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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)

[
x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[     ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT

For the transition period from _____to _______

Commission File Number: 001-12974

SANTA FE GOLD CORPORATION(Exact Name of Small Business Issuer as Specified in its
Charter)

|Delaware                        | 84-1094315         
|------------------------------- | -------------------
|(State or other jurisdiction of | (I.R.S. Employer   
|incorporation or organization)  | Identification No.)

1128 Pennsylvania NE, Suite 200, Albuquerque, NM
87110(Address of Principal Executive Offices)

Registrant's telephone number including area code: (505)
255-4852

N/AFormer name, former address, and former
fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes [ x ]     No [   
]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

|Larger accelerated filer [     ] | Accelerated filer [ x ]                
|-------------------------------- | ---------------------------------------
|Non-accelerated filer [     ]    | Smaller reporting company
      [     ]

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

Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest practicable date: 94,744,412
shares outstanding as of May 9, 2011.

---

|SANTA FE GOLD CORPORATION
|-------------------------
|INDEX TO FORM 10-Q       
|                         
|                         
|PART I                   
|FINANCIAL INFORMATION    

|                  |                                                                                                                                              | Page
|----------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ----
|Item 1.           | Financial Statements                                                                                                                         | 3   
|                  | Consolidated Balance Sheets, March 31, 2011 (Unaudited) and
      June 30, 2010                                                              | 3   
|                  | Consolidated Statements of Operations and Comprehensive Income
      for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited) | 4   
|                  | Consolidated Statements of Cash Flows for the Nine Months
      Ended March 31, 2011 and 2010 (Unaudited)                                    | 5   
|                  | Notes to the Unaudited Consolidated Financial Statements                                                                                     | 7   
|Item 2.           | Managements Discussion and Analysis of Financial Condition
      and Results of Operations                                                  | 20  
|Item 3.           | Quantitative and Qualitative Disclosures about Market Risk                                                                                   | 26  
|Item 4.           | Controls and Procedures                                                                                                                      | 26  
|                  |                                                                                                                                              |     
|PART II          
|OTHER INFORMATION
|Item 1.           | Legal Proceedings                                                                                                                            | 27  
|Item 1A.          | Risk Factors                                                                                                                                 | 27  
|Item 2.           | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                  | 27  
|Item 3.           | Defaults Upon Senior Securities                                                                                                              | 27  
|Item 4.           | Submission of Matters to a Vote of Security Holders                                                                                          | 27  
|Item 5.           | Other Information                                                                                                                            | 27  
|Item 6.           | Exhibits                                                                                                                                     | 28  
|SIGNATURES        | 28                                                                                                                                          
|CERTIFICATIONS    |                                                                                                                                             

