,440                   |       | 6,442      |       | 6,442       |       |
| Common stock                 |       | 761                     |       | 842        |       | 842         |       |
| Total available  for sale    |       | 258,155                 |       | 258,378    |       | 258,378     |       |
| Held to maturity             |       |                    |       |       |       |        |       |
| Corporate notes              |       | 3,601                   |       | 3,597      |       | 3,601       |       |
| Government bonds             |       | 28,764                  |       | 28,764     |       | 28,764      |       |
| Total held to  maturity      |       | 32,365                  |       | 32,361     |       | 32,365      |       |
| Total short term             |       | $                       | 290,520    |       | $          | 290,739     |       | $ | 290,743 |   |
| Long-term                    |       |                    |       |       |       |        |       |
| Available for  sale          |       |                    |       |       |       |        |       |
| Corporate notes              |       | 2,000                   |       | 2,000      |       | 2,000       |       |
| Total available  for sale    |       | 2,000                   |       | 2,000      |       | 2,000       |       |
| Held to maturity             |       |                    |       |       |       |        |       |
| Government bonds             |       | 2,000                   |       | 2,000      |       | 2,000       |       |
| Total held to  maturity      |       | 2,000                   |       | 2,000      |       | 2,000       |       |
| Total long term              |       | $                       | 4,000      |       | $          | 4,000       |       | $ | 4,000 |   |
|                         |       |                    |       |       |       |        |       |
| Restricted  Investments:     |       |                    |       |       |       |        |       |
| Short-term                   |       |                    |       |       |       |        |       |
| Available for sale           |       |                    |       |       |       |        |       |
| Auction rate securities      |       | $                       | 75,000     |       | $          | 75,000      |       | $ | 75,000 |   |
| Total available  for sale    |       | 75,000                  |       | 75,000     |       | 75,000      |       |
| Held to maturity             |       |                    |       |       |       |        |       |
| Government bonds             |       | 26,133                  |       | 26,039     |       | 26,133      |       |
| Total held to  maturity      |       | 26,133                  |       | 26,039     |       | 26,133      |       |
| Total short term             |       | $                       | 101,133    |       | $          | 101,039     |       | $ | 101,133 |   |

 
| 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 |   |

 

9

----

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 Company recognized a$0.2 million and $0.1 million loss on the liquidation for the fourth quarter of2005 and first quarter of 2006, respectively. The liquidation was necessitated by the terms of the project financefacility which required the Company to transfer substantially all of its cashand/or investments to collateral accounts to restrict funds necessary tocomplete 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 oneyear.  During the full year 2005 and forthe nine month period ended September 30, 2006, the Company recorded as aninvesting cash inflow an additional $126.3 million and $41.5 million respectivelyrelated to HTM 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 did not change the Company’s ability or intent to hold its remainingHTM investments until their maturity dates.

**4.****              Prepaid expenses andother assets**

Prepaid expensesand other assets consist of the following:
|                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**      | ** ** |
| Prepaid  insurance                          |       | $                            | 2,704      |                        | $          | 824 |   |
| Prepaid bank  fees                          |       | 83                           |       | —                      |       |
| Accrued interest  receivable                |       | 752                          |       | 758                         |       |
| Prepaid  consulting & contractor fees   |       | 5,345                        |       | 3,874                       |       |
| Receivables,  travel advances and other     |       | 715                          |       | 118                         |       |
| Prepaid import  taxes and duties receivable |       | 1,333                        |       | —                      |       |
| Withholding  taxes receivable               |       | 512                          |       | 250                         |       |
|                                        |       | $                            | 11,444     |                        | $          | 5,824 |   |

 

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

10

----

**5.****              Value Added TaxRecoverable**

The Company has recorded value added tax (“VAT”) paidin Bolivia as a recoverable asset. Current Bolivian tax law states that VAT paid prior to production isrecoverable as a credit against Bolivian taxes arising from production, includingincome tax. The VAT paid in Bolivia is expected to be recovered throughproduction from the proven and probable reserves at the San Cristobal Projectthat the Company is developing.  Futurechanges to Bolivian tax law should they occur, could have an adverse effect onthe Company’s ability to recover these taxes. At September 30, 2006 and December 31, 2005 the recoverable VAT recordedfor Bolivia is $45.5 million and $20.1 million, respectively.

In addition, the Company incurred VAT related to variousexploration activities outside of the San Cristobal project in Bolivia and inother countries. Because of the uncertainty of the recoverability of thesetaxes they are charged to expense as incurred.

**6.****              Property, Plant andEquipment**

The components of property, plant and equipment wereas follows:
|                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(in thousands)**      | ** ** |
| Mineral  properties             |       | $                            | 117,319    |                        | $          | 117,103 |   |
| Construction in  progress       |       | 425,767                      |       | 232,288                     |       |
| Buildings                       |       | 11,493                       |       | 8,423                       |       |
| Mining equipment  and machinery |       | 12,868                       |       | 10,127                      |       |
| Equipment under  capital lease  |       | 22,183                       |       | 14,928                      |       |
| Other furniture  and equipment  |       | 3,150                        |       | 1,966                       |       |
|                            |       | 592,780                      |       | 384,835                     |       |
| Less:  Accumulated depreciation |       | (9,612                       | )          | (5,697                      | )          |
|                            |       | $                            | 583,168    |                        | $          | 379,138 |   |

 

For the nine monthperiods ended September 30, 2006 and 2005 the Company recorded depreciationexpense of $296,000 and $114,000, respectively. Also, for the nine month periods ended September 30, 2006 and 2005 theCompany capitalized depreciation associated with the San Cristobal Project inthe amounts of $3.6 million and $1.8 million respectively.

The September 30,2006 and December 31, 2005 construction in progress balances include $28.1 and$9.4 million of capitalized interest respectively.

**7.****              Debt**

The Company’s debtconsists of the following:
|                                                        | ** ** | **September 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                              |       | —                           |       | 120,000                         |       | — |   | — |   |
| Note payable to  Ingelec                               |       | —                           |       | 1,407                           |       | — |   | — |   |
| Note assigned to  Sumitomo                             |       | —                           |       | 7,798                           |       | — |   | — |   |
| Capital lease  obligations                             |       | 2,993                            |       | 14,925                          |       | 2,270 |   | 10,034 |   |
|                                                   |       | $                                | 2,993      |                            | $          | 434,117 |   | $ | 2,270 |   | $ | 320,021 |   |

 

11

----

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 nine months ended September 30, 2006 theCompany borrowed $120.0 million under the facility. The Company is required topay a 1.0% 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 metals price protection contracts as wellas other requirements.  The firstprincipal payment under the facility is due in December 2008, and the facilitymust be fully repaid in December 2012.

In connection withthe sale to Sumitomo of a 35% interest in the subsidiaries that own our SanCristobal Project, Sumitomo has guaranteed the repayment of 35% of the projectfinance facility debt. Also, in conjunction with the sale, the project financefacility agreements were amended to provide for the release of $70.0 million ofoverrun financing previously held in accounts controlled by the lenders andapproximately $5.7 million previously escrowed to meet interest payments on oursubordinated notes. This $75.7 million is now unrestricted and available forgeneral corporate purposes (see Note 11 for detail of sale of 35% interest inSan Cristobal).

During the ninemonths ended September 30, 2006 the Company placed in service $8.1 million ofadditional mining equipment to be used in stripping and mine production, andrecorded the transaction as a capital lease, resulting in total capital leaseobligations of $17.9 million. During the nine months ended September 30, 2006the Company made payments of $1.7 million related to capital lease obligationsand will be required to make additional payments of $0.8 million for the remainderof 2006, $3.0 million during each of 2007 and 2008, $2.4 million during 2009,$1.9 million during 2010 and $6.8 million thereafter.

The Company hasloaned funds to the contractor that is building the power line for the SanCristobal Project and holds a note receivable from the contractor in the amountof $22.3 million. The Company expects to receive repayment of the note from thepower company in the form of credits against charges for the delivery ofpower.  In connection with the sale of35% of the San Cristobal Project to Sumitomo, the Company assigned 35% of the$22.3 million note to Sumitomo. As the Company receives payments from the powercompany it must pay Sumitomo its 35% share of such payments. As a result, theCompany has recorded a note payable to Sumitomo in the amount of $7.8 million.

During the thirdquarter of 2006 the contractor that is building the power line for the SanCristobal Project borrowed approximately $1.4 million from its parent companyto complete the construction of the power line. Per the guidance of FASB Interpretation No. 46R “Variable InterestEntities” (“FIN 46R”) the Company consolidates the accounts of the contractorand recorded the note payable of $1.4 million on its consolidated books.

During 2006 theCompany issued approximately 1.1 million Ordinary Shares valued at $17.1million and $0.3 million of cash for unpaid interest to complete the purchaseof $20.0 million principal amount of the Company’s 4.0% Convertible SeniorSubordinated Notes due 2024 in a privately negotiated exchange transaction. Thetransaction resulted in the recognition of a $2.9 million gain onextinguishment of debt.  The Companycanceled 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 ofSeptember 30, 2006, $5.5 million of restricted investments were designated forthis purpose.

**8.****              Sales Contracts andDerivative Instruments**

Certain covenantsrelated to the project finance facility require the Company to provide priceprotection for a portion of its planned production of metals from SanCristobal.  During the third quarter of2005, the Company entered into contracts utilizing forward sales, puts andcalls to comply with these covenants. In order to maintain leverage to silvermarket prices, the Company entered into proportionally

12

----

more zinc and lead contracts than silver.  Non-cash mark-to-market gains and losses fromthese outstanding metal derivative positions may fluctuate substantially fromperiod to period based on spot and forward prices and option volatilities.

