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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

 

**x****                            ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2008.**

** **

**o****                               ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 FOR THE TRANSITION PERIOD FROM                TO                .**

** **

**COMMISSION FILE NUMBER  000-29786**

 
| **MINES MANAGEMENT, INC.**                                           |
|----------------------------------------------------------------------|
| (Exact Name of Registrant as Specified in  its Charter)              |
|                                                                 |
| **IDAHO**                                                            |   | **91-0538859** |
| (State or Other Jurisdiction of  Incorporation or Organization)      |   | (I.R.S. Employer Identification No.) |
| ** **                                                           |   | ** ** |
| **905 W. Riverside Avenue, Suite 311**

**Spokane, Washington** |   | **99201** |
| (Address Of Principal Executive Offices)                             |   | (Zip Code) |
| ** **                                                           |
| **(509) 838-6050**                                                   |
| (Registrant’s Telephone Number, Including  Area Code)           |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  xYes    o  No

 

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

 

| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o                        | Smaller reporting company o |
|---------------------------|--------------------------|------------------------------------------------|----------------------------------|
|                      |                     | (Do not check if a smaller  reporting company) |                             |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

At November 10, 2008, 22,756,848 shares of common stock, par value$0.001 per share, were issued and outstanding.

 

SEC 1296(9-05)          Potentialpersons who are to respond to the collection of information contained in thisform are not required to respond unless the form displays a currently valid OMBcontrol number.

 

 

 

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**MINES MANAGEMENT, INC.**

**FORM 10-Q**

**QUARTER ENDED SEPTEMBER 30, 2008**

 

**INDEX**

 
| PART I — FINANCIAL INFORMATION | i                                                                                           |
|------------------------------------------|---------------------------------------------------------------------------------------------|
|                                     |                                                                                        |   |
| ITEM 1.                                  | Financial statements (unaudited)                                                            | i |
| ITEM 2.                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 11 |
| ITEM 3.                                  | Quantitative and Qualitative Disclosures  About Market Risk and Hedging Activities          | 14 |
| ITEM 4.                                  | Controls and Procedures                                                                     | 14 |
|                                     |                                                                                        |   |
| PART II —  OTHER INFORMATION   | 15                                                                                          |
|                                     |                                                                                        | 15 |
| ITEM 1.                                  | Legal Proceedings                                                                           | 15 |
| ITEM 1A.                                 | Risk Factors                                                                                | 15 |
| ITEM 2.                                  | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 15 |
| ITEM 3.                                  | Defaults Upon Senior Securities                                                             | 15 |
| ITEM 4.                                  | Submission of Matters to a Vote of Security  Holders                                        | 15 |
| ITEM 5.                                  | Other Information                                                                           | 15 |
| ITEM 6.                                  | Exhibits                                                                                    | 15 |
|                                     |                                                                                        |   |
| SIGNATURES                               |                                                                                        | 16 |

 

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**PART I—FINANCIAL INFORMATION**

** **

**ITEM 1.**                                                     FINANCIAL STATEMENTS (UNAUDITED)

** **

**Contents**

 
| ** **                                              | **Page** |
|---------------------------------------------------------|----------|
|                                                    |     |
| *FINANCIAL STATEMENTS:*                                 | * * |
| * *                                                | * * |
| *Condensed  consolidated balance sheets*                | *1*      |
| * *                                                | * * |
| *Condensed consolidated statements of operations*       | *2*      |
| * *                                                | * * |
| *Condensed consolidated statements of cash flows*       | *3*      |
| * *                                                | * * |
| *Notes  to condensed consolidated financial statements* | *4-10*   |

 

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**MinesManagement, Inc. and Subsidiaries**

**(AnExploration Stage Company)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS (UNAUDITED)**

** **
| ** **                                                                                                                                                                                            | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ***Assets***                                                                                                                                                                                          |       |                         |       |                        |       |
| *CURRENT ASSETS:*                                                                                                                                                                                     |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $                            | 18,168,009 |                        | $          | 29,743,372 |   |
| Interest receivable                                                                                                                                                                                   |       | 50,312                       |       | 80,662                      |       |
| Prepaid expenses and deposits                                                                                                                                                                         |       | 208,741                      |       | 130,583                     |       |
| Restricted certificate of deposit                                                                                                                                                                     |       | 296,187                      |       | —                      |       |
| Certificates of deposit                                                                                                                                                                               |       | 5,000,000                    |       | —                      |       |
| Total current assets                                                                                                                                                                                  |       | 23,723,249                   |       | 29,954,617                  |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| *PROPERTY AND EQUIPMENT:*                                                                                                                                                                             |       |                         |       |                        |       |
| Construction in progress                                                                                                                                                                              |       | 1,920,937                    |       | 3,092,374                   |       |
| Mine buildings and leasehold improvements                                                                                                                                                             |       | 836,454                      |       | 783,610                     |       |
| Plant and equipment                                                                                                                                                                                   |       | 8,075,220                    |       | 5,662,485                   |       |
| Office equipment                                                                                                                                                                                      |       | 326,000                      |       | 297,909                     |       |
|                                                                                                                                                                                                  |       | 11,158,611                   |       | 9,836,378                   |       |
| Less accumulated depreciation                                                                                                                                                                         |       | 1,196,003                    |       | 428,693                     |       |
|                                                                                                                                                                                                  |       | 9,962,608                    |       | 9,407,685                   |       |
| *OTHER ASSETS:*                                                                                                                                                                                       |       |                         |       |                        |       |
| Restricted certificate of deposit                                                                                                                                                                     |       | 1,124,055                    |       | 1,124,055                   |       |
| Certificates of deposit                                                                                                                                                                               |       | —                       |       | 363,166                     |       |
| Available-for-sale securities                                                                                                                                                                         |       | 2,066,980                    |       | 132,516                     |       |
| Reclamation  deposits                                                                                                                                                                                 |       | 1,184,966                    |       | 1,184,966                   |       |
|                                                                                                                                                                                                  |       | 4,376,001                    |       | 2,794,703                   |       |
|                                                                                                                                                                                                  |       | $                            | 38,061,858 |                        | $          | 42,157,005 |   |
| ***Liabilities and Stockholders’ Equity***                                                                                                                                                       |       |                         |       |                        |       |
| *CURRENT LIABILITIES:*                                                                                                                                                                                |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                      |       | $                            | 1,036,564  |                        | $          | 1,948,566 |   |
| Payroll and payroll taxes payable                                                                                                                                                                     |       | 18,636                       |       | 23,173                      |       |
| Line of credit                                                                                                                                                                                        |       | 1,815,231                    |       | —                      |       |
| Total current liabilities                                                                                                                                                                             |       | 2,870,431                    |       | 1,971,739                   |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| *LONG-TERM LIABILITIES:*                                                                                                                                                                              |       |                         |       |                        |       |
| Asset retirement obligation                                                                                                                                                                           |       | 371,669                      |       | —                      |       |
| Total liabilities                                                                                                                                                                                     |       | 3,242,100                    |       | 1,971,739                   |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| *COMMITMENTS AND CONTINGENCIES*                                                                                                                                                                       |       |                         |       |                        |       |
| *STOCKHOLDERS’ EQUITY:*                                                                                                                                                                          |       |                         |       |                        |       |
| Preferred stock — no par value, 10,000,000  shares authorized; no shares issued and outstanding                                                                                                  |       | —                       |       | —                      |       |
| Common stock — par value $0.001, authorized  100,000,000 shares; issued and outstanding 22,756,848 and 22,236,067 shares  as of September 30, 2008 and December 31, 2007, respectively |       | 22,757                       |       | 22,236                      |       |
| Additional paid-in capital                                                                                                                                                                            |       | 66,691,231                   |       | 64,700,129                  |       |
| Accumulated deficit                                                                                                                                                                                   |       | (1,117,306                   | )          | (1,117,306                  | )          |
| Deficit accumulated during the exploration  stage                                                                                                                                                     |       | (31,017,391                  | )          | (23,541,144                 | )          |
| Accumulated other comprehensive income                                                                                                                                                                |       | 240,467                      |       | 121,351                     |       |
| Total stockholders’ equity                                                                                                                                                                       |       | 34,819,758                   |       | 40,185,266                  |       |
|                                                                                                                                                                                                  |       | $                            | 38,061,858 |                        | $          | 42,157,005 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