2

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SANTA FE GOLD CORPORATIONCONSOLIDATED BALANCE
    SHEETS

|                                                                                                                                                                                                                                                                     |   | March 31,   |   |   | June 30,    |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
|                                                                                                                                                                                                                                                                     |   | 2011        |   |   | 2010        |  
|ASSETS                                                                                                                                                                                                                                                               |   | (Unaudited) |   |   |             |  
|CURRENT ASSETS:                                                                                                                                                                                                                                                      |   |             |   |   |             |  
|Cash and cash
      equivalents                                                                                                                                                                                                                                      | $ | 473,631     |   | $ | 5,540,130   |  
|Accounts
      receivable                                                                                                                                                                                                                                            |   | 2,783,632   |   |   | -           |  
|Inventory                                                                                                                                                                                                                                                            |   | 78,851      |   |   | -           |  
|Marketable
      securities                                                                                                                                                                                                                                          |   | 164,898     |   |   | -           |  
|Prepaid expenses
      and other current assets                                                                                                                                                                                                                      |   | 298,308     |   |   | 267,208     |  
|Total
      Current Assets                                                                                                                                                                                                                                           |   | 3,799,320   |   |   | 5,807,338   |  
|MINERAL PROPERTIES                                                                                                                                                                                                                                                   |   | 579,000     |   |   | 579,000     |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                                                                                                   |   | 13,342,360  |   |   | 3,790,215   |  
|OTHER ASSETS:                                                                                                                                                                                                                                                        |   |             |   |   |             |  
|Construction in
      process                                                                                                                                                                                                                                        |   | 7,499,226   |   |   | 15,177,362  |  
|Idle equipment,
      net                                                                                                                                                                                                                                            |   | 1,223,528   |   |   | 1,223,528   |  
|Note receivable
      and accrued interest                                                                                                                                                                                                                           |   | 201,400     |   |   | -           |  
|Restricted cash                                                                                                                                                                                                                                                      |   | 410,374     |   |   | 410,374     |  
|Deferred
      financing costs                                                                                                                                                                                                                                       |   | 339,279     |   |   | 413,017     |  
|Total
      Other Assets                                                                                                                                                                                                                                             |   | 9,673,807   |   |   | 17,224,281  |  
|Total Assets                                                                                                                                                                                                                                                         | $ | 27,394,487  |   | $ | 27,400,834  |  
|                                                                                                                                                                                                                                                                     |   |             |   |   |             |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                                                                                                                                       |   |             |   |   |             |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                                 |   |             |   |   |             |  
|Accounts payable                                                                                                                                                                                                                                                     | $ | 845,405     |   | $ | 458,098     |  
|Accrued
      liabilities                                                                                                                                                                                                                                            |   | 1,582,444   |   |   | 320,566     |  
|Derivative
      instrument liabilities                                                                                                                                                                                                                              |   | 11,524,959  |   |   | 9,894,041   |  
|Notes payable,
      current portion                                                                                                                                                                                                                                 |   | 108,124     |   |   | 138,821     |  
|Capital leases,
      current portion                                                                                                                                                                                                                                |   | 109,100     |   |   | 138,117     |  
|Deferred
      revenue, current portion                                                                                                                                                                                                                              |   | 3,804,674   |   |   | 243,107     |  
|Accrued interest
      payable                                                                                                                                                                                                                                       |   | 229,629     |   |   | 20,525      |  
|Total
      Current Liabilities                                                                                                                                                                                                                                      |   | 18,204,335  |   |   | 11,213,275  |  
|LONG TERM LIABILITIES:                                                                                                                                                                                                                                               |   |             |   |   |             |  
|Senior secured
      convertible notes payable, net of discount of $2,861,621 and $3,793,560,
      respectively                                                                                                                                                     |   | 11,088,379  |   |   | 10,156,440  |  
|Notes payable,
      net of current portion                                                                                                                                                                                                                          |   | 60,518      |   |   | 122,915     |  
|Capital leases,
      net of current portion                                                                                                                                                                                                                         |   | 54,913      |   |   | 128,909     |  
|Deferred revenue,
      net of current portion                                                                                                                                                                                                                       |   | -           |   |   | 3,756,893   |  
|Asset retirement
      obligation                                                                                                                                                                                                                                    |   | 84,059      |   |   | 84,059      |  
|Total
      Liabilities                                                                                                                                                                                                                                              |   | 29,492,204  |   |   | 25,462,491  |  
|STOCKHOLDERS' (DEFICIT) EQUITY :                                                                                                                                                                                                                                     |   |             |   |   |             |  
|Common stock,
      $.002 par value, 200,000,000 shares authorized; 94,744,412
      and 
               
      93,059,568 shares issued and outstanding, respectively; Includes
      non-vested 
               
      shares of 575,000 and 765,000, respectively |   | 188,341     |   |   | 184,590     |  
|Additional paid
      in capital                                                                                                                                                                                                                                     |   | 58,876,434  |   |   | 56,883,203  |  
|Accumulated
      (deficit)                                                                                                                                                                                                                                          |   | (61,229,332 | ) |   | (55,129,450 | )
|Accumulated
      other comprehensive income                                                                                                                                                                                                                         |   | 66,840      |   |   | -           |  
|Total
      Stockholders' (Deficit) Equity                                                                                                                                                                                                                           |   | (2,097,717  | ) |   | 1,938,343   |  
|                                                                                                                                                                                                                                                                     | $ | 27,394,487  |   | $ | 27,400,834  |  

The accompanying notes are an integral part of the consolidated
  financial statements.