In addition, theCompany made limited investments in shorter duration put and call options andother metals derivatives not required by the project financing facility.  These discretionary derivative positionstypically have settlement dates less than one year and management has theoption to settle these positions in cash or roll them forward to a future date.During 2006, the Company made $36.9 million of net cash payments to settle themajority of these discretionary derivative contracts. The remaining liabilityfor these discretionary derivative positions on a mark-to-market basis as ofSeptember 30, 2006 was approximately $5.0 million.

The Companyrecorded losses of $45.4 million and $165.5 million related to its totalderivative position for the quarter and nine month periods ended September 30,2006, respectively.  The losses are theresult of continuing high spot and forward prices for silver, zinc and lead.The actual final financial impact of the required project financing facilityderivative positions will not be known until the positions are closed on theirfuture settlement dates.  The Companydoes not intend to use cash to settle the open derivatives position contractsrelating to the project financing facility prior to their settlement datesbeginning in 2007.  At the time of finalsettlement, the gain or loss recorded will exclude previously recognizednon-cash mark-to-market gains or losses.

The followingtable sets forth the Company’s open contracts at September 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 theproject financing.
| ** **                         | ** ** | **Current Maturity Date** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **Year 1**                     | ** ** | **Years 2 and 3** | ** ** | **Years 4 and 5** | ** ** | **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)                  |       | 9,177                               |       | 411,431 |   | 335,348 |   | 19,841 |   | 775,797 |   |
| Average price (per pound)          |       | $                                   | 0.59       |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.48 |   | $ | 0.48 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                  |       | 17,085                              |       | 241,511 |   | 64,374 |   | — |   | 322,970 |   |
| Average price (per pound)          |       | $                                   | 0.30       |   | $ | 0.30 |   | $ | 0.29 |   | $ | — |   | $ | 0.30 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| **Put  Option Contracts Owned**    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)                |       | 100                                 |       | 1,325 |   | 3,102 |   | 4,573 |   | 9,100 |   |
| Average price (per ounce)          |       | $                                   | 5.25       |   | $ | 5.49 |   | $ | 5.71 |   | $ | 5.91 |   | $ | 5.78 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                  |       | 24,251                              |       | — |   | — |   | — |   | 24,251 |   |
| Average price (per pound)          |       | $                                   | 0.57       |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.57 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| **Call  Option Contracts Written** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)                |       | 1,885                               |       | 6,200 |   | 3,255 |   | 345 |   | 11,685 |   |
| Average price (per ounce)          |       | $                                   | 15.24      |   | $ | 8.25 |   | $ | 8.37 |   | $ | 9.14 |   | $ | 9.44 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                  |       | 57,871                              |       | 12,126 |   | 1,653 |   | — |   | 71,650 |   |
| Average price (per pound)          |       | $                                   | 1.06       |   | $ | 0.57 |   | $ | 0.57 |   | $ | — |   | $ | 0.97 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| Lead (000 pounds)                  |       | 4,409                               |       | 24,251 |   | 3,307 |   | — |   | 31,967 |   |
| Average price (per pound)          |       | $                                   | 0.70       |   | $ | 0.39 |   | $ | 0.39 |   | $ | — |   | $ | 0.43 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| **Call  Option Contracts Owned**   | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Silver (000 ounces)                |       | 1,240                               |       | — |   | — |   | — |   | 1,240 |   |
| Average price (per ounce)          |       | $                                   | 13.55      |   | $ | — |   | $ | — |   | $ | — |   | $ | 13.55 |   |
|                               |       |                                |       |   |   |   |   |   |   |   |   |
| Zinc (000 pounds)                  |       | 57,871                              |       | — |   | — |   | — |   | 57,871 |   |
| Average price  (per pound)         |       | $                                   | 1.23       |   | $ | — |   | $ | — |   | $ | — |   | $ | 1.23 |   |

 

The Company marksits open derivative positions to fair value at the end of each accountingperiod with the related change in fair value recorded to earnings in accordancewith Statement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“FAS No. 133”).  For the quarter and year to date periodsended September 30, 2006 the Company recorded

13

----

derivative losses of $45.4 million and $165.5 million, respectively,compared to derivative losses of $9.6 million and $7.6 million recorded for therespective quarter and year to date periods ended September 30, 2005. As theresult of the sale of a 35% interest in the San Cristobal Project to Sumitomo,Sumitomo has guaranteed the payment of 35% of the hedge positions required bythe project finance facility (see Note 11).

In connection withthe sale to Sumitomo of a 35% interest in the subsidiaries that own the SanCristobal Project, Sumitomo also purchased a 35% interest in the subsidiarythat holds the metals hedge positions required by the project finance facilityand assumed 35% of the derivative liability. At September 30, 2006 the Company reported 100% of the derivativeliability in its financial statements and included Sumitomo’s share of theliability in minority interest.

To arrive at fairvalue for its open derivative positions, the Company utilizes publiclyavailable current and historical market data, including major commodities priceindices such as the LME and COMEX, in combination with independently derivedthird party projections to derive future forward metal prices.  Many of the Company’s open derivativepositions expire on dates that are beyond the periods covered by the LME orCOMEX indices, or expire in the future periods covered by those indices withrespect to which little or no trading activity has occurred.  In these instances, where an active marketdoes not exist, the Company uses price projections provided by an independentthird party employing statistical analysis as the best indication of fairvalue.  The Company obtains advice fromoutside consultants knowledgeable in the valuation of commodities to establishthe major assumptions used in the fair value calculation, including discountrates, historical price trends and forward price projections.

Longer datedforward and option positions are valued using the Black option pricing modelwhich is a recognized mean-reversion commodities pricing model that uses asingle volatility factor.  Mean-reversionmodels assume that prices eventually revert to a longer-term historical pricetrend.  Forward prices derived from themean-reversion model are lower than current spot market prices due to therecent sharp increase in prices during the past year.  If current spot prices continue into futureperiods that include the settlement dates of the Company’s open derivative positions,the Company will report further mark-to-market losses in subsequentperiods.  As of September 30, 2006, thefair value of the Company’s open commodities derivatives position was recordedas a $182.2 million liability.  Of thatamount, $14.1 million was recorded as a current liability with $9.1 millionbeing related to the hedge positions required by the project finance facility.

During the ninemonths ended September 30, 2005 the Company incurred a mark-to-market loss of$0.9 million with respect to certain foreign currency derivative positionsrelated to certain equipment being purchased for San Cristobal that wasdenominated in Euros. At September 30, 2006 the Company did not hold anyforeign currency derivative positions.

14

----

The followingtable sets forth the realizable fair value of the Company’s open derivativepositions at December 31, 2005 and the change for the nine months endedSeptember 30, 2006.
| ** **                                                            | ** ** | ** **            | ** ** | **Amount To Be Realized In** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|
| **Valuation Technique**                                          | ** ** | **Period Ended** | ** ** | **Year 1**                                  | ** ** | **Years 2 & 3** | ** ** | **Years 4 & 5** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                                            | ** ** | ** **            | ** ** | **(in thousands)**                          | ** ** |
| ** **                                                            | ** ** | ** **            | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Based  on quoted prices in active markets:**                        |       | 12/31/2005            |       | $                                                | (5,652     | ) | $ | — |   | $ | — |   | $ | — |   | $ | (5,652 | ) |
|                                                                  |       | 9/30/2006             |       | $                                                | (5,018     | ) | $ | — |   | $ | — |   | $ | — |   | $ | (5,018 | ) |
|                                                                  |       | 2006 Change           |       | $                                                | 634        |   | $ | — |   | $ | — |   | $ | — |   | $ | 634 |   |
|                                                                  | ** ** | ** **            | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Based  on Black option pricing model and other valuation methods:** |       | 12/31/2005            |       | $                                                | —     |   | $ | (25,785 | ) | $ | (25,580 | ) | $ | 744 |   | $ | (50,621 | ) |
|                                                                  |       | 9/30/2006             |       | $                                                | (9,083     | ) | $ | (132,452 | ) | $ | (35,407 | ) | $ | (282 | ) | $ | (177,224 | ) |
|                                                                  |       | 2006 Change           |       | $                                                | (9,083     | ) | $ | (106,667 | ) | $ | (9,827 | ) | $ | (1,026 | ) | $ | (126,603 | ) |
|                                                                  | ** ** | ** **            | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Totals:**                                                           |       | 12/31/2005            |       | $                                                | (5,652     | ) | $ | (25,785 | ) | $ | (25,580 | ) | $ | 744 |   | $ | (56,273 | ) |
|                                                                  |       | 9/30/2006             |       | $                                                | (14,101    | ) | $ | (132,452 | ) | $ | (35,407 | ) | $ | (282 | ) | $ | (182,242 | ) |
|                                                                  |       | 2006 Change           |       | $                                                | (8,449     | ) | $ | (106,667 | ) | $ | (9,827 | ) | $ | (1,026 | ) | $ | (125,969 | ) |

 

**9.****              Asset RetirementObligations**

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 quarterof 2005 the Company has been conducting activities at its San Cristobal Projectincluding earthworks, plant construction and mining activities that fall withinthe scope of the asset retirement plan and as such will require futurereclamation and closure expenditures.