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**Mines Management, Inc. and Subsidiaries**

**(An Exploration Stage Company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

 
| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** | **From Inception  August 12, 2002  Through********September 30,** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008**                                                                              | ** ** | **2007** | ** ** | **2008** | ** ** |
| *REVENUE:*                                                       |       |                                                 |       |                                                |       |                                                                                  |       |   |   |   |   |
| Royalties                                                        |       | $                                                    | 3,429      |                                                | $          | 2,277                                                                                 |       | $ | 11,756 |   | $ | 4,970 |   | $ | 63,995 |   |
| *OPERATING EXPENSES:*                                            |       |                                                 |       |                                                |       |                                                                                  |       |   |   |   |   |
| General and administrative                                       |       | 1,208,077                                            |       | 883,852                                             |       | 3,385,212                                                                             |       | 2,636,412 |   | 16,684,306 |   |
| Technical  services                                              |       | 1,452,710                                            |       | 787,202                                             |       | 3,066,341                                                                             |       | 2,230,702 |   | 10,988,420 |   |
| Depreciation                                                     |       | 277,290                                              |       | 82,793                                              |       | 808,675                                                                               |       | 141,453 |   | 1,184,505 |   |
| Legal, accounting, and consulting                                |       | 185,609                                              |       | 246,004                                             |       | 645,424                                                                               |       | 541,015 |   | 2,188,039 |   |
| Fees, filing, and licenses                                       |       | 154,713                                              |       | 148,971                                             |       | 253,419                                                                               |       | 326,463 |   | 1,818,324 |   |
| Exploration                                                      |       | —                                               |       | —                                              |       | —                                                                                |       | 11,866 |   | 165,176 |   |
| Impairment of  mineral properties                                |       | —                                               |       | —                                              |       | —                                                                                |       | — |   | 504,492 |   |
| Total operating expenses                                         |       | 3,278,399                                            |       | 2,148,822                                           |       | 8,159,071                                                                             |       | 5,887,911 |   | 33,533,262 |   |
| *LOSS FROM OPERATIONS*                                           |       | (3,274,970                                           | )          | (2,146,545                                          | )          | (8,147,315                                                                            | )          | (5,882,941 | ) | (33,469,267 | ) |
| *OTHER INCOME:*                                                  |       |                                                 |       |                                                |       |                                                                                  |       |   |   |   |   |
| Interest                                                         |       | 189,336                                              |       | 407,362                                             |       | 671,068                                                                               |       | 734,307 |   | 2,451,876 |   |
| *NET LOSS*                                                       |       | $                                                    | (3,085,634 | )                                                   | $          | (1,739,183                                                                            | )          | $ | (7,476,247 | ) | $ | (5,148,634 | ) | $ | (31,017,391 | ) |
| *NET LOSS PER SHARE*  (basic and diluted)                        |       | $                                                    | (0.14      | )                                                   | $          | (0.09                                                                                 | )          | $ | (0.33 | ) | $ | (0.30 | ) |   |   |
| *WEIGHTED AVERAGE COMMON SHARES OUTSTANDING*(basic  and diluted) |       | 22,750,841                                           |       | 19,736,067                                          |       | 22,637,961                                                                            |       | 16,923,168 |   |   |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**MinesManagement, Inc. and Subsidiaries**