3

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SANTA FE GOLD CORPORATION 
  CONSOLIDATED STATEMENT OF
  OPERATIONSAND COMPREHENSIVE INCOME(Unaudited)

|                                                       |   | For the Three Months Ended |   |   | For the Nine Months Ended |  
|------------------------------------------------------ | - | -------------------------- | - | - | ------------------------- | -
|                                                       |   | March 31,                  |   |   | March 31,                 |  
|                                                       |   | 2011                       |   |   | 2010                      |  
|SALES                                                  | $ | 2,894,007                  |   | $ | 261,532                   |  
|                                                       |   |                            |   |   |                           |  
|OPERATING COSTS AND EXPENSES:                          |   |                            |   |   |                           |  
|Costs applicable to sales                              |   | 1,604,449                  |   |   | -                         |  
|Exploration and mine
      and mill start up costs     |   | 597,266                    |   |   | 275,425                   |  
|General and administrative                             |   | 679,757                    |   |   | 655,407                   |  
|Depreciation and
      amortization                    |   | 577,857                    |   |   | 127,641                   |  
|                                                       |   | 3,459,329                  |   |   | 1,058,473                 |  
|                                                       |   |                            |   |   |                           |  
|LOSS FROM OPERATIONS                                   |   | (565,322                   | ) |   | (796,941                  | )
|                                                       |   |                            |   |   |                           |  
|OTHER INCOME (EXPENSE):                                |   |                            |   |   |                           |  
|(Loss) on disposal of
      assets                     |   | -                          |   |   | -                         |  
|Interest income                                        |   | 2,750                      |   |   | 6,948                     |  
|Miscellaneous income                                   |   | 2,485                      |   |   | 1,000                     |  
|Foreign currency translation loss                      |   | -                          |   |   | (726                      | )
|Gain (loss) on
      derivative instrument liabilities |   | 4,425,628                  |   |   | 3,634,854                 |  
|Accretion of discounts on notes payable                |   | (322,782                   | ) |   | (260,774                  | )
|Interest expense                                       |   | (180,457                   | ) |   | (25,017                   | )
|                                                       |   | 3,927,624                  |   |   | 3,356,285                 |  
|                                                       |   |                            |   |   |                           |  
|INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES        |   | 3,362,302                  |   |   | 2,559,344                 |  
|PROVISION FOR INCOME TAXES                             |   | -                          |   |   | -                         |  
|                                                       |   |                            |   |   |                           |  
|NET INCOME (LOSS)                                      |   | 3,362,302                  |   |   | 2,559,344                 |  
|OTHER COMPREHENSIVE INCOME                             |   |                            |   |   |                           |  
|Unrealized (loss) gain
      on marketable securities  |   | (25,102                    | ) |   | -                         |  
|                                                       |   |                            |   |   |                           |  
|NET COMPREHENSIVE INCOME (LOSS)                        | $ | 3,337,200                  |   | $ | 2,559,344                 |  
|                                                       |   |                            |   |   |                           |  
|Basic and Diluted Per Share Data                       |   |                            |   |   |                           |  
|Net Income (Loss) - basic and diluted                  | $ | 0.04                       |   | $ | 0.03                      |  
|                                                       |   |                            |   |   |                           |  
|Weighted Average Common Shares Outstanding:            |   |                            |   |   |                           |  
|Basic and diluted                                      |   | 94,126,551                 |   |   | 90,646,438                |  

The accompanying notes are an integral part of the consolidated
  financial statements.

4

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SANTA FE GOLD CORPORATIONCONSOLIDATED STATEMENTS
    OF CASH FLOWS(Unaudited)