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 $28.5 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                       |   | 3,115  |   |
| Changes in estimates, and other |   | — |   |
| Liabilities settled             |   | — |   |
| Accretion expense               |   | 276    |   |
|                            |   |   |   |
| Balance at September  30, 2006  |   | $      | 5,394  |   |

 

15

----

**10.****       Shareholders’ Equity**

The followingtable sets forth the changes in shareholders’ equity during the first ninemonths 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**       | ** ** | **$**                  | **(164,696** | **)**      | **$**      | **(243** | **)** | **$** | **322,327** | ** ** |
| Stock to finance  construction of the 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                                         |       | —                                                   |       | —      |       | 3,897           |       | —            |       | —                 |         | 3,897      |       |
| Stock options  exercised ($12.52 per share)                         |       | 140,925                                                  |       | 1.4         |       | 1,764           |       | —            |       | —                 |         | 1,765      |       |
| Stock granted as  compensation ($19.30 per share)                   |       | 17,000                                                   |       | 0.2         |       | —          |       | —            |       | —                 |         | —     |       |
| Sale of Ordinary  Shares, net ($23.70 per share)                    |       | 6,375,000                                                |       | 63.8        |       | 151,003         |       | —            |       | —                 |         | 151,067    |       |
| Unrealized gain on  marketable equity securities                    |       | —                                                   |       | —      |       | —          |       | —            |       | 403                    |         | 403        |       |
| Net loss                                                            |       | —                                                   |       | —      |       | —          |       | (51,277           | )          | —                 |         | (51,277    | )          |
| **Balance, September 30, 2006**                                     | ** ** | **58,435,200**                                           | ** ** | **$**       | **584.4**  | ** **      | **$**      | **666,291**       | ** ** | **$**                  | **(215,973** | **)**      | **$**      | **160** | ** ** | **$** | **451,062** | ** ** |

 

*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 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.

The Company also established a share option plan forits non-employee directors (the “Director Plan”).  Options granted under the Director Plan veston the date of the grant and expire ten years after the date of the grant orthree years after the date that a non-employee director ceases to be a directorof the Company.  Options granted underthe Director Plan are transferable only in limited circumstances.

16

----

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 be outstanding,based on past experience and future estimates and includes data from both thePlan and the Directors Plan.  Therisk-free rate for periods within the contractual life of the option is basedon the U.S. Treasury yield curve in effect at the time of grant.

For purposes of calculating the fair value of options,volatility for the periods presented is based on the historical volatility ofthe Company’s Ordinary Shares.  TheCompany currently does not foresee the payment of dividends in the near term.The fair value for these options was estimated at the date of grant using theBlack-Scholes option-pricing model with the following assumptions:
|                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
|                         |       |                                                    |       |   |   |
| Expected  volatility         |       | 43.8% - 45.4%                                           |       | 42.6% - 43.8% |   |
| Weighted average  volatility |       | 44.9                                                    | %          | 43.3 | % |
| Expected  dividend yield     |       | —                                                  |       | — |   |
| Expected term  (in years)    |       | 3.06                                                    |       | 3.78 |   |
| Risk-free rate               |       | 4.89                                                    | %          | 3.72 | % |

 

A summary of theCompany’s stock options at September 30, 2006 and changes during the ninemonths then ended 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  |                                | $          | 6,664,178 |   |
| Granted during  period                     |       | 123,888                    |       | $                                                      | 15.97      |                                                | 9.6 Years  |                                | $          | — |   |
| Forfeited or  expired during period        |       | (47,901                    | )          | $                                                      | 16.64      |                                                |       |                                | $          | 289,983 |   |
| Exercised during  period                   |       | (140,925                   | )          | $                                                      | 12.53      |                                                |       |                                | $          | 1,145,515 |   |
| Outstanding at  end of period              |       | 2,794,843                  |       | $                                                      | 14.54      |                                                | 5.8 Years  |                                | $          | 7,460,540 |   |
| Exercisable at  end of period              |       | 1,938,293                  |       | $                                                      | 13.33      |                                                | 4.7 Years  |                                | $          | 7,027,492 |   |
| Expected to vest  at the end of the period |       | 856,550                    |       | $                                                      | 17.28      |                                                | 8.3 Years  |                                | $          | 433,047 |   |

 

Duringthe nine months ended September 30, 2006 and September 30, 2005, the Companygranted equity awards with weighted average grant date fair values of $0.7million and $0.8 million, respectively; options were exercised with totalintrinsic values of $1.1 million and $0.1 million, respectively; and the totalfair value of shares vested during the nine months was $1.7 million and $0.4million, respectively.

Asof September 30, 2006, total unrecognized compensation cost related to thenon-vested stock options granted pursuant to the Plan was $1.8 million whichthe Company expects will be recognized over a weighted average period of 1.0year.

17

----

Asummary of the status of the Company’s non-vested restricted stock grants atSeptember 30, 2006 and changes during the nine months then ended is presentedin the following table:
| Non-vested Shares             | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Non-vested 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 September 30, 2006, total unrecognized compensation cost related to thenon-vested restricted shares granted pursuant to the Plan was $1.9million.  The Company expects that the totalunrecognized cost will be recognized over a weighted average period of 1.5years.

During2005 the Company granted stock-based performance bonuses under the Plan,related to certain cost and completion date targets for the San CristobalProject.  The following table summarizesthe stock-based performance bonus plan at September 30, 2006 and changes duringthe first nine months of 2006:
| Non-vested Shares             | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value Per Share** | ** ** |
|------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------|------------|
| Non-vested 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 September 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 of0.7 years.

Totalcompensation costs recognized for all stock-based employee compensation awards,including amounts capitalized, were $3.6 million and $2.0 million for the ninemonths ended September 30, 2006 and 2005, respectively.

**11.****       Minority Interest**

OnSeptember 25, 2006, pursuant to a Purchase and Sale Agreement among theCompany, certain of its wholly owned subsidiaries and Sumitomo Corporation (“Sumitomo”),the Company sold to Sumitomo a 35% interest in three subsidiaries that own itsSan Cristobal Project, market Project concentrates and hold the metals hedgepositions required by the Project lenders, in exchange for $224 million in cashand certain deferred payments based on silver and zinc production from theProject.  The Company continues to own65% of these three subsidiaries.  TheCompany also agreed to assign Sumitomo a 35% interest in the $22.3 million notereceivable the Company holds from the Project power line construction andtransmission contractor.

Pursuantto the Purchase and Sale Agreement, the Company agreed to indemnify Sumitomo generallyfor breaches of representations and warranties discovered within one year ofclosing resulting in damages to Sumitomo exceeding $3 million, up to a cap of$40 million, provided that for breaches related to title to shares of theacquired companies, subordinated debt, certain transferred agreements and realand personal property required for the San Cristobal Project discovered withinsix years of closing, the cap is $224 million.

18

----

Sumitomo agreed toindemnify the Company generally for breaches of representations and warrantiesthat are discovered within one year of closing, resulting in damages to theCompany exceeding $3 million, up to a cap of $40 million.

Pursuantto a Deferred Payments Agreement dated September 25, 2006 Sumitomo will makethe following deferred payments to the Company in respect of production fromthe San Cristobal Project and future expansions:  (i) quarterly payments equal to 22.86% ofSumitomo’s share of payable silver production from the San Cristobal Project,or approximately 8% of total payable silver production, payable in cash orsilver at Sumitomo’s option, and (ii) quarterly cash payments equal to 20% ofSumitomo’s share of payable zinc production from the San Cristobal Project, orapproximately 7% of total payable zinc production, multiplied by the zinc pricein excess of $1,800 per tonne.

The Minera San Cristobal (“MSC”) Shareholders Agreement dated September25, 2006 provides that the majority shareholder will control the MSC Board andappoint the Board Chairman.  MSC is thesubsidiary that owns and operates the San Cristobal Project.  As long as the minority shareholder holdsmore than 25% of MSC, certain significant matters require the approval of theminority shareholder director including approval of annual programs andbudgets, increases of 15% or more over budgeted capital expenditures oroperating expenses (with customary exceptions for emergencies and compliance),merger or liquidation, permanent cessation or suspension for more than 180 daysof mining at or abandonment of the San Cristobal Project.  If a deadlock with respect to adoption oramendment in excess of 15% of a program and budget continues for 180 days, themajority shareholder’s directors are then entitled to approve the program andbudget.

Under the MSC Shareholder Agreement, the Company and Sumitomo arerequired to provide their respective proportionate shares of shareholder debtor equity funding required for MSC to achieve commercial operations, or bediluted on a two for one basis. Following commercial operations, the Company and Sumitomo may choose toprovide their proportionate share of required external funding or dilute on aone for one basis.  Dilution by theCompany or Sumitomo of its ownership interest in MSC will result in transfersof shares in the other two subsidiaries, so that the parties’ ownershipinterests in the three companies remain identical.  If Sumitomo were to dilute below 25% solelyas a result of its failure to provide future funding, and were to refuse toapprove a program and budget proposed by the Company for more than 180 days, Sumitomowould have the right to sell to the Company all (but not less than all) of itsremaining interest in MSC for $224 million, reduced pro rata by the percentageof year-end 2005 reserves produced from the San Cristobal Project.

Each of the Company and Sumitomo has a right of first refusal toacquire any interests in MSC that the other wishes to sell or, if the partywishing to sell has less than a 25% interest in MSC, a right of firstoffer.  In the event of a change ofcontrol of the Company, Sumitomo would be relieved of its right of firstrefusal and first offer obligations for two years.  Any party that acquires an interest in MSCmust acquire a pro rata interest in the other two subsidiaries.