**(AnExploration Stage Company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

** **
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** | **From Inception  August 12, 2002  Through  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Increase (Decrease) in Cash and Cash Equivalents** | ** ** | **2008**                                            | ** ** | **2007**                                                                        | ** ** | **2008** | ** ** |
| *CASH FLOWS FROM OPERATING ACTIVITIES:*                        |       |                                                |       |                                                                            |       |   |   |
| Net loss                                                                           |       | $                                                   | (7,476,247 | )                                                                               | $          | (5,148,634 | ) | $ | (31,017,391 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:       |       |                                                |       |                                                                            |       |   |   |
| Stock-based compensation                                                           |       | 1,420,179                                           |       | 656,120                                                                         |       | 6,436,034 |   |
| Stock received for services                                                        |       | —                                              |       | —                                                                          |       | (11,165 | ) |
| Depreciation                                                                       |       | 808,675                                             |       | 141,453                                                                         |       | 1,184,505 |   |
| Accretion of asset retirement obligation                                           |       | 27,482                                              |       | —                                                                          |       | 27,482 |   |
| Impairment of mineral properties                                                   |       | —                                              |       | —                                                                          |       | 504,492 |   |
| Changes in assets and liabilities:                                                 |       |                                                |       |                                                                            |       |   |   |
| Interest receivable                                                                |       | 30,350                                              |       | 13,745                                                                          |       | (50,312 | ) |
| Prepaid expenses and deposits                                                      |       | (78,158                                             | )          | (343,500                                                                        | )          | (269,152 | ) |
| Accounts payable                                                                   |       | (912,002                                            | )          | 1,360,710                                                                       |       | 1,036,400 |   |
| Payroll and payroll taxes payable                                                  |       | (4,537                                              | )          | 9,034                                                                           |       | 15,456 |   |
| Net cash used in operating activities                                              |       | (6,184,258                                          | )          | (3,311,072                                                                      | )          | (22,143,651 | ) |
| *CASH FLOWS FROM INVESTING ACTIVITIES:*                                            |       |                                                |       |                                                                            |       |   |   |
| Purchase of property and equipment                                                 |       | (890,212                                            | )          | (2,727,225                                                                      | )          | (7,581,784 | ) |
| Proceeds from disposition of property and  equipment                               |       | 33,154                                              |       | —                                                                          |       | 35,423 |   |
| Construction in progress                                                           |       | (162,353                                            | )          | (1,773,654                                                                      | )          | (3,254,727 | ) |
| (Purchase) sale of certificates of deposit                                         |       | (4,943,021                                          | )          | 1,768,977                                                                       |       | (7,544,297 | ) |
| Purchase of available-for-sale securities                                          |       | (1,815,348                                          | )          | —                                                                          |       | (1,815,348 | ) |
| Increase in mineral properties                                                     |       | —                                              |       | —                                                                          |       | (144,312 | ) |
| Net cash used in investing activities                                              |       | (7,777,780                                          | )          | (2,731,902                                                                      | )          | (20,305,045 | ) |
| *CASH FLOWS FROM FINANCING ACTIVITIES:*                                            |       |                                                |       |                                                                            |       |   |   |
| Proceeds from note payable                                                         |       | 1,815,231                                           |       | —                                                                          |       | 1,815,231 |   |
| Net proceeds from sales of common stock                                            |       | 571,444                                             |       | 31,585,713                                                                      |       | 58,754,139 |   |
| Net cash provided by financing activities                                          |       | 2,386,675                                           |       | 31,585,713                                                                      |       | 60,569,370 |   |
| *NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS*                            |       | (11,575,363                                         | )          | 25,542,739                                                                      |       | 18,120,674 |   |
| *CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD*                                  |       | 29,743,372                                          |       | 743,652                                                                         |       | 47,335 |   |
| *CASH AND CASH EQUIVALENTS, END OF PERIOD*                                         |       | $                                                   | 18,168,009 |                                                                            | $          | 26,286,391 |   | $ | 18,168,009 |   |
| *SUPPLEMENTAL DISCLOSURE OF NONCASH  INVESTING ACTIVITIES:*                        |       |                                                |       |                                                                            |       |   |   |
| Initial measurement of asset retirement  obligation                                |       | $                                                   | 344,187    |                                                                            | —     |   | $ | 344,187 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**NOTE1  — ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES:**

** **

## *Organization:*

## * *

Mines Management, Inc. (the Company) isan Idaho corporation incorporated in 1947. The Company acquires, explores, and develops mineral properties in NorthAmerica.

 

## *Summary of Significant AccountingPolicies:*

##  

Theseunaudited interim financial statements have been prepared by the Company inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information, as well as the instructions to Form 10-Q.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of the Company’s management, all adjustments (consisting of onlynormal recurring accruals) considered necessary for a fair presentation of theinterim financial statements have been included.

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires the use ofestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities known to exist asof the date the financial statements are published, and the reported amounts ofrevenues and expenses during the reporting period. Uncertainties with respectto such estimates and assumptions are inherent in the preparation of theCompany’s consolidated financial statements; accordingly, it is possible thatthe actual results could differ from these estimates and assumptions, whichcould have a material effect on the reported amounts of the Company’s condensedconsolidated financial position and results of operations. Operating resultsfor the three or nine month periods ended September 30, 2008, are notnecessarily indicative of the results that may be expected for the full yearending December 31, 2008.

 

For further information refer to the financialstatements and footnotes thereto in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

*(a)*                                  Principlesof consolidation

* *

The accompanying condensed consolidatedfinancial statements include the accounts of Mines Management, Inc., andits wholly-owned subsidiaries, Newhi, Inc., Montanore Mineral Corporationand Montmin Corporation.  Intercompanybalances and transactions have been eliminated.

 

*(b)*                                 ExplorationStage Enterprise

* *

Since the Company is in the exploration stageof operation, the Company’s financial statements are prepared in accordancewith the provisions of Statement of Financial Accounting Standards (SFAS) No. 7*Accounting for Development Stage Enterprises*,as it devotes substantially all of its efforts to acquiring and exploringmining interests that management believes should eventually provide sufficientnet profits to sustain the Company’s existence. Until such interests are engaged in commercial production, the Companywill continue to prepare its financial statements and related disclosures inaccordance with this standard.

 

*(c)*                                  Cashand cash equivalents

* *

Cash and cash equivalents include cash onhand, cash in banks, investments in certificates of deposit with originalmaturities of 90 days or less, and money market funds.

 

*(d)*                                 Availablefor sale securities

* *

Available for sale securities are recorded atfair value, with unrealized gains or losses recorded as a component of equity,unless the value of the security is considered impaired.  Realized gains and losses and non-temporaryimpairments in value are recorded in the statement of operations.

 

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* *

*(e)*                                  Propertyand equipment

* *

Property and equipment are stated atcost.  Buildings and leaseholdimprovements are depreciated on the straight-line basis over an estimateduseful life of 39 years.  Machinery andfurniture are generally depreciated using accelerated methods over estimateduseful lives ranging from 5 to 10 years.

 

*(f)*                                    Miningproperties, exploration and development costs

* *

All exploration expenditures are expensed asincurred.  Significant propertyacquisition payments for active exploration properties are capitalized,including payments to acquire mineral rights. Once a feasibility study has been completed, approved by management, anda decision is made to put the ore body into production, expenditures to developnew mines, to define further mineralization in existing ore bodies, and toexpand the capacity of operating mines, are capitalized and amortized on theunits of production basis over proven and probable reserves.  The Company charges to operations theallocable portion of capitalized costs attributable to properties sold.  Capitalized costs are allocated to propertiessold based on the proportion of claims sold to the claims remaining within theproject area.

 

*(g)*                                 Assetimpairment

* *

The Company evaluates its long-lived assetsfor impairment when events or changes in circumstances indicate that therelated carrying amounts may not be recoverable.  If the sum of estimated future net cash flowson an undiscounted basis is less than the carrying amount of the related assetgrouping, asset impairment is considered to exist.  The related impairment loss is measured bycomparing estimated future net cash flows on a discounted basis to the carryingamount of the asset.  Changes insignificant assumptions underlying future cash flow estimates may have amaterial effect on the Company’s financial position and results ofoperations.  During 2007, the Companyidentified and recognized an impairment loss as described more fully in note 2.