|                                                       |   | For the Nine Months Ended |  
|------------------------------------------------------ | - | ------------------------- | -
|                                                       |   | March 31,                 |  
|                                                       |   | 2011                      |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                  |   |                           |  
|Net loss                                               | $ | (6,099,882                | )
|Adjustments to reconcile net
      loss to net cash    |   |                           |  
|used in
      operating activities:                    |   |                           |  
|Depreciation                                           |   | 1,725,858                 |  
|Stock based compensation                               |   | 864,965                   |  
|Accretion of discounts on notes payable                |   | 931,939                   |  
|Foreign currency translation loss                      |   | -                         |  
|Loss (gain) on derivative instrument liabilities       |   | 898,934                   |  
|Loss on disposal of assets                             |   | -                         |  
|Amortization of deferred financing costs               |   | 73,738                    |  
|Net change in
      operating assets and liabilities:  |   |                           |  
|Accounts receivable                                    |   | (2,783,632                | )
|Prepaid expenses and other current assets              |   | (109,951                  | )
|Accounts payable and accrued liabilities               |   | 1,649,185                 |  
|Deferred revenue                                       |   | (195,326                  | )
|Accrued interest payable                               |   | 209,104                   |  
|Net Cash (Used in) Operating Activities                |   | (2,835,068                | )
|                                                       |   |                           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                  |   |                           |  
|Purchase of marketable
      securities                |   | (98,058                   | )
|Note receivable
      and accrued interest             |   | (201,400                  | )
|Proceeds from disposal of assets                       |   | -                         |  
|Purchase of
      property, plant and equipment        |   | (862,720                  | )
|Construction in progress                               |   | (2,737,147                | )
|Net Cash (Used in) Investing Activities                |   | (3,899,325                | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                  |   |                           |  
|Proceeds from
      issuance of stock and warrants     |   | 2,000,001                 |  
|Proceeds from notes payable                            |   | 77,306                    |  
|Proceeds from
      deferred revenue                   |   | -                         |  
|Payment of private placement
      fees                |   | (136,000                  | )
|Payment of
      financing cost                        |   | -                         |  
|Payments on notes payable                              |   | (170,400                  | )
|Payments on
      capital leases                       |   | (103,013                  | )
|Net Cash Provided by Financing Activities              |   | 1,667,894                 |  
|INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS |   | (5,066,499                | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD         |   | 5,540,130                 |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD               | $ | 473,631                   |  

5

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SANTA FE GOLD CORPORATIONCONSOLIDATED STATEMENTS
    OF CASH FLOWS(Unaudited)

|                                                        |   | For the Nine Months Ended | 
|------------------------------------------------------- | - | ------------------------- | 
|                                                        |   | March 31,                 | 
|                                                        |   | 2011                      | 
|SUPPLEMENTAL CASH FLOW INFORMATION:                     |   |                           | 
|Cash paid for
      interest                            | $ | 558,331                   | 
|                                                        |   |                           | 
|Cash paid for
      income taxes                        | $ | -                         | 
|                                                        |   |                           | 
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
      INVESTING AND |   |                           | 
|FINANCING ACTIVITIES:                                   |   |                           | 
|Stock issued for
      conversion of accrued interest   | $ | -                         | 
|                                                        |   |                           | 
|Equipment
      purchased with note payable             | $ | -                         | 
|                                                        |   |                           | 
|Stock issued for
      conversion of accrued liability  | $ | -                         | 
|                                                        |   |                           | 
|Stock issued for
      conversion of note payable       | $ | -                         | 
|                                                        |   |                           | 
|Stock issued for
      services                         | $ | 16,550                    | 

6

The accompanying notes are an integral part of the consolidated
  financial statements.

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|SANTA FE GOLD CORPORATION                                     
|--------------------------------------------------------------
|NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
      STATEMENTS
|March 31, 2011                                                
|(Unaudited)                                                   

NOTE 1  NATURE OF OPERATIONS
AND BASIS OF
PRESENTATION

Santa Fe Gold Corporation (the Company) is a U.S. mining
company incorporated in Delaware in August 1991. Its general business strategy
is to acquire, explore and develop mineral properties. The Companys principal
assets are the 100% owned Summit silver-gold project in New Mexico, the leased
Ortiz gold property in New Mexico, and the 100% owned Black Canyon mica project
in Arizona.

The unaudited interim
consolidated financial statements of the Company included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions for Form 10-Q
under Article 8.03 of Regulation S-X. These statements do not include all of the
information and notes to the financial statements required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended March 31, 2011, are not necessarily
indicative of the results that may be expected for the year ending June 30,
2011. The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended June 30, 2010, included in the Companys Annual Report
on Form 10-K, as filed with Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

The consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities and commitments in the normal course of business.
Should the Company be unable to continue as a going concern, it may be unable to
realize the carrying value of its assets and to meet its liabilities as they
become due.

The Company had a net loss of $6,099,882 for the nine months ended March 31, 2011, has a working capital deficit of $14,405,015 which includes a non-cash financial derivative liability of $11,524,959 and deferred revenue of $3,804,674, and has a total accumulated deficit of $61,229,332 at March 31, 2011. The Company generated revenues of $4,144,269 from the initial sales of precious metals in the nine months ended March 31, 2011. To continue as a going concern, the Company is dependent upon an increased ramp up of production on the Company’s Summit mine site; increased through put recovery of precious metals through the Banner mill; and continued fund raising for project development and working capital for operational and administrative expenses.