The MSC Shareholders Agreement provides that available cash will bedistributed quarterly, first to pay the $5.4 million annual management fee duefrom MSC to the Company, then to shareholders that have advanced loans onbehalf of a non-funding shareholder, then to shareholders who have advancedshareholder loans pro rata to their ownership interests, and then as cashdividends. An additional aggregate $0.3 million annual management fee isjointly payable to the Company by the other two jointly owned subsidiaries.

The Company and Sumitomo have also entered into a two year OptionAgreement dated September 25, 2006, pursuant to which Sumitomo may acquire a 20percent to 35 percent interest in each of certain active exploration propertiesat historical cost, and in each of certain of the Company’s inactiveexploration properties at historical cost once the Company has spent $200,000in exploration costs on the property. Sumitomo must exercise its option on each active property within 60 daysof receiving complete information regarding the property and on each inactiveproperty within 60 days of the Company spending $200,000 on the property.  At September 30, 2006 Sumitomo had notexercised its options to acquire any exploration properties.

The Company also amended the San Cristobal project finance facility inconnection with the sale to Sumitomo, as follows:  (i) the Company and Sumitomo provideseverally pro rata to their respective 65%

19

----

and 35% ownership interests in MSC, and not jointly, San Cristobal Projectcompletion and cost overrun support; (ii) the Company and Sumitomo guaranteeseverally pro rata to their MSC ownership interests, and not jointly, theperformance of the metals hedge positions; (iii) the Company is permitted towithdraw from accounts controlled by the lenders $70 million of contingentoverrun financing previously required by the Project lenders; (iv) Sumitomoguarantees up to $45.5 million of overrun funding by the Company; (v) theCompany was permitted to remove from escrow approximately $5.7 millionpreviously deposited to meet interest payments on its subordinated notes, andis no longer required to escrow an additional $10.4 million; and (vi)additional cure periods for certain representation and covenant defaults andcertain defaults related to completion of the Project are permitted, as is thesubstitution of a replacement sponsor in the event of certain defaults,bankruptcy or expropriation events.

The Company recorded a minority interest in the assets and liabilitiessold of $88.6 million and recognized a gain of $119.8 million related to thetransaction.  The gain is net ofapproximately $6.4 million of selling costs incurred by the Company related tothe transaction.  The $119.8 million gainis calculated as the difference between the cash proceeds (net of sellingcosts) and the book value of the interests sold. The book value includes themark-to-market liability on the open metals hedge positions required by theproject finance facility, excludes pre-feasibility exploration and other costspreviously expensed, and was reduced by the book value allocated to theretained interests in future silver and zinc production. The payments relatedto the retained interests in future production will be recorded as a reductionof minority interest as they become receivable by the Company.

The Company may be required to pay up to an estimated $4.0 millionbonus to the Project construction management contractor contingent upon certainproject completion parameters. Sumitomo is deemed to have already paid its 35%share of the bonus as part of the initial cash payment. Therefore, Apex Silverhas agreed to reimburse Sumitomo its $1.4 million share of the bonus if it ispaid. Apex Silver will defer $1.4 million of the gain until such time as the paymentis made or determined not to be payable.

The Company recognized a $0.3 million minority interest benefit relatedto Sumitomo’s share of certain losses incurred subsequent to the close of thetransaction. The losses were primarily related to the mark-to-market losses onthe open hedge positions required by the project finance facility that wereincurred from the date of the Sumitomo transaction through the end of theperiod.

**12.****       Commitments andContingencies**

*Letters of Credit* – AtSeptember 30, 2006, the Company hadoutstanding irrevocable standby letters of credit related to the San CristobalProject in the aggregate amount of $7.6 million. The letters of creditinclude $4.5 million associated with the rail contract to transport metalconcentrates to the port facilities, $2.0 million associated with theconstruction management contract and $1.1 million associated with the powerline construction contract.  At September30, 2006 the Company had deposited $7.6 million to collateralize the letters ofcredit and has recorded $0.5 million to restricted cash and $7.1 million torestricted investments.  Per the terms ofthe letters of credit the required amounts may be reduced from time to timeunder certain circumstances.

*Escrow and Other Restricted Amounts –*At September 30, 2006, $4.1 million remained in an escrow account to providefor certain requirements related to the development of the port facility forthe San Cristobal Project. At September 30, 2006 the amount was recorded to restrictedcash.

*Project Financing* – Per theterms and conditions of the San Cristobal Project finance facility the Companywas required to deposit cash and investments in an account the use of which isrestricted to the development of the San Cristobal Project. At September 30,2006 the remaining balance in the account was $99.1 million of which $10.6million was recorded to restricted cash and $88.5 million recorded torestricted investments.

*Capital Commitments* – TheCompany 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 $77.6million at September 30, 2006.  If theCompany had cancelled all of these agreements or orders at September 30, 2006,it would have incurred cancellation fees totaling approximately $18.6 million.

20

----

*Taxes –* The Company isreceiving certain tax and duty benefits on a portion of the equipment it isimporting for its San Cristobal Project. The benefits are contingent uponfulfilling certain expenditure commitments within a specified period of timeand returning certain equipment off shore within a specified period of time.Failing to comply with these commitments would obligate the Company to refundall or a portion of the benefits received.

*Performance Bonus –* TheCompany may be required to pay up to an estimated $4.0 million bonus to the SanCristobal Project construction management contractor contingent upon certainproject completion parameters.  Based onthe current project status the company does not consider the payment probableand at September 30, 2006 no amounts have been accrued.

*Other Contingencies –* TheCompany reported in its 10-K filing for the period ended December 31, 2005 thatit had concluded an internal investigation regarding impermissible paymentsmade to government officials by several senior employees of one of its SouthAmerican subsidiaries during 2003 and 2004. The Company reported at that time that the SEC had commenced aninvestigation with respect to these matters including possible violations ofthe Foreign Corrupt Practices Act. The Company is cooperating fully with theSEC investigation and will cooperate with any investigation by the U. S. Departmentof Justice.  The Company cannot predictwith any certainty at this time the final outcome of any investigations thatmay take place including any fines or penalties that may be imposed.

The Company continues tomonitor the political uncertainties in Bolivia resulting from the Boliviangovernment's renegotiation of agreements with oil and gas producers andstatements regarding possible changes in current policies affecting the miningindustry.  If the San Cristobal Projectwere nationalized, or if taxes were substantially increased or significantroyalty payments imposed, the Company might be unable to recover its investmentin the Project and could have substantial liabilities for the derivativepositions required by the Project lenders. In addition, changes in Bolivian lawmay have an adverse effect on the Company’s ability to recover VAT receivable(See Note 5).

**13.****       Foreign Currency**

Gains and losseson foreign currency derivatives and translation consist of the following:
|                                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                             | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**          | ** ** | **(in thousands)**         | ** ** |
| Loss on Euro  derivatives                                                              |       | $                                | —     |                            | $          | — |   | $ | — |   | $ | (872 | ) |
| Gain (loss) on  re-measurement of monetary assets denominated in other than US dollars |       | $                                | 203        |                            | $          | 474 |   | $ | 439 |   | $ | 62 |   |
| Total                                                                                  |       | $                                | 203        |                            | $          | 474 |   | $ | 439 |   | $ | (810 | ) |

 

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

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.

21

----

**14.****       Supplemental cash flowinformation**

Thefollowing table sets forth supplemental cash flow information and non-cashtransactions:
|                                                             | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**          | ** ** |
| ** **                                                  | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**         | ** ** |
| **Supplemental  disclosure:**                               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Interest paid, net of amounts capitalized                   |       | $                               | 774        |   | $ | 6,387 |   |
|                                                        |       |                            |       |   |   |
| **Supplemental  disclosure of non-cash transactions:**      | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Depreciation expense capitalized                            |       | $                               | 3,618      |   | $ | 1,776 |   |
| Accrued interest capitalized                                |       | $                               | 799        |   | $ | 228 |   |
| Stock issued as compensation to consultants                 |       | $                               | 27         |   | $ | 126 |   |
| Mark-to-market gain (loss) on derivatives                   |       | $                               | (125,969   | ) | $ | (7,116 | ) |
| Accrued property plant & equipment                      |       | $                               | (13,008    | ) | $ | 55,807 |   |
| Capitalized leases                                          |       | $                               | 8,123      |   | $ | 15,222 |   |
| Stock issued as compensation including amounts  capitalized |       | $                               | 3,608      |   | $ | 2,016 |   |
| Stock issued to  purchase debt                              |       | $                               | 17,125     |   | $ | 6,103 |   |

 

**15.****       Subsequent Events**

DuringOctober 2006 the Company borrowed an additional $20 million against the $225million San Cristobal project finance facility, bringing to $140 million thetotal borrowings against the facility. The funds are restricted to thedevelopment of the San Cristobal Project.