 

*(h)*                                 Assetretirement obligations

* *

The Company has adopted SFAS No. 143, *Accounting for Asset Retirement Obligations*,which establishes a uniform methodology for accounting for estimatedreclamation and abandonment costs. According to SFAS No. 143, the fair value of a liability for anasset retirement obligation (ARO) will be recognized in the period in which itis incurred if a reasonable estimate of fair value can be made.  The ARO is capitalized as part of thecarrying value of the assets with which it is associated, and depreciated overthe useful life of the asset.  TheCompany has an ARO associated with its underground evaluation program at theMontanore Project, described more fully in note 7.

 

The Financial Accounting Standards Board(FASB) issued Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations* (FIN 47), whichclarifies that the term *conditional assetretirement obligation* as used in SFAS No. 143 refers to a legalobligation to perform an asset retirement activity where the timing or methodof settlement is conditional on a future event. Where the obligation to perform the asset retirement activity isunconditional, even though uncertainty exists about the timing or method ofsettlement, the entity is required to recognize a liability for the fair valueof the conditional retirement obligation if reasonably estimable.  FIN 47 also clarifies when an entity wouldhave sufficient information to reasonably estimate fair value.

* *

*(i)*                                     DeferredIncome Taxes

* *

Deferred income taxes are provided fordifferences between the basis of assets and liabilities for financial andincome tax reporting.  A deferred taxasset, subject to a valuation allowance, is recognized for estimated future taxbenefits of tax-basis operating losses being carried forward.

 

The FASB has issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting forIncome Taxes*. FIN 48 prescribes a recognition 

 

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threshold and measurement standard for thefinancial statement recognition and measurement of an income tax position takenor expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, and transition.   The Company adopted FIN 48 on January 1,2007. At September 30, 2008, the provisions of FIN 48 had no effect on theCompany’s financial statements.

 

*(j)*                                     Stockcompensation

* *

The Company measures and records the costs ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award, recognized over the period duringwhich an employee is required to provide services in exchange for suchaward.  Compensation cost is recognizedfor awards granted and for awards modified, repurchased or cancelled in theperiod after adoption.  Compensation costis also recognized for the unvested portion of awards granted prior toadoption.  The Company recognizedstock-based compensation of $692,270 and $228,700 for the three month periodsended September 30, 2008 and 2007, respectively.  The Company recognized stock-basedcompensation of $1,420,179 and $656,120 for the nine month periods ended September 30,2008 and 2007, respectively.

 

At September 30, 2008, the Company had threestock option plans, which are described more fully in note 10.

 

*(k)*                                  Netloss per share

* *

Basic and diluted loss per share is computedusing the weighted average number of shares outstanding during the periods.Stock options and warrants outstanding that are antidilutive****are not considered in the computation.

 

*(l)*                                     Reclassifications

* *

Certain amounts in the prior-period financialstatements have been reclassified for comparative purposes to conform tocurrent period presentation with no effect on total assets or net loss aspreviously reported.

 

**NOTE2  — MINING PROPERTIES:**

** **

## *Montanore:*

## * *

The Montanore property is located innorthwestern Montana and includes 18 mining claims covering 355 acres plus one5-acre patented mill site.  In August 2002,the Company acquired a controlling interest in the Montanore silver and copperdeposit in Sanders County, Montana.  TheCompany received a quitclaim deed from Noranda Mineral Corp. (Noranda) whenNoranda elected to withdraw from the project.   In December 2002, the Company received a quitclaim deed to allintellectual property connected with studies that Noranda carried out on theproject.

 

During the fourth quarter of 2007, theCompany determined that the $278,519 carrying value of this property should bewritten off due to the fact that a significant portion of the balancerepresented exploration costs inappropriately capitalized in prior years.

 

## *Advance and Iroquois:*

## * *

The Advance property consists of 720 acres ofpatented mineral rights.  Although theCompany does not own the overlying surface rights to its patented mineralrights, it does have right of access to explore and mine.  The Iroquois property consists of 64 acres ofpatented mineral and surface rights and 15 unpatented mining claims containing300 acres.

 

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During the fourth quarter of 2007, theCompany evaluated the carrying values of these properties and determined torecord an impairment adjustment of $225,973 based on its assessment of thelikely future cash flows from the properties.

 

**NOTE3  — CONSTRUCTION IN PROGRESS:**

** **

Construction has begun on the undergroundelectrical, pumping, and ventilation systems at the Libby adit at the MontanoreProject.  The anticipated cost of theseprojects is expected to total $2,517,000, with approximately $1,500,000included in construction in progress as of September 30, 2008.

 

Also included in construction in progress asof September 30, 2008 are approximately $77,000 in costs associated withthe construction of a nitrate treatment and removal system at the MontanoreProject site.  The estimated total costof this project is $1,798,000.

 

**NOTE4  — CERTIFICATES OF DEPOSIT:**

** **

The Company owns six $236,707 certificates ofdeposit for a total of $1,420,842.  Theseinvestments mature in 2009 and bear interest at the rate of 4.21%.  The Company purchased a $5,000,000certificate of deposit in September 2008 which is pledged as security forborrowings incurred in September 2008. See Note 6.  This certificatematures in September 2009 and bears interest at the rate of 3.54%.  Included with reclamation deposits, theCompany has a $1,124,055 certificate of deposit which is pledged as securityfor a Letter of Credit to the Montana Department of Environmental Quality as areclamation guarantee for the Montanore expansion evaluation program.  This certificate matures in January 2009and will automatically renew annually. It currently bears interest at the rate of 4.5%.

 

**NOTE5  — AVAILABLE-FOR-SALE SECURITIES:**

** **

The following table summarizes the Company’savailable-for-sale securities:

 
| ** **           | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| Cost                 |       | $                            | 1,826,513  |                        | $          | 11,165 |   |
| Net Unrealized Gains |       | 240,467                      |       | 121,351                     |       |
| Fair Market Value    |       | $                            | 2,066,980  |                        | $          | 132,516 |   |

 

Effective January 1, 2008, the Companyadopted the provisions of Financial Accounting Standards No. 157, *Fair Value Measurements* (FAS 157) for thefinancial assets and liabilities measured at fair value on a recurringbasis.  FAS 157 establishes a frameworkfor measuring fair value in the form of a fair value hierarchy whichprioritizes inputs into valuation techniques used to measure fair value intothree broad levels.  This hierarchy givesthe highest priority to quoted prices in active markets (Level 1) and thelowest priority to unobservable inputs (Level 3).  The Company’s available-for-sale securitiesare classified within Level 1 of the fair value hierarchy.  These securities are comprised of commonstocks which have been valued using quoted prices in active markets.