The Companys consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
in existence.

Principles of Consolidation

The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries
Azco Mica, Inc., a Delaware corporation; The Lordsburg Mining Company, a New
Mexico corporation; Minera Sandia, S.A. de C.V., a Mexican corporation; and
Santa Fe Gold Barbados Corporation, a Barbados corporation. All significant
inter-company accounts and transactions have been eliminated in
consolidation.

7

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Estimates

The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates under
different assumptions or conditions.

Marketable Securities

Marketable securities are
classified as available for sale and classified as current assets as they are
subject to use within one year. The marketable securities are carried at fair
value with unrealized gains and losses, if any, included as a component of
accumulated other comprehensive income (loss) in stockholders equity.

Inventory

Inventory classifications include
stockpiled ore, in-process inventory, siliceous flux material and precious
metals concentrate. Currently the stockpiled ore represents ore that is
extracted from the mine and is waiting for processing. The ore currently is
valued solely at the cost of transportation to the mill site as the Summit mine
is still in process of ramping up to full production from the development stage.
In-process inventory represents material that is currently being processed
through the Banner mill. The in-process inventory is currently valued at
stockpile ore costs plus applicable costs to crush the ore into mill feed. The
siliceous flux material inventory and the precious metals concentrates awaiting
shipment are valued at stockpile ore costs, plus allocated mill processing costs
per ton based upon the processing requirements of the final product.

Fair Value Measurements

The carrying values of cash and
cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued liabilities approximated their related fair values as of March 31, 2011,
due to the relatively short-term nature of these instruments. The carrying value
of the Companys convertible debentures approximates the fair value based on the
terms at which the Company could obtain similar financing and the short term
nature of these instruments.

Derivative Financial Instruments

The Company does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks.

The Company reviews the terms of
convertible debt, equity instruments and other financing arrangements to
determine whether there are embedded derivative instruments, including embedded
conversion options that are required to be bifurcated and accounted for
separately as a derivative financial instrument. Also, in connection with the
issuance of financing instruments, the Company may issue freestanding options or
warrants that may, depending on their terms, be accounted for as derivative
instrument liabilities, rather than as equity. The Company may also issue
options or warrants to non-employees in connection with consulting or other
services.

Derivative financial instruments
are initially measured at their fair value. For derivative financial instruments
that are accounted for as liabilities, the derivative instruments are initially
recorded at their fair values and are then re-valued at each reporting date,
with changes in the fair values reported as charges or credits to income. For
option-based derivative financial instruments, the Company uses the
Black-Scholes option pricing model to value the derivative instruments. To the
extent that the initial fair values of the freestanding and/or bifurcated
derivative instrument liabilities exceed the total proceeds received, an
immediate charge to income is recognized, in order to initially record the
derivative instrument liabilities at their fair value.

The discount from the face value
of a convertible debt or equity instrument resulting from allocating some or all
of the proceeds to the derivative instrument, together with the stated interest
on the instrument, is amortized over the life of the instrument through periodic
charges to income, usually using the effective interest method.

8

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The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is reassessed at the end of each reporting period. If
reclassification is required, the fair value of the derivative instrument, as of
the determination date, is reclassified. Any previous charges or credits to
income for changes in the fair value of the derivative instrument are not
reversed. Derivative instrument liabilities are classified in the balance sheet
as current or non-current based on whether or not net-cash settlement of the
derivative instrument could be required within twelve months of the balance
sheet date.

Deferred Revenue

Deferred revenue represents a
cash advance made under a definitive gold sale agreement to sell a portion of
the life-of-mine gold production only, not silver production, from our Summit
silver-gold mine. Under the terms of the agreement, the Company received an
upfront cash advance of $4.0 million. The upfront cash advance will be amortized
by the difference between the market price and $400 per ounce for those gold
deliveries where the prevailing market price exceeds $400 per ounce. These
credits will be recognized as revenue along with the on-going production
payments for gold delivered pursuant to the agreement. Deferred revenue on the
Companys balance sheet is categorized as current if the Company expects to
recognize such revenue within the following twelve months. Based upon the terms
of the agreement, current deferred revenue approximated $3,804,674 at March 31,
2011.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred either physically or through an irrevocable transfer of metals to customers’ accounts, the price is fixed or determinable, no related obligations remain and collectability is probable.