22

----

**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 nine monthperiods ended September 30, 2006 and changes in our financial condition fromDecember 31, 2005.  This discussionshould be read in conjunction with the Management’s Discussion and Analysisincluded in our Annual Report on Form 10-K as amended for the period endedDecember 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**

Development of SanCristobal

During the firstnine months of 2006 we continued to make significant progress on theconstruction of our San Cristobal Project in Bolivia with expenditures ofapproximately $71 million in the third quarter and $207 million in the firstnine months on equipment procurement, plant construction, infrastructuredevelopment, engineering and other costs. The concrete work, steel erection andpower line construction was essentially completed at September 30, 2006.  During the first nine months of 2006significant progress was made on the installation of the mills and constructionof the primary crusher and the associated conveyor system with constructionbeginning on the rail spur during the third quarter. We expect to have accessto the power grid by the end of 2006 and construction of the rail and portfacilities are expected to be completed in the second quarter of 2007. AtSeptember 30, 2006 the project was estimated to be approximately 80% completed.We anticipate commencement of production at the project in the third quarter of2007.

During the year webegan mining ore at the San Cristobal Project and at September 30, 2006 we hadstockpiled approximately 3.5 million tonnes of work-in-process ore inventoriesrecorded at a cost of approximately $16.9 million. Work-in-process inventoriesinclude ore produced and stockpiled for which further processing is necessarybefore a product is ready for sale. During September 2006 we began mining and stockpiling sulfide ore and atSeptember 30, 2006 approximately 0.1 million tonnes of the total stockpiled orewas sulfide ore.  The sulfide ores willbe processed through the San Cristobal mill first with the oxide ores scheduledfor processing later in the mine life. Final processing of work-in-process ore inventories to a saleableproduct is scheduled to begin during the third quarter of 2007.

Sale of 35% of SanCristobal to Sumitomo

On September 25,2006, we sold to Sumitomo Corporation (“Sumitomo”), a 35% interest in threesubsidiaries that own and operate our San Cristobal Project, market Projectconcentrates and hold the metals hedge positions required by the Projectlenders, and certain other Project-related assets. We continue to own 65% ofthese three subsidiaries. The purchase price paid by Sumitomo was $224 million incash and certain deferred payments based on silver and zinc production from theProject and future expansions as follows: (i) quarterly payments equal to 22.86% of Sumitomo’s share of payablesilver production from the San Cristobal Project, or approximately 8% of totalpayable silver production, payable in cash or silver at Sumitomo’s option, and(ii) quarterly cash payments equal to 20% of Sumitomo’s share of payable zincproduction from the San Cristobal Project, or approximately 7% of total payablezinc production, multiplied by the zinc price in excess of $1,800 per tonne.

The Minera SanCristobal (“MSC”) Shareholders Agreement entered into in connection with thesale to Sumitomo provides that the majority shareholder will control the MSCBoard and appoint the Board Chairman. MSC is the subsidiary that owns and operates the San CristobalProject.  As long as the

23

----

minority shareholderholds more than 25% of the outstanding stock of MSC, certain significantmatters require the approval of the minority shareholder director includingapproval of annual programs and budgets, increases of 15% or more over budgetedcapital expenditures or operating expenses (with customary exceptions foremergencies and compliance), merger or liquidation, permanent cessation orsuspension for more than 180 days of mining at or abandonment of the SanCristobal Project.  If a deadlock withrespect to adoption or amendment in excess of 15% of a program and budgetcontinues for 180 days, the majority shareholder’s directors are then entitledto approve the program and budget.

Under the MSCShareholder Agreement, we and Sumitomo are required to provide our respectiveproportionate shares of shareholder debt or equity funding required for MSC toachieve commercial operations, or be diluted on a two for one basis.   Following commercial operations, we andSumitomo may choose to provide our proportionate share of required externalfunding or dilute on a one for one basis. Dilution by us or Sumitomo of ownership interest in MSC would result intransfers of shares in the other two subsidiaries, so that the parties’ownership interests in the three companies would remain identical.  If Sumitomo were to dilute below 25%ownership of MSC solely as a result of its failure to provide future funding,and were to refuse to approve a program and budget proposed by us for more than180 days, Sumitomo could elect to sell to us all (but not less than all) of itsremaining interest in MSC for $224 million, reduced pro rata by the percentageof year-end 2005 reserves produced from the San Cristobal Project.

We and Sumitomohave also entered into a two year Option Agreement pursuant to which Sumitomomay acquire a 20 percent to 35 percent interest in each of certain of ouractive exploration properties at historical cost, and in each of certaininactive exploration properties at historical cost once we have spent $200,000in exploration costs. Sumitomo must exercise its option on each active propertywithin 60 days of receiving complete information regarding the property and oneach inactive property within 60 days of the Company spending $200,000 on theproperty.  At September 30, 2006 Sumitomohad not exercised its options to acquire any exploration properties.

In connection withthe sale to Sumitomo, we also amended the San Cristobal project financefacility, as follows:  (i) we andSumitomo provide severally pro rata to our respective 65% and 35% ownershipinterests in MSC, and not jointly, San Cristobal Project completion and costoverrun support; (ii) we and Sumitomo guarantee severally pro rata to our MSCownership interests, and not jointly, the performance of the metals hedgepositions; (iii) we were permitted to withdraw from accounts controlled by theProject lenders $70 million of contingent overrun financing previously requiredby the lenders; (iv) Sumitomo guarantees up to $45.5 million of overrun fundingby the Company; (v) we were permitted to remove from escrow approximately $5.7million previously deposited to meet interest payments on its subordinatednotes, and are no longer required to escrow an additional $10.4 million; and(vi) additional cure periods for certain representation and covenant defaultsand certain defaults related to completion of the Project are permitted, as isthe substitution of a replacement sponsor in the event of certain defaults,bankruptcy or expropriation events.

We recorded aminority interest in the assets and liabilities sold of $88.6 million andrecognized a gain of $119.8 million related to the transaction. The gain is netof approximately $6.4 million of selling costs we incurred related to thetransaction.

Updated San CristobalFunding Requirements, Production and Operating Costs

During October2006, we completed our review of the San Cristobal development plan commencedduring the third quarter 2006, based on the advancement of construction andmining activities.  As a result, we haveincreased our estimate for the total amount of project funding, increased ourestimates of zinc production and reduced our estimates of silver production forthe first five years of operation, and increased our estimates of average cashoperating costs for the first five years of operation.  These changes result primarily from recordhigh commodity prices and the required stockpiling of increased amounts ofoxide ore for future processing.  Recordhigh commodities prices have had a direct impact on the cost of supplies suchas fuel, tires, and reagents, contributing to increased funding requirementsfor the project and higher estimated operating costs once productionbegins.  Recent pre-stripping activityhas provided additional information regarding the ore body, which indicatesthat the boundary between the surface silver-rich oxide ore that will bestockpiled for future processing and the sulfide ore that will be the first tobe processed through the San Cristobal mill is lower than previouslybelieved.   This has increased the amountof oxide ore stockpiled for future processing and has required that increasedamounts of material be moved to access the sulfide ore. Based on the increasedamounts of silver-rich oxide ore, we have begun to analyze

24

----

the feasibility ofvarious alternative methods to process the oxide ore earlier in the mine lifethan originally planned.

With more than 80%of the construction complete, our estimate for the total amount of projectfunding required from January 1, 2004 through the beginning of production in2007 has increased from approximately $600 million to approximately $650million or an 8% increase over the original estimate developed in 2004. Thisamount includes all estimated costs required to commence production at SanCristobal, including all engineering, procurement and construction costs, aswell as estimates for constant dollar escalation and contingencies. Theincrease includes approximately $23 million of additional mining costs relatedto the stockpiling of additional oxide ore, $15 million in additional capital,and $9 million of additional contingency. As previously indicated, this estimate excludes $22 million advanced tothe company constructing the power line, $6 million advanced to the companyconstructing the port facilities, and $43 million of working capital.  The working capital estimate has beenincreased by approximately $16 million to $43 million due to higher operatingcosts incurred prior to the commencement of receipt of revenues fromproduction.

Based onadditional information developed during pre-stripping and a40,000-tonne-per-day ore throughput, in the first five years of operation SanCristobal is now expected to produce annually approximately 16.9 million ouncesof payable silver (at an average cash operating cost of approximately $1.97 perounce), 225,000 tonnes of payable zinc (at an average cash operating cost ofapproximately $0.51 per pound) and 82,000 tonnes of payable lead (lead iscredited as a by-product to silver production costs).  The higher operating costs result primarilyfrom the increases in the cost of supplies due to higher commodity pricesdescribed above, and also from increases in estimated man power requirementsover those anticipated in the original development plan. The term “average cashoperating cost” is a non-GAAP financial measure (see “Non-GAAP FinancialMeasures”). During its projected 16-year life, San Cristobal is expected toproduce annually approximately 15.7 million ounces of payable silver, 166,000tonnes of payable zinc and 59,000 tonnes of payable lead.

We are updatingour San Cristobal reserve estimates to reflect the new information about theboundary between oxide and sulfide ore and updated operating costs and metalsprices.  We expect to complete thisupdated estimate prior to filing our report on Form 10-K for the year endedDecember 31, 2006. 

Financing and CommodityDerivatives Matters

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.  We cancelled the notes purchasedin the transaction.

During the firstquarter of 2006 we initiated borrowing under the $225 million San Cristobalproject finance facility that we closed during December 2005.  At September 30, 2006 we had borrowed $120million under the facility.  DuringOctober 2006 we borrowed an additional $20 million bringing the totalborrowings against the facility to $140 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 wehave accelerated the evaluation of our current exploration portfolio and theexpansion of new exploration opportunities.

Certain covenantsrelated to the project finance facility required us to provide price protectionfor a portion of our planned production of metals from San Cristobal.  During the third quarter 2005, we enteredinto contracts utilizing forward sales, puts and calls to comply with theproject finance facility covenants.  Inorder to maintain leverage to silver market prices, we entered intoproportionally more zinc and lead contracts than silver.