 

**NOTE6  —LINE OF CREDIT:**

** **

In connection with the acquisition of certaininvestments during September 2008, the Company entered into a line ofcredit agreement with a credit limit of $5,000,000 bearing interest at a rateequal to the Washington Trust Bank Index Rate. As of September 30, 2008, the line of credit had an outstandingbalance of $1,815,231 and the interest rate was 5.0% per annum.  The line of credit matures on September 17,2009 and is secured by a $5,000,000 certificate of deposit.

 

**NOTE7  —ASSET RETIREMENT OBLIGATIONS:**

** **

Included in the Company’s construction inprogress account is an approximately $344,000 asset related to an assetretirement obligation (ARO) associated with the Company’s undergroundevaluation program at the Montanore Project. The ARO resulted from the reclamation and remediation requirements ofthe Montana Department of Environmental Quality as outlined in the Company’spermit to carry out the evaluation program.

 

Estimated reclamation costs were discountedusing a credit adjusted risk-free interest rate of 4.78% from the time theCompany expects to pay the retirement obligation to the time it incurred theobligation, which is estimated at 25 years. In 

 

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May 2008, the Company revised estimatedreclamation costs based on additional work completed at the Montanore Project.The following table summarizes activity in the Company’s ARO.

 
| ** **                      | ** ** | **Nine Months  Ended  September 30,  2008** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| Balance January 1, 2008    |       | —                                                |       |
| Revisions of estimates          |       | $                                                     | 306,013    |   |
| Accretion expense               |       | 18,787                                                |       |
| Balance March 31, 2008     |       | 324,800                                               |       |
| Revision of estimate            |       | 38,174                                                |       |
| Accretion expense               |       | 4,186                                                 |       |
| Balance June 30, 2008      |       | $                                                     | 367,160    |   |
| Accretion expense               |       | 4,509                                                 |       |
| Balance September 30, 2008 |       | 371,669                                               |       |

 

**NOTE8  — CONCENTRATION OF CREDIT RISK:**

** **

The Company maintains its cash and cashequivalents in one financial institution. Balances are insured by the Federal Deposit Insurance Corporation up to$250,000.  To date, the Company has not experienced amaterial loss or lack of access to its invested cash or cash equivalents;however no assurance can be provided that access to the Company’s invested cashand cash equivalents will not be impacted by adverse conditions in thefinancial markets.

 

**NOTE9  — STOCKHOLDERS’ EQUITY:**

** **

## *Common Stock:*

## * *

In 2003, the Company sold 1,152,007 commonshares for $1,267,207 ($1.10 per share). In connection with the stock sales, the Company granted warrants topurchase up to 1,152,007 common shares at $1.20 per share through two yearsfrom the date of issue.  Cumulativewarrants exercised relating to this issue were 1,152,007 shares at September 30,2008 and December 31, 2007, respectively.

 

In 2004, the Company sold 1,285,000 commonshares for $6,425,000 ($5.00 per share). In connection with the stock sales, the Company granted warrants topurchase up to 511,000 shares of common stock at $7.25 per share through fiveyears from the initial exercise date. The Company paid a cash finder’s fee of 7% of the gross purchase pricereceived in the offering.  The finderalso received 3% warrant compensation, or warrants to purchase 192,750 commonshares at $7.25 per share through February 18, 2009.  The warrant exercise price was reduced to$6.00 per share in October 2005, to $5.00 per share in April 2007,and to $4.00 per share in November 2007 in accordance with theanti-dilution provisions of the 2004 warrant agreement. Cumulative warrantsexercised relating to this issue at September 30, 2008 and December 31,2007, were 148,750 and 145,750, respectively.

 

In 2005, the Company sold 1,016,667 commonshares for $6,100,002 ($6.00 per share). In connection with the stock sales, the Company granted warrants topurchase up to 737,084 shares of common stock at $8.25 per share through fiveyears from the date of issuance.  TheCompany paid a cash finder’s fee of 7% of the gross purchase price received inthe offering.  The finder also received a3.75% warrant compensation, or warrants to purchase 228,750 common shares at$8.25 per share through October 20, 2010. These warrants were repriced at $5.00 per share in April 2007 inaccordance with the anti-dilution provisions of the 2005 warrantagreement.  To date, no warrants relatingto this issue have been exercised.

 

In 2005, the Company sold 40,000 commonshares for $240,000 ($6.00 per share).

 

On April 20, 2007, the Company completeda public offering of 6,000,000 units at a price of $5.00 per unit, resulting ingross proceeds of $30,000,000 ($28,200,000 net proceeds).  Each unit is comprised of one share of commonstock and one-half of one common stock purchase warrant, with each full warrantbeing exercisable for five years to purchase one share of common stock at aprice of $5.75 per share.  The warrantsare listed on the Toronto Stock Exchange and are tradable in US dollars underthe symbol MGT.GT.U.

 

The underwriters were granted anover-allotment option, exercisable for a period of 30 days following theclosing, to acquire up to an additional 900,000 units.   On May 7, 2007, the underwritersexercised the over-allotment option for 836,600 units.  The total offering was therefore 6,836,600units for gross proceeds to the Company of $34,183,000, or 

 

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$32,124,697 in net proceeds to the Company,after deducting underwriting commissions but before deducting offeringexpenses.  To date, no warrants relatingto this issue have been exercised.

 

On November 2, 2007, the Company sold2,500,000 common shares in a private placement at a price of $4.00 per share,resulting in gross proceeds of $10,000,000. In connection with the stock sale, the Company entered into a Right ofFirst Refusal agreement (the “ROFR”) which grants a twenty-year right of firstproposal and a right to match third-party proposals, to purchase all or anyportion of silver mined, produced or recovered by the Company in the State ofMontana.  The ROFR does not apply totrade sales and spot sales in the ordinary course of business or forward sales,in each case, for which no upfront payment is received by the Company.  During the nine months ended September 30,2008, the Company paid approximately $241,000 in legal fees directly related tothe common stock offering.

 

## *Preferred Stock:*

## * *

The Company has authorized 10,000,000 sharesof no par value preferred stock.  ThroughSeptember 30, 2008, the Company had not issued any preferred stock.

 

**NOTE10  — STOCK OPTIONS:**

** **

During the year ended December 31, 2003,the shareholders of the Company approved two stock-based compensation plans –the 2003 Stock Option Plan (which includes both qualified and nonqualifiedoptions) and the 2003 Consultant Stock Compensation Plan.  Under the 2003 Stock Option Plan, the Companymay grant options to purchase up to 1,200,000 shares of common stock.  Under the 2003 Consultant Stock CompensationPlan, the Company may grant options to purchase up to 400,000 shares of commonstock.  During 2004, the Companyincreased the maximum number of common shares available under the 2003 StockOption Plan and the 2003 Consultant Stock Compensation Plan to 3,000,000 and700,000 shares, respectively.  The sharesare issued from the Company’s authorized and unissued common stock uponexercise.