Sales of all metals products sold
  directly to the Companys metals buyers, including by-product metals, are
  recorded as revenues when a buyer either, takes delivery of siliceous flux
  material or has received all required documentation necessary to take delivery
  of concentrate (generally at the time the concentrate is loaded onto the ship at
  the originating port and the bill of lading is generated).

Revenues for metals products are
recorded at current market prices at the time of delivery. Due to the time
elapsed from delivery to the buyer and the final settlement with the buyer, we
must estimate the prices at which sales of our metals will be settled. Changes
in metals prices between delivery and final settlement will result in
adjustments to revenues related to sales previously recorded upon delivery.
Previously recorded sales are adjusted to estimated settlement metals prices
until final settlement by the buyer.

Sales of metals products are
recorded net of charges from the buyer for treatment, refining, smelting losses,
and other negotiated charges. Charges are estimated upon shipment of product
based on contractual terms, and actual charges do not vary materially from
estimates. Costs charged by smelters include a metals payable fee, fixed
treatment and refining costs per ton of product.

Sales of refined gold related to the definitive gold sale agreement entered into on September 11, 2009 are recorded as revenues when the buyer takes delivery. Revenue from sales of refined gold is not estimated and is final at the time of delivery. Due to the contractual obligation of the definitive gold sale agreement, costs applicable to sales for the delivery of refined gold are recorded at the current market price to purchase the gold and concurrent with deliveries for our metals products to the smelter and the resulting recording of revenue for those products. Due to the time elapsed between the delivery of our metals products to the smelter and the delivery of refined gold, we must estimate the prices at which costs applicable to sales of refined gold will be settled.  Cost of sales previously recorded for open invoices are adjusted to estimated settlement prices until final settlement upon delivery of the refined gold.

Net Earnings (Loss) per Common Share

The Company calculates net income
(loss) per share as required by Accounting Standards Codification subtopic
260-10, Earnings per Share (ASC 260-10). Basic earnings (loss) per share is
calculated by dividing net income (loss) by the weighted average number of
common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income (loss) by the weighted average number of
common shares and dilutive common stock equivalents outstanding. During the
periods when they are anti-dilutive, common stock equivalents, if any, are not
considered in the computation. Consequently the impact of outstanding stock
equivalents has not been included in the current period as they would be
anti-dilutive.

9

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Comprehensive Loss

In addition to net loss,
comprehensive loss includes all changes in equity during a period, such as
cumulative unrealized changes in the fair value of marketable securities
available for sale or other investments.

Reclassifications

Certain items in these
consolidated financial statements have been reclassified to conform to the
current years presentation.

Recent Accounting Pronouncements

In January 2010, the ASC
guidance for fair value measurements and disclosure was updated to require
additional disclosures related to: i) transfers in and out of level 1 and 2 fair
value measurements and ii) enhanced detail in the level 3 reconciliation. The
guidance was amended to provide clarity about: i) the level of disaggregation
required for assets and liabilities and ii) the disclosures required for inputs
and valuation techniques used to measure fair value for both recurring and
nonrecurring measurements that fall in either level 2 or level 3. The adoption
of the updated guidance by the Company, with the exception of the level 3
disaggregation, which is effective for the Companys fiscal year beginning July
1, 2011, did not have a material impact on the Companys consolidated financial
statements. The Company is evaluating the potential impact of adopting the level
3 disaggregation of this guidance on the Companys consolidated financial
position, results of operations and cash flows.

In March 2010, the FASB issued
authoritative guidance which clarifies the Embedded Derivatives guidance (ASC
815). All entities that enter into contracts containing an embedded credit
derivative feature related to the transfer of credit risk that is not only in
the form of subordination of one financial instrument to another will be
affected by the amendments. The amendments in this update are effective for
interim periods beginning after June 15, 2010. The adoption of this update has
not had a material impact on the Companys consolidated financial
statements.