25

----

In addition, wehave made limited investments in shorter duration put and call options andother metals derivatives not required by the project financing. Thesediscretionary derivative positions typically have settlement dates less thanone year and we have the option to settle these positions in cash or roll themforward to a future date. During 2006 we made $36.9 million of net cashpayments to settle the majority of these discretionary derivative contracts notrequired by the project financing.  Theremaining liability for these discretionary derivative positions on amark-to-market basis as of September 30, 2006 was $5.0 million.

We continue torecognize losses on our total derivative position as a result of continuinghigh spot and forward prices for silver, zinc and lead. During the first ninemonths of 2006 we recorded losses of $165.5 million. During the same period wemade net cash payments of $36.9 million to settle the majority of ourdiscretionary positions not required by the project financing facility.   While the final financial impact of therequired price protection program related to the project financing will not beknown until the positions are closed on their future settlement dates, we donot intend to settle those open positions with cash prior to the settlementdates beginning in 2007.  At the time offinal settlement, the gain or loss recorded will exclude previously recognizedmark-to-market gains or losses.  Inaddition, if the increased silver, zinc and lead prices were to continue intothe production phase of the San Cristobal Project, the increased revenue frommetals sales for which price protection was not required would generate asignificant benefit to future earnings and cash flows.  During the periods that the metal derivativepositions are outstanding, gains and losses may fluctuate substantially from periodto period in accordance with Statement of Financial Accounting Standards No.133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),based on spot prices, forward prices and quoted option volatilities. If currentspot prices continue into future periods that include the settlement dates ofour open derivative positions, we will report further mark-to-market losses insubsequent periods.

Political Matters in Bolivia

We continue tomonitor the political uncertainties in Bolivia that may affect our SanCristobal Project.  To date, there havebeen no formal proposals by the Bolivian government to nationalize the miningindustry but it is possible that the government may alter its current policieswith respect to the mining industry in the future.

**Results of Operations**

Three Months EndedSeptember 30, 2006

*Exploration.*  Exploration expense was $2.2 million for thethird quarter 2006 compared to $1.1 million for the third quarter 2005.  Exploration expense was incurred primarily inBolivia, Peru, Argentina and Mexico during the third quarter 2006 with theincreased expense resulting primarily from a drilling program in Argentina.

*Administrative.*  Administrative expense of $4.1 million forthe third quarter 2006 is comparable to $4.8 million for the third quarter2005.  The additional administrativeexpense incurred during the third quarter of 2005 as compared to the sameperiod of 2006 is primarily related to indirect legal and consulting feesassociated with the project finance facility that we closed in December 2005.

*Gainsand Losses - Commodity Derivatives*.  For the third quarter of 2006 we recordedlosses related to our metals derivative positions in the amount of $45.4million compared to a loss of $9.6 million on our derivative positions for thethird quarter of 2005. During the same period of 2006 we made net cash paymentsof $8.8 million to settle the majority of our discretionary derivativepositions not required by the project financing facility.  Continuing high spot and forward prices forsilver, zinc and lead resulted in the losses for the 2006 period, which areprimarily related to the hedge positions required by the project financefacility. Our open metals derivative position for the second quarter 2005 wassubstantially smaller, prior to the project financing facility requirements, asreflected in the smaller non-cash mark-to-market loss. (See “Overview” foradditional discussion of the third quarter 2006 derivative loss).

26

----

*Gain onsale of interest in subsidiary.* During the third quarter 2006we sold a 35% equity interest in the subsidiaries that own and operate our SanCristobal Project to Sumitomo for $224 million in cash and the retention ofcertain interests in future silver and zinc production. We recognized a gain of$119.8 million on the transaction. There was no similar activity during thethird quarter of 2005.

*Interestand other income.* We recorded interest and other income of$4.5 million for the third quarter 2006 as compared to $5.7 million recordedduring the third quarter 2005.  Thedecrease in interest and other income during 2006 is primarily related to loweraverage cash and investment balances during the third quarter 2006 as comparedto the same period of 2005, resulting in lower interest earned. Amounts spenton our San Cristobal Project resulted in the lower average cash and investmentbalances during 2006.

*Interestexpense and other borrowing costs.*  We recognized no interest expense and otherborrowing costs during the third quarter 2006 as the total related costs of$7.1 million were capitalized. During the third quarter 2005 we recognized $2.6million of interest expense and other borrowing costs net of approximately $1.8million capitalized. Interest costs for 2006 are primarily related to theConvertible Senior Subordinated Notes Due 2024 and the project finance facilitywhile the 2005 interest costs are primarily related to the Convertible SeniorSubordinated Notes Due 2024.

*IncomeTaxes*.   For the thirdquarter 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 third quarter 2005.

Nine Months EndedSeptember 30, 2006

*Exploration.*  Exploration expense was $5.2 million for thefirst nine months of 2006 compared to $3.9 million for the first nine months of2005.  Exploration expense was incurredprimarily in Bolivia, Peru, Argentina and Mexico during the first half of 2006with the increased expense resulting primarily from a drilling program inArgentina.

*Administrative.*  Administrative expense was $15.1 million forthe first nine months of 2006, compared to $13.7 million for the first ninemonths of 2005.  The increase inadministrative expense during 2006 is primarily the result of additionalpersonnel and related indirect support costs associated with the advancement ofour San Cristobal Project and certain legal fees and other costs associatedwith the investigation of a possible violation of the Foreign Corrupt PracticesAct as previously reported.

*Gainsand Losses - Commodity Derivatives*.  For the first nine months of 2006 we recordedlosses related to our metals derivative positions in the amount of $165.5million compared to a loss of $7.6 million on our derivative positions for thefirst nine months of 2005. During the same period of 2006 we made net cashpayments of $36.9 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, which are primarily related to the hedge positionsrequired by the project finance facility. Our open metals derivative positionfor the first nine months of 2005 was substantially smaller prior to theproject financing requirements, as reflected in the smaller non-cashmark-to-market gain. (See “Overview” for additional discussion of the 2006derivative loss)

*Interestand other income.* Interest and other income of $12.6 millionfor the first nine months of 2006 comparable to $12.7 million recorded duringthe first nine months of 2005.

*Interestexpense and other borrowing costs.*  Interest and other borrowing costs were $0.8and $6.5 million, net of approximately $16.9 million and $4.3 million capitalized,for the first nine months of 2006 and 2005, respectively. The 2006 interestexpense includes a $0.5 million write-off of deferred issuance costs related tothe extinguishment of debt. The interest expense for 2006 is primarily relatedto the 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.

*IncomeTaxes*.   For the firstnine months of 2006 we recorded approximately $0.2 million of income taxexpense related to withholding taxes on certain services we provided to one ofour Bolivian subsidiaries.  No such taxeswere incurred during the first nine months of 2005.

27

----

**Liquidity and Capital Resources**

At September 30, 2006 our aggregate cash, restricted cash, short and longterm investments and restricted investments totaled $549.1 million compared toan aggregate of $351.9 million in cash, restricted cash, short and long terminvestments and restricted investments at December 31, 2005.  The amounts held at September 30, 2006include $138.1 million in cash and cash equivalents, $294.7 million ininvestments,  $15.2 million of cash thathas been restricted to cover outstanding letters of credit and other purposes,$95.6 million of investments that are restricted to fund development at our SanCristobal Project and $5.5 million of investments that are restricted and atmaturity will provide the amounts necessary to pay interest through September2007 on the 4.0% Convertible Senior Subordinated Notes Due 2024.

As of September 30, 2006, we had cash and cash equivalents of $138.1million, compared to $4.8 million at December 31, 2005.  The increase in our cash balance at September30, 2006 is primarily the result of $151.1 million of net proceeds from anequity offering, $120.0 million of borrowings against the project financefacility, and $224.0 million of proceeds from the sale of a 35% interest in ourSan Cristobal Project.  In addition, cashand cash equivalents increased as a result of $5.7 million of net proceeds fromthe sale of Ordinary Shares to fund the power line construction, $1.8 millionof proceeds from employee stock options exercised, $1.4 million of proceedsreceived from a loan from the power line contractor’s parent, and a netdecrease in restricted cash of $120.0 million. The increases in our cash balances were all partially offset by $207.3million invested in property, plant and equipment related to the development ofthe San Cristobal Project, $58.4 million used to fund operations, propertyholding costs and administrative costs, net of interest and other income, thenet purchase of $181.7 million of investments, $39.5 million of net premiumsand liquidation payments made related to our discretionary derivativepositions, $1.5 million paid to suppliers and contractors related to our SanCristobal Project, $0.7 million paid to the banks related to the creditfacility and payments on long term debt (capital lease payments) of $1.6million.

In conjunctionwith the sale of the 35% equity interest in the subsidiaries that own our SanCristobal Project to Sumitomo, the project finance facility agreements wereamended to provide for the release to us of $70.0 million of overrun financingpreviously held in accounts controlled by the lenders and approximately $5.7million previously escrowed to meet interest payments on our subordinatednotes.  This $75.7 million (which wasincluded in the $120.0 million of net decrease in restricted cash describedabove) is now unrestricted and available to us for general corporate purposes.At September 30, 2006 the amounts were recorded as investments as discussedabove.