 

Under both 2003 Stock Option Plans, theoption exercise price may not be less than 100% of the fair market value pershare on the date of grant.  Stockoptions are exercisable within ten years from the date of the grant of theoption.  The schedule for vesting of theoptions granted under both plans is at the discretion of the Board ofDirectors.

 

In November 2007, the Board of Directorsadopted, subject to shareholder approval, the 2007 Equity Incentive Plan (the “2007Plan”), which provides for the issuance of both qualified and nonqualifiedstock options and restricted shares to directors, employees and consultants ofthe Company.  Up to 3,000,000 shares ofthe Company’s authorized but unissued common stock are available for issuanceunder the 2007 Plan.  On December 17,2007, the Company issued 750,000 stock options under the 2007 Plan to directorsand officers, subject to shareholder approval. The 2007 Plan was approved by the shareholders on May 22,2008.  The options are treated as havingbeen issued immediately following stockholder approval of this Plan.

 

The Company has a policy of re-pricing stockoptions when the market price of the stock is $1.00 below the exercise price ofthe outstanding option.  The newly issuedoption has the same vesting schedule and expiration date as the option that iscancelled.  During 2007, the Companycancelled and reissued 1,670,000 stock options held by 12 employees, includingofficers and directors.  During 2008, theCompany cancelled and reissued 2,036,000 stock options held by 20employees.   As a result of those actions,the Company recognized additional compensation expense of $523,654 for the ninemonths ended September 30, 2008 and $462,527 for the year ended December 31,2007.

 

A summary of the option activity under thePlans as of September 30, 2008, and changes during the period then ended,is presented below:

 
| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at January 1, 2008    |       | 2,136,000                   |       | $                                       | 2.68       |                                                 |       |                                |       |   |
| Granted                                |       | 10,000                      |       | $                                       | 3.30       |                                                 |       |                                |       |   |
| Exercised                              |       | (520,000                    | )          | $                                       | 1.65       |                                                 |       |                                |       |   |
| Forfeited or expired                   |       | (5,000                      | )          | $                                       | 6.20       |                                                 |       |                                |       |   |
| Outstanding at March 31, 2008     |       | 1,621,000                   |       | $                                       | 3.00       |                                                 |       |                                |       |   |
| Granted                                |       | 750,000                     |       | $                                       | 2.99       |                                                 |       |                                |       |   |
| Outstanding at June 30, 2008      |       | 2,371,000                   |       | $                                       | 2.99       |                                                 |       |                                |       |   |
| Exercised                              |       | (100,000                    | )          | $                                       | 1.85       |                                                 |       |                                |       |   |
| Outstanding at September 30, 2008 |       | 2,271,000                   |       | $                                       | 1.75       |                                                 | 3.52       |                                | $          | 1,736,710 |   |
| Exercisable at September 30, 2008 |       | 1,736,000                   |       | $                                       | 1.63       |                                                 | 2.81       |                                | $          | 714,860 |   |

 

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The fair value for each option award isestimated at the date of grant using the Black-Scholes option-pricing modelusing the assumptions noted in the following table.   Volatility for the periods presented isbased on the historical volatility of the Company’s common stock over theexpected life of the option.  Therisk-free rate for periods within the expected term of the option is based onthe U.S. Treasury yield curve in effect at the time of the grant.  The Company does not foresee the payment of dividendsin the near term.

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average risk-free interest rate  |       | —                                               |       | 4.38                                                | %          | 2.59 | % | 4.77 | % |
| Weighted average volatility               |       | —                                               |       | 58.12                                               | %          | 52.09 | % | 53.39 | % |
| Expected dividend yield                   |       | —                                               |       | —                                              |       | — |   | — |   |
| Weighted average expected life (in years) |       | —                                               |       | 2.00                                                |       | 2.00 |   | 2.00 |   |

 

The total intrinsic value of optionsexercised during the three month periods ended September 30, 2008 and 2007was $2,338 and $-0-, respectively.  Duringthe nine months ended September 30, 2008, there were 620,000 stock optionsexercised with a weighted average exercise price of $1.68.  The intrinsic value of these options uponexercise was $1,313,568.  There were nooptions exercised during the nine months ended September 30, 2007.

 

A summary of the status of the Company’snonvested options as of September 30, 2008, and changes during the periodthen ended, is presented below:

 
| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------|------------|
| Nonvested at January 1, 2008    |       | 290,000                     |       | $                                                   | 1.27       |   |
| Granted                              |       | 10,000                      |       | $                                                   | 1.12       |   |
| Vested                               |       | (5,000                      | )          | $                                                   | 1.12       |   |
| Nonvested at March 31, 2008     |       | 295,000                     |       | $                                                   | 1.27       |   |
| Granted                              |       | 375,000                     |       | $                                                   | 1.42       |   |
| Vested                               |       | (25,000                     | )          | $                                                   | 1.35       |   |
| Nonvested at June 30, 2008      |       | 645,000                     |       | $                                                   | 1.35       |   |
| Granted                              |       | —                      |       | —                                              |       |
| Vested                               |       | (110,000                    | )          | $                                                   | 1.53       |   |
| Nonvested at September 30, 2008 |       | 535,000                     |       | $                                                   |  1.32 |   |

 

As of September 30, 2008, there was$431,917****of unrecognizedcompensation cost related to nonvested share-based compensation arrangementsgranted under the Plans.  That cost isexpected to be recognized over a weighted-average period of less than one year.

 

Total compensation costs recognized forstock-based employee compensation awards was $672,307 and $228,700 for thethree months ended September 30, 2008 and 2007, respectively.  Total compensation costs recognized forstock-based employee compensation awards was $1,349,525 and $649,570 for thenine months ended September 30, 2008 and 2007, respectively,  These costs were included in general andadministrative expenses and technical services on the Statement of Operations.  Total costs recognized for stock-basedcompensation awards for services performed by outside parties was $19,963 and$-0- for the three months ended September 30, 2008 and 2007,respectively.  Total costs recognized forstock-based compensation awards for services performed by outside parties was$70,654 and $6,550 for the nine months ended September 30, 2008 and 2007,respectively.  These costs were includedin administrative and technical expenses on the Statement of Operations.  Cash received from options exercised underall share-based payment arrangements during the nine months ended September 30,2008 and 2007 was $800,000 and $-0-, respectively.

 

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

** **

Advancing the Montanore Silver-Copper Projectcontinues to be the Company’s main focus. In addition to its advanced exploration and delineation drillingprogram, the Company is continuing its repermitting efforts with federal andstate agencies and its optimization review of the Project.