In April 2010, the FASB issued
authoritative guidance which clarifies the Stock Compensation guidance (ASC
718). This guidance clarifies the accounting for certain employee share-based
payment awards. Awards with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys equity securities trades
would not be considered to contain a condition that is not a market, performance
or service condition. Therefore, an entity would not classify such an award as a
liability if it otherwise qualifies as equity. This accounting guidance is
effective for accounting periods beginning on or after December 15, 2010, with
earlier application permitted. The adoption of this update has not had a
material impact on the Companys consolidated financial statements.

In December 2010, FASB issued ASU
2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro
Forma Information for Business Combinations (a consensus of the FASB Emerging
Issues Task Force)." ASU 2010-29 provides amendments to subtopic 805-10 of the
FASB ASC that requires a public entity to disclose pro forma information for
business combinations that occurred in the current reporting period. ASU 2010-29
is effective prospectively for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2010, with early adoption permitted. The adoption of
this update has not had an impact on the Company's consolidated financial
statements.

Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force),
the AICPA, and the SEC during the current reporting period did not, or are not
believed by management to have a material impact on the Companys present or
future consolidated financial statements.

NOTE 3  INVENTORY

The following table provides the
components of inventory:

10

---

|                            |   | March 31, |  |   | June 30 | 
|--------------------------- | - | --------- |  | - | ------- | 
|                            |   | 2011      |  |   | 2010    | 
|Stockpiled ore              | $ | 2,647     |  | $ | --      | 
|In-process material         |   | 1,782     |  |   | --      | 
|Siliceous flux material     |   | 49,911    |  |   | --      | 
|Precious metals concentrate |   | 24,511    |  |   | --      | 
|                            | $ | 78,851    |  | $ | --      | 

NOTE 4  NOTE RECEIVABLE

On January 27, 2011, the Company
advanced $200,000 to Columbus Silver Corporation (Columbus Silver) (TSXV: CSC)
in exchange for a promissory note bearing interest at 4% per annum. All accrued
interest and principal is due and payable on December 31, 2012. The loan was
extended for the purpose of providing Columbus Silver with working capital in
connection with a Memorandum of Understanding (MOU) dated September 23, 2010,
in contemplation of a business combination (the Transaction). In the event
that either party to the MOU informs the other that it will not proceed with the
Transaction, either the maker or the holder will have the ability, by providing
written notice to the other, to require that the maker apply to the TSX Venture
Exchange to have the entire outstanding principal amount and accrued unpaid
interest of this note paid in common shares of the maker. As of March 31, 2011,
accrued interest receivable on the note receivable was $1,400.

NOTE 5 - DERIVATIVE INSTRUMENT LIABILITIES

On December 30, 2010, in
connection with the registered direct offering to three institutional investors
for 1,666,668 shares of the Companys common stock, the Company issued 833,334
five year warrants giving the holders the right to purchase common stock at
$1.50 per share. The warrants are exercisable immediately after issuance and
will expire five years from the date of issuance. Using the Black-Scholes option
pricing model, the fair market value of the warrants under the placement at the
time of issuance was determined to be $669,372 with the following assumptions:
(1) risk-free rate of interest of 2.01%, (2) an expected life of 5.0 years, (3)
expected stock price volatility of 79.51%, and (4) expected dividend yield of
zero. The private placement was subject to the issuance of 100,000 warrants to
the placement agent, exercisable at $1.50 per share and has an exercise period
of approximately 3.92 years. The warrants are exercisable immediately after
issuance. Using the Black-Scholes option pricing model, the fair market value of
the placement agent warrants under the placement at the time of issuance was
determined to be $62,614 with the following assumptions: (1) risk-free rate of
interest of 1.47%, (2) an expected life of 3.92 years, (3) expected stock price
volatility of 68.65%, and (4) expected dividend yield of zero.

The fair market value of the
derivative instruments liability at March 31, 2011, was determined to be
$11,524,959 with the following assumptions: (1) risk free interest rate of 0.15%
to 2.12%, (2) remaining contractual life of 0.45 to 4.75 years, (3) expected
stock price volatility of 70.63% to 71.39%, and (4) expected dividend yield of
zero. Based upon the change in fair value, the Company has recorded a non-cash
loss on derivative instruments for the nine months ended March 31, 2011, of
$(898,934) and a corresponding increase in the derivative instruments
liability.

|                                                            |   | Derivative          |         |   | Derivative      |  |   | Derivative     |  
|----------------------------------------------------------- | - | ------------------- | ------- | - | --------------- |  | - | -------------- | -
|                                                            |   | Liability as of     |         |   | Liability as of |  |   | (Loss) Through |  
|                                                            |   | June
      30, 2010 |         |   | March 31, 2011  |  |   | March 31, 2011 |  
|Convertible Debentures:                                     |   |                     |         |   |                 |  |   |                |  
|Purchase Agreement Warrants                                 | $ | 6,585,752           |         | $ | 7,204,696       |  | $ | (618,944       | )
|Amendment 2 Warrants                                        |   | 637,296             |         |   | 598,043         |  |   | 39,253         |  
|Embedded Conversion Option                                  |   | 2,670,993           |         |   | 3,722,220       |  |   | (1,051,227     | )
|Totals                                                      | $ | 9,894,041           |         | $ | 11,524,959      |  |   | (1,630,918     | )
|                                                            |   |                     |         |   |                 |  |   |                |  
|Amount allocated to derivative
      liability at inception |   |                     | 731,984 |  
|                                                            |   |                     |         |   |                 |  | $ | (898,934       | )

11

---

The derivative liability is comprised of the following as
of:

|                                                          |   | March 31,  |  |   | June 30,  | 
|--------------------------------------------------------- | - | ---------- |  | - | --------- | 
|                                                          |   | 2011       |  |   | 2010      | 
|Current portion of derivative instruments
      liability | $ | 11,524,959 |  | $ | 9,894,041 | 
|Long-term portion of derivative instruments liability     |   | -          |  |   | -         | 
|                                                          | $ | 11,524,959 |  | $ | 9,894,041 | 

NOTE 6  CONVERTIBLE NOTES PAYABLE AND
DEBENTURES

Convertible Senior Subordinated Notes

On October 30, 2007, the Company
completed the placement of 10% Convertible Senior Subordinated Notes of
$450,000. The notes were placed with three accredited investors for $150,000
each. The notes have a term of 60 months, and at such time all remaining
principal and interest shall be due. The notes bear interest at 10% per annum.
Interest accrued for 18 months from the date of closing. Interest on the
outstanding principal balance is then payable in quarterly installments
commencing on the first day of the 19th month following closing. In connection
with the transaction, the Company issued a five year warrant for each $2.50
invested, for a total of 180,000 warrants, each warrant giving the note holder
the right to purchase one share of common stock at a price of $1.25 per share.
At the option of the holders of the convertible notes, the outstanding principal
and interest is convertible at any time into shares of the Companys common
stock at conversion price of $1.25 per share. The notes will be automatically
converted into common stock if the weighted average closing sales price of the
stock exceeds $2.50 per share for ten consecutive trading days. The shares
underlying the notes and warrants will be registered on request of the note
holders, provided the weighted average closing price of the stock exceeds $1.50
per share for ten consecutive trading days.

Senior Secured Convertible Debenture

On December 21, 2007, the Company
entered into definitive agreements for the placement with a single investor of a
7% Senior Secured Convertible Debenture in the amount of $13,500,000. Proceeds
from the debenture were issued in accordance with a pre-determined funding
schedule related to the Summit projects anticipated construction requirements.
The term of the debenture is 60 months, at the end of which time all remaining
principal and interest shall be due. The debenture bears interest at the rate of
7% per annum. Interest was accrued until June 30, 2009. Interest on the
outstanding principal balance is payable in quarterly installments, commencing
on July 1, 2009. Interest may be paid in cash or stock at the investors
election. If paid in stock, the number of shares will be calculated using the
average of the daily volume weighted average sales prices of the common stock
for the twenty (20) trading days immediately preceding the payment date. The
entire amount of principal and any unpaid interest will be due December 31,
2012, subject to the investors right to require the Company after 36 and 48
months to apply up to 30% of the Summit projects positive cash flow toward
retirement of the debenture. The debenture is secured by a mortgage on the
Summit real property and a security interest in Summit personal property. The
investor may at any time convert unpaid principal and interest into shares of
our common stock at the rate of $1.00 per share. The debenture will be
automatically converted into common stock if the weighted average closing sales
price of the stock exceeds $2.50 per share for 10 consecutive trading days.
Beginning January 1, 2011, the Company may redeem the entire outstanding amount
of the debenture, including principal and outstanding interest, subject to the
investors right to convert the debenture into shares of