During the thirdquarter 2006 we revised our estimate for the total amount of project fundingrequired for the San Cristobal Project from January 1, 2004 through thebeginning of production scheduled for the third quarter of 2007 toapproximately $650 million or an 8% increase over the original estimatedeveloped in December 2004.  This amountincludes all estimated costs required to commence production at San Cristobal,including all engineering, procurement and construction costs, as well asestimates for constant-dollar escalation and contingencies.  The estimate excludes $22 million advancedthrough the issuance of Ordinary Shares to the company constructing the powerline, $6 million advanced to or escrowed for the company constructing the portfacilities and approximately $43 million of working capital.  Advances to the power line and port facilityproviders are expected to be recouped through credits applied against paymentsfor the contracted services. Excluding the power line and port advances, wehave spent approximately $420 million on the Project through September 30, 2006including $226 million spent during the first nine months of 2006.  In addition to the amounts above, we expectto incur interest and other financing costs related to the project financefacility of approximately $30 million prior to the start up of operations.

During the nexttwelve months we expect to spend about $230 million on the San CristobalProject,  representing the remainder ofthe approximately $650 million total project cost estimate, plus an additional$43 million of working capital and $16 million of project financing interest costsprior to start up of operations.  Thepreceding amounts include $50 million in total project costs and $16 million inworking capital in excess of the original estimates. We expect to fund thesecash requirements by liquidating the restricted investments already set asidefor this purpose, drawing the remaining funds available from the projectfinancing facility, and using existing cash and investments to fund our 65% ofthe requirements in excess of the original estimates. In addition, during the nexttwelve months we expect to spend approximately $14 

28

----

million on general corporate costs and approximately $10 million oninterest payments related to the outstanding convertible debt.  Our current plans call for expenditures ofapproximately $12 million on exploration efforts during the next twelve months.We plan to fund these expenditures from our existing cash and investmentbalances and from interest and other income. At September 30, 2006 our aggregate cash, restricted cash, short andlong term investments and restricted investments totaled $549 million. Inaddition we expect operating cash flows to begin during the third quarter of2007.

**Significant Accounting Policies**

Effective January1, 2006 we 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. We hadpreviously adopted FAS No. 123 effective January 1, 2004 and consequently theadoption of FAS No. 123R did not have a significant impact on the comparabilityof stock compensation costs recognized in 2006 as compared to 2005. Werecognized $3.6 million of stock based compensation costs for the nine monthsended September 30, 2006 including amounts capitalized compared to $2.0 millionof stock based compensation for the same period of 2005 including amountscapitalized. The increased cost is primarily related to stock option grantsmade in December of 2005 and vesting over a four year period.  (See Item 1 Note 10 for further detail ofstock based compensation.)

EffectiveJanuary 1, 2006 we adopted Emerging Issues Task Force Issue No. 04-06(“EITF 04-06”), “Accounting for Stripping Costs Incurred during Production inthe Mining Industry.” In January 2006, the EITF issued additional guidancedefining the commencement of production as the period when saleable mineralsare first extracted in greater than de minimis amounts. During the firstquarter of 2006, we began mining significant amounts of oxide ore reserves atour San Cristobal Project, which have been placed in stockpiles for futureprocessing.  The quantity and value ofthe minerals mined were sufficient to declare the start of ore productionaccording to the EITF consensus. At September 30, 2006 we had recorded oreinventories valued at $16.9 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 $77.6 million at September 30, 2006.  If we had cancelled all of these agreementsor orders at September 30, 2006, we would have incurred cancellation feestotaling approximately $18.6 million.

During the ninemonths ended September 30, 2006 we had a net increase in long term debt of$114.8 million consisting of $120.0 million of borrowings against the projectfinance facility, $14.8 million of other long term borrowings and a $20.0reduction of long term debt resulting from the buy back of a portion of the4.0% Convertible Senior Subordinated Notes due 2024. In addition during thenine months ended September 30, 2006 we placed in service $8.1 million ofequipment recorded as capital leases resulting in total capital leaseobligations of $17.9 million at September 30, 2006.

In conjunctionwith the sale of a 35% interest in our San Cristobal Project to Sumitomo theCompany recorded a note payable of $7.8 million as the result of assigningSumitomo a 35% interest in a $22.3 million note receivable the Company holdsfrom the power line contractor at the San Cristobal Project. The Company alsorecorded a $1.4 million deferred gain that is contingent upon the payment of aperformance bonus to the construction contractor at the San Cristobal Projectand the reimbursement to Sumitomo of its $1.4 million share of the bonus by theCompany should the bonus be paid.  Inaddition, as a result of the sale the project finance facility agreements wereamended to provide for the release of $70.0 million of overrun financingpreviously held in accounts controlled by the lenders and approximately $5.7million previously escrowed to meet interest payments on our subordinatednotes. This $75.7 million is now unrestricted and available for generalcorporate purposes.

29

----

**Non-GAAP Financial Measures**

The non-GAAP financial measure term “cash operating costs” is used on a per-ounce of payable silverand per-pound of payable zinc basis. Our estimated cash operating costs includeestimated mining, milling and other mine related overhead costs. The per-ounceof silver cost also includes off-site costs related to projected silverrefining charges. The per-pound of zinc cost also includes charges related to transportationof zinc concentrates and their projected treatment and smelting charges. Allcash operating costs exclude taxes, depreciation, amortization and provisionsfor reclamation. The average cash operating cost per ounce of silver is equalto the pro-rata share of estimated average operating costs for the periodreduced by the estimated value of lead by-product credits for the period anddivided by the number of “payable ounces”. The lead by-product credits are netof charges related to transportation of lead concentrates and their projectedtreatment and smelting charges. The “payable ounces” are the estimated numberof ounces of silver to be produced during the period reduced by the ouncesrequired to cover estimated refining, treatment and transportation charges forthe period. Average cash operating cost per pound of zinc is equal to thepro-rata share of estimated average operating costs for the period divided bythe number of “payable pounds”. The “payable pounds” are the estimated numberof pounds of zinc to be produced during the period reduced by the number ofpounds required to cover estimated refining, treatment and transportationcharges for the period. We have included estimated average cash operating costinformation to provide investors with information about the cash generatingcapabilities of the San Cristobal Project. This information will differ frommeasures of performance determined in accordance with generally acceptedaccounting principles (GAAP) and should not be considered in isolation or as asubstitute for measures of performance that will be prepared in accordance withGAAP. These measures are not necessarily indicative of operating profit or cashflow from operations to be determined under GAAP and may not be comparable to similarlytitled measures of other companies.

## **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; anticipated spending during 2006 and 2007;increased funding requirements, capital costs and working capital requirementsfor the San Cristobal Project; Contractual arrangements with Sumitomo,including Sumitomo’s obligations with respect to deferred payments and fundingcommitments; the likely increased volatility in future earnings due to forwardsales, derivative positions and metals trading activity; anticipated SanCristobal production and operating costs and the timing and amounts of spendingon the evaluation and expansion of our exploration portfolio. The use of any ofthe words “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;

·                  politicalunrest and economic instability in Bolivia including the communities locatednear the San Cristobal Project and other countries in which we conductbusiness;

·                  futureactions of the Bolivian government with respect to nationalization of gas andother natural resources;

·                  changesin the mining policies of the Bolivian government;

·                  volatilityin market prices for silver, zinc and lead;

·                  financialmarket conditions;

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

30

----

·                  variationsin ore 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;

·                  failureto comply obligations under the San Cristobal project finance facility;

·                  disagreementswith Sumitomo Corporation regarding future development or operation of SanCristobal, or failure to comply with agreements with Sumitomo related to theSan Cristobal Project;

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

·                  thefactors discussed under “Risk Factors” in our Form 10-K for the period endedDecember 31, 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.****    Quantitativeand Qualitative Disclosures About Market Risk and Hedging Activities**

## **InterestRate Risk**

Our outstanding debtconsists primarily of our 4.0% and 2.875% Convertible Senior Subordinated Notesdue 2024 and amounts borrowed under our San Cristobal project financefacility.  The Convertible SeniorSubordinated Notes bear interest at a fixed rate and thus do not have exposureto interest rate changes.  The projectfinance facility bears interest at the LIBOR rate plus a credit spread.  As of September 30, 2006, we had borrowed$120 million under the facility and expect to borrow the full amount of the$225 million facility before the completion of the San Cristobal project in2007.  Assuming the full $225 million wasborrowed under the facility, a 1% increase in the LIBOR rate would result in anannual increase in interest expense of $2.25 million.  We have not entered into any agreements tohedge against unfavorable changes in interest rates, but may in the futuremanage our exposure to interest rate risk.

We invest excess cash inU.S. government and debt securities rated “investment grade” or better.  The rates received on such investments mayfluctuate with changes in economic conditions. As a result, our investmentincome may fall short of expectations during periods of lower interest rates.  Based on the average cash balancesoutstanding during the first nine months of 2006, a 1% decrease in interestrates would have resulted in a reduction in interest income for the period ofapproximately $3 million.

## **ForeignCurrency Exchange Risk**

Although most of ourexpenditures are in U.S. dollars, certain purchases of labor, operatingsupplies and capital assets are denominated in Bolivianos, Euros or othercurrencies.  As a result, currencyexchange fluctuations may impact the costs of our operations.  Specifically, the appreciation of Bolivianosagainst the U.S. dollar may result in an increase in operating expenses andcapital costs at the San Cristobal project in U.S. dollar terms.  To reduce this risk, we maintain minimum cashbalances in all foreign currencies, including Bolivianos, and complete most ofour purchases, including purchases relating to the San Cristobal project, inU.S. dollars.