 

## **Overview**

## ** **

In the third quarter of 2008:

 

·                  The U. S. Forest Service and the MontanaDEQ continued their joint review of the preliminary draft environmental impactstatement (PDEIS).

 

·                  Small Mine Development (SMD), anindependent contractor engaged by the Company to assist with the rehabilitationof the Libby Adit, mobilized in late August to assist in the excavation oftwo sumps and placed them into service as part of the overall dewatering systemto clarify water before sending it to the water treatment plant.

 

·                  The Company maintained a strong cashposition with $18.2 million of cash on hand at September 30, 2008.

 

·                  The Company continued to build itsInvestor Relations program by increasing retail contacts as well as investmentconference attendance during the quarter (3 shows).

 

The primary cash expenditures for the quarter ended September 30,2008 were $5.0 million for the purchase of a certificate of deposit, $1.8million for the purchase of securities, and $1.5 million for operatingactivities.  Management has reviewed nearterm spending and implemented a plan to conserve cash where prudent. TheCompany believes that it has sufficient working capital to complete therehabilitation of the Libby adit and to commence delineation drilling.

 

## **AdvancedExploration and Delineation Drilling Program**

## ** **

Libbyoperations in the third quarter of 2008 showed progress in implementing theMontanore site water treatment system including constructing two dewateringsumps, continued design work on the nitrate removal system and mobilization ofthe adit rehabilitation contractor.

 

Twosumps were excavated and placed into service during the third quarter of2008.  These sumps consist of twodeclining drifts approximately 15 ft. x 15 ft. in section and 80 ft. long each.  These sumps are part of the overall dewateringsystem designed to clarify mine water before sending it to the water treatmentplant on the surface.  A suspendedplatform was constructed and installed in one sump, allowing for personnelaccess to the sump pumps.  Constructionof the sumps allowed a good test of most of the mining equipment that will beused for decline advancement and future mine development.  The jumbo, roof bolter, LHDs and haul truckswere all used to construct the sumps.  Other support equipment saw limited use such as the explosives loadingtruck and scissor lift truck.

 

SmallMine Development, our adit rehabilitation contractor, mobilized near the end ofAugust to begin re-bolting of the adit. As of the end of September, decline rebolting had advanced 558 ft., fora total of 1,531 ft. from the portal. Advance rates are expected to increase as the contractor gainsfamiliarity with our equipment and develops a systematic approach to thework.  Thus far, the ground conditionsappear to be at least as good as expected. Original projections were to install welded wire mesh on the ribs downapproximately 5 ft. from the sill.  Afterthe September advance, it appears that this may not be necessary in mostcases.

 

Dewateringis advancing ahead of the decline rehabilitation at a rate of approximately 350gallons per minute through the water treatment plant.  With the more consistent flow, the treatmentplant is experiencing a few difficulties that were not apparent at the lowerflow rates.  These challenges are beingaddressed as they appear and thus far, none have had an adverse impact on theability to keep the dewatering ahead of the rehabilitation.

 

Engineeringfor the nitrate removal addition to the water treatment system is advancing inaccordance with expectations. The current schedule is to have the designcompleted in early December with construction set to begin in late April orearly May 2009.  In accordance with thisschedule, the plant is expected to be ready for operation when the EIS isissued next year.

 

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Engineeringand geology work continue using existing information.  Geology confirmation mapping is beginningwith the advance of the rehabilitation down the decline.  Currently, a system is being developed toevaluate the water producing areas as they are encountered.

 

## **Permittingand Environmental**

## ** **

In the third quarter of 2008, the U.S. Forest Service (USFS) andMontana Department of Environmental Quality (MDEQ) continued to conduct itsinternal review of the preliminary draft environmental impact statement(PDEIS).  In addition, the USFS and MDEQ are expected to finalize theirselection of the preferred alternative in November, which may be included inthe PDEIS submitted for public review.  The agencies have indicated thatthe submission of the PDEIS is still on schedule for the fourthquarter of 2008.

 

The Company continues to provide additional technical data and other supportinformation to the agencies in the preparation of the PDEIS.  In addition,the Company has expanded the 3-dimensional hydrologic model designed to predictwater inflow to the mine during the evaluation drilling program to include thefull mine project.  This information, when completed, will be submitted tothe agencies to be incorporated into the long-term monitoring program for theMontanore Project.

 

The USFS advised the Company on August 21, 2008 that theenvironmental assessment (EA) being developed for the underground evaluationprogram should be terminated and the analysis incorporated into theenvironmental impact statement (EIS) being prepared for the overallproject.  While the company believes that the EA provided adequateanalyses to meet regulatory requirements, the company agreed to accept theirrecommendation.  The State’s approval for the Minor Revision to Permit 150(Evaluation Program) remains in place, however, the Company continues toconstruct project infrastructure to support the evaluation drillingprogram.  The Company does not anticipateany delays to the EIS schedule due to this change.

 

## **Financialand Operating Results**

## ** **

Mines Management, Inc. is an exploration stagecompany with a large silver-copper project, the Montanore Project, located innorthwestern Montana.  The Companycontinues to expense all of its expenditures with the exception of equipmentand site infrastructure, which are capitalized.   The Company has no revenues from miningoperations.  Financial results of operationsinclude primarily interest income, general and administrative expenses,permitting, project advancement and engineering expenses.

 

**Quarter Ended September 30,2008**

** **

The Company reported a net loss for the quarterended September 30, 2008 of $3.1 million, or $0.14 per share, compared toa net loss of $1.7 million, or $0.09 per share, for the quarter ended September 30,2007.  The $1.4 million increase in netloss in the third quarter of 2008 is attributable to increases in operatingexpenses of approximately $1.1 million over the third quarter of 2007,principally in depreciation, compensation, environmental expenses, andpermitting.  These increases resultedfrom the addition of new employees, depreciation for new equipment receivedlate in 2007.  Permitting andenvironmental costs increased by approximately $0.6 million during thethird quarter of 2008 compared to the third quarter of 2007 because ofincreased activities relating to the submission of the second draft PDEIS.  Interest income was down $0.2 million for thethird quarter 2008 verses 2007 because of lower interest rates and reduced cashon hand.

 

**Nine Months Ended September 30, 2008**

** **

The Company reported a net loss for the nine monthsended September 30, 2008 of $7.5 million, or $0.33 per share, versus aloss of $5.1 million or $0.30 per share for the nine months ended September 30,2007.  The $2.4 million****increase in net loss in 2008 is largely attributable toincreased depreciation of $0.7 million, an increase in legal accounting andconsulting fees of $0.1 million, compensation increase of $1.0 million andincreased environmental and permitting expenses of $0.5 million.  These increases were a result of a full ninemonths of depreciation of the Montanore equipment and site infrastructure deliveredand completed in late 2007 and early 2008. Legal fees increased in 2008 because of the increased activity on theEIS for the Montanore Project, primarily responding to Forest Service commentsand questions.   The compensationincrease was due to the addition of new employees and the payment of stockbased compensation for employees and directors for 2008.  Permitting and environmental expenditures areup due to responding to agency 

 

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comments, report updates, and additional technicalstudies that are being incorporated into the final PDEIS to be distributed forpublic comment.