We have previouslyengaged in a limited amount of currency hedging activities primarily related toan equipment order for the San Cristobal project that was denominated inEuros.  At September 30, 2006 we did nothold any foreign currency derivative positions.

## **CommodityPrice Risk**

None of our propertiesare in production and, consequently, we do not have any current revenue fromsales.  When the San Cristobal projectbegins production, our primary source of income will be from sales

31

----

of concentratescontaining silver, zinc and lead.  As aresult, changes in the price of any of these commodities could significantlyaffect our results of operations and cash flows.

To complete the SanCristobal project finance facility, we were required to hedge a portion of ourplanned silver, zinc and lead production from San Cristobal.  We have entered into contracts utilizingforward sales, puts and calls.  Non-cashmark-to-market gains and losses from these and other outstanding metalsderivative positions may fluctuate substantially from period to period based onspot and forward prices and option volatilities.  The actual final financial impact of the requiredproject financing facility derivative positions will not be known until thepositions are closed on their future settlement dates.  Our outstanding derivative positionsrepresent 4%, 14% and 17% of planned life-of-mine payable production of silver,zinc and lead at San Cristobal.

As a result ofrising commodity prices, we recorded losses of $165.5 million on our derivativepositions for the nine months ended September 30, 2006.  During the same period, we made net cashpayments of $36.9 million to settle the majority of certain discretionary hedgepositions that were not required by the project financing facility.  As of September 30, 2006, the fair value ofour open commodities derivatives position was recorded as a $182.2 millionliability.  If current spot pricescontinue into future periods that include the settlement dates of our openderivative positions, we will report further mark-to-market losses insubsequent periods.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Results of Operations.”

# **Item 4. Controls and Procedures**

(a)          Disclosure Controls andProcedures

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Securities andExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to Apex Silver’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our Disclosure Committee andmanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness 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 thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this report.

(b)    Change in Internal Controlover Financial Reporting

Apex Silver’s managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the Securities ExchangeAct of 1934.  Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles (GAAP). Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectivenessto future 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.

There has been no changein the Company’s internal control over financial reporting during the mostrecent fiscal quarter that has materially affected, or that is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

32

----

PART II:OTHER INFORMATION

## **Item1.****    Legal Proceedings**

We reported in our 10-Kfiling for the period ended December 31, 2005 that the SEC has commenced aninvestigation into possible violations of the Foreign Corrupt Practices Act byone of our South American subsidiaries following our voluntary report to theSEC and Department of Justice of the results of our internal investigation. Weare cooperating fully with the SEC investigation and will cooperate with anyinvestigation by the U. S. Department of Justice.  We cannot predict with any certainty at thistime the final outcome of any investigations that may take place including anyfines or penalties that may be imposed.

## **Item1A. Risk Factors**

Other than as set forthbelow, there were no material changes from the risk factors as previouslydiscussed in our Form 10-K as amended for the year ended December 31, 2005.

**We depend on a single mining project which is not100% owned by us.**

We anticipate that themajority, if not all, of any revenues for the next few years and beyond will bederived from the sale of metals mined at the San Cristobal Project.  Therefore, if we are unable to complete andsuccessfully mine the San Cristobal Project, our ability to generate revenueand profits would be materially adversely affected.

In September 2006 we sold35% of the San Cristobal Project to Sumitomo Corporation. As a result of thistransaction, Sumitomo obtained certain rights with respect to the managementand operation of the project. For example, certain significant matters for theproject require the approval of Sumitomo, including approval of annual programsand budgets, and increases of 15% or more in capital expenditures or operatingexpenses and mergers or liquidations. If Sumitomo does not approve ourproposals with respect to these matters, we may face significant delays incompleting the project or improving its operations and may be unable to operatethe project in the manner we believe to be in the best interests of ourshareholders.

We and Sumitomo arerequired to provide our proportionate shares of funding for the project ifnecessary in order to complete construction and begin commercial operations. Ifadditional funding is necessary and Sumitomo does not pay its 35% share of suchadditional amounts, there can be no assurance that we would have sufficientcapital to fund the amounts required.

Sumitomo is also requiredto comply with certain provisions of the San Cristobal project financingagreements.  If Sumitomo fails to complywith its obligations, the failure could result in a default under thoseagreements, and in the subsequent acceleration of the San Cristobal projectloans and settlement obligations under the commodity derivative obligationsrequired by the project lenders, and enforcement of the lender’s liens againstthe San Cristobal Project. See --- “We may be unable to comply with the termsand covenants of the debt financing for our San Cristobal Project.”

**Our SanCristobal Project may be adversely affected by changes in government policiestoward the mining industry.**

On May 1, 2006, PresidentEvo Morales of Bolivia, who took office in January 2006, signed a decree to nationalizeBolivia’s hydrocarbon industry, in order to take control of companies involvedin the production, transport, refining or distribution of oil and gas.  Although the oil and gas companies werepermitted to continue operating, the nationalization decree provides that alarger share of the revenues derived from the production and sale ofhydrocarbons in Bolivia will go to the government.  The government is negotiating newarrangements separately with each of the oil and gas producers operating inBolivia. President Morales and others in his administration have made publicstatements regarding their desire to recover natural resource production inBolivia, including mining.

33

----

To date, there have beenno formal proposals to nationalize the mining industry.   The government may, however, alter itscurrent policies with respect to the mining industry.  If the San Cristobal project werenationalized, we might be unable to recover any significant portion of ourinvestment in the project.  Thegovernment could also substantially increase mining taxes or requiresignificant royalty payments, which could have a material adverse effect on theprofitability of the San Cristobal project.  If as a result of changes in government policy, we did not completeconstruction of the San Cristobal project, we could have substantialliabilities in connection with our hedge positions.  We do not maintain political risk insuranceto cover losses that we may incur as a result of nationalization, expropriationor similar events in Bolivia.  Thelenders, other than Corporacion Andina de Fomento, do, however maintainpolitical risk insurance to cover their loan and hedge position exposures.  Amounts payable with respect to suchinsurance would be payable directly to the lenders or hedge counterparties andwould not cover any portion of our investment in the project.

In addition, in May 2006,the Constitutional Court of Bolivia issued a ruling declaring certain articlesof the Mining Code unconstitutional. The Court’s ruling is not effective untilMay 2008 and the ruling urges the Bolivian Congress to enact legislation duringthat time which may supersede the ruling. Among other things, the ruling may limit the transferability of miningconcessions and restrict our ability to transfer or mortgage our miningconcessions including the San Cristobal concessions that we have mortgaged ascollateral to the lenders providing financing for the San CristobalProject.  There can be no assurance thatthe Bolivian Congress will enact legislation to permit the transfer or mortgageof concessions prior to the May 2008 implementation and if implemented, whatthe impact of the Court’s ruling will be. If the Court’s ruling is implemented and causes a negative effect on thevalidity of our existing San Cristobal mortgages that situation could result ina default under the San Cristobal Project finance facility, which could resultin acceleration of the loan and hedge liabilities.

## **Item2.****    UnregisteredSales of Equity Securities and Use of Proceeds**

None.

## **Item3.****    DefaultsUpon Senior Securities**

None.

## **Item4.****    Submissionof Matters to a Vote of Security Holders**

None.

**Item 5.****    Other Information**

None.

**Item 6.****    Exhibits**

10.1               Purchase and SaleAgreement, dated September 25, 2006 among the Company, Apex LuxembourgS.A.R.L., Apex Silver Mines Sweden AB and Sumitomo Corporation.

10.2               Deferred PaymentsAgreement, dated September 25, 2006 between Apex Silver Mines Sweden AB andSumitomo Corporation.

10.3               MSC ShareholdersAgreement, dated September 25, 2006 among Apex Luxembourg S.A.R.L., Apex SilverMines Sweden AB, Gotlex Lageraktiebolag nr. 451 AB and Minera SanCristobal, S.A.

10.4               Option Agreement,dated September 25, 2006 between the Company and Sumitomo Corporation.

10.5               Omnibus AmendmentAgreement, dated September 25, 2006 among Minera San Cristobal S.A., theCompany, Apex Silver Mines Sweden AB, Apex Luxembourg S.A.R.L., Apex MetalsGmbH, Apex Silver Finance LTD., Apex Metals Marketing GmbH, GotlexLageraktiebolag nr. 451 AB, Comercial Metales Blancos AB, BNP Paribas,Barclays Capital, JP

34

----

Morgan Chase Bank, N.A.,Corporacion Andina de Fomento and the senior lenders and hedge banks partythereto.

10.6     Form of Change of ControlAgreement

31.1     Certification of ChiefExecutive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2     Certification of ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32                        Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.,1350 (Section 906 of the Sarbanes-Oxley Act)

35

----

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on behalf of the undersigned thereunto dulyauthorized.

 
|        |             | APEX SILVER MINES LIMITED |
|--------|------------------|---------------------------|
|   |             |                      |
|   |             |                      |
| Date:  | November 6, 2006 | By:                       | \s\ Jeffrey G. Clevenger |   |
|   |             |                      | Jeffrey G. Clevenger |
|   |             |                      | President and Chief Executive Officer |
|   |             |                      |
|   |             |                      |
| Date:  | November 6, 2006 | By:                       | \s\ Gerald J. Malys |   |
|   |             |                      | Gerald J. Malys |
|   |             |                      | Senior Vice President and Chief Financial Officer |

 

36

----