 

## **Liquidity**

## ** **

During the nine months ended September 30,2008, the net cash used for operating activities was $6.2 million, whichconsisted largely of permitting and administrative expenses associated withincreased activities at the Montanore Project site.  The net cash used in investing activitiesduring the nine months was $7.8 million, which was for the purchase of a $5.0million Certificate of Deposit and an equity investment of $1.8 million and$1.0 million for equipment and construction in progress.  Cash from financing activities included $1.8million in short term debt, which was a draw down from a $5.0 million line ofcredit at Washington Trust Bank and $0.6 million from the exercise of stockoptions by an officer.

 

The Company anticipates spending approximately $2.9million from cash and investments on hand during the final quarter of 2008 formaintenance of ongoing water treatment activities and engineering studiesrelating to site optimization and repermitting efforts at the MontanoreProject. The total capital andoperating expenses for the year to date are approximately $5.0 millionbelow the original forecast for the year because of delays relating to theissuance of the PDEIS issuance for public comment, which is scheduled to becompleted late in the fourth quarter. The Company believes that it has sufficient working capital forrehabilitation and completion of the Libby adit and commencement of delineationdrilling, which are estimated to cost $19.0million**.** Once initial drilling results are in, thecompany expects to initiate the process of obtaining a bankable feasibilitystudy.

 

## **ForwardLooking Statements**

## ** **

Some information contained in or incorporated byreference into this report may contain forward looking statements.  These statements include comments regardingfurther exploration and evaluation of the Montanore Project, including planneddewatering, rehabilitation and extension of the Libby Adit, drillingactivities, feasibility determination, engineering studies, environmental andpermitting requirements, process and timing; financing needs; plannedexpenditures in 2008; potential completion of a bankable feasibility study; andthe markets for silver and copper.  Theuse of any of the words “development”, “anticipate”, “continues”, “estimate”, “expect”,“may”, “project”, “should”, “believe”, and similar expressions are intended toidentify uncertainties.  The Companybelieves the expectations reflected in those forward looking statements arereasonable.  However, the Company cannotassure that the expectations will prove to be correct.  Actual results could differ materially fromthose anticipated in these forward looking statements as a result of thefactors set forth below and other factors set forth and incorporated byreference into this report:

 

·                  Worldwide economic and political eventsincluding those affecting the supply of and demand for silver and copper, andthe availability and cost of financing for mining projects

 

·                  Volatility in the market price for silverand copper

 

·                  Financial market conditions and the availabilityof financing on acceptable terms

 

·                  Uncertainties associated with developingnew mines

 

·                  Variations in ore grade and othercharacteristics affecting mining, crushing, milling and smelting and mineralrecoveries

 

·                  Geological, technical, permitting, miningand processing problems

 

·                  The availability, terms, conditions andtiming of required governmental permits and approvals, and potential oppositionto the majority of permits

 

·                  Uncertainty regarding future changes inapplicable law or implementation of existing law

 

·                  The availability of experienced employees

 

·                  The factors discussed under “Risk Factors”in our Form 10-K, for the period ending December 31, 2007.

 

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| **ITEM 3.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK AND HEDGING  ACTIVITIES** |
|-------------|-----------------------------------------------------------------------------------------|

** **

All of our cash balances are held in U.S. dollarsand our long term investment certificates of deposit are denominated in U.S.dollars in local and national banking institutions.  We manage the timing of cash required forreview of the permitting and engineering of the Montanore Project and forgeneral corporate purposes utilizing our money market account and we investfunds not immediately required in certificates of deposit with varyingmaturities and fixed early retirement costs of three months interest.

 

The market prices of base and precious metals suchas silver and copper fluctuate widely and are affected by numerous factorsbeyond the control of any mining company. These factors include expectations with regard to the rate of inflation,the exchange rates of the dollar and other currencies, interest rates, globalor regional political, economic or banking crises, and a number of otherfactors.  If the market price of silveror copper should decrease, the value of the Company’s Montanore Project coulddecline and the Company might not be able to recover its investment in thatproject.  Any determination to develop orconstruct a mine would be made long before the first revenues from productionwould be received.  Price fluctuationsbetween the time that such decisions are made and the commencement ofproduction could affect the economics of the mine.

 
| **ITEM 4.** | **CONTROLS AND PROCEDURES** |
|-------------|-----------------------------|

** **

Glenn M. Dobbs, the Company’s President and CEO, andJames H. Moore, the Company’s Chief Financial Officer and Treasurer, haveevaluated the Company’s disclosure controls and procedures as of September 30,2008.  Based upon this evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are designed and were effective as of September 30,2008 to give reasonable assurances that the information required to bedisclosed in the reports that the Company files or submits under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission, and that such information is alsoaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer.

 

There were no changes in the Company’s internalcontrols or, to the knowledge of the management of the Company, any otherchanges that materially affect, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

** **

**ITEM 1.**                                                     LEGAL PROCEEDINGS

** **

None.

 

**ITEM1A.**                                            RISKFACTORS

** **

There are no material changes from the risk factorspreviously disclosed in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007.

 

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

** **

None.

 

**ITEM 3.**                                                     DEFAULTS UPON SENIOR SECURITIES

** **

None.

 

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

** **

None

 

**ITEM 5.**                                                     OTHER INFORMATION

** **

None.

 

**ITEM 6.**                                                     EXHIBITS

** **

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

 

32.1                          Certification of ChiefExecutive Officer pursuant to 18 U.S.C., 1350 (Section 906 of theSarbanes-Oxley Act)

 

32.2                          Certification of ChiefFinancial Officer pursuant to 18 U.S.C., 1350 (Section 906 of theSarbanes-Oxley Act)

 

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# **Table of Contents**

 

# **SIGNATURES**

# ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on behalf of the undersigned thereunto duly authorized.

 

 
| Date:  November 10, 2008 | By:    | /s/  Glenn M. Dobbs                    |
|-------------------------------|--------|----------------------------------------|
|                          |   | Glenn  M. Dobbs                        |
|                          |   | President  and Chief Executive Officer |
|                          |   |                                   |
|                          |   |                                   |
| Date:  November 10, 2008 | By:    | /s/  James H. Moore                    |
|                          |   | James  H. Moore                        |
|                          |   | Chief  Financial Officer               |

 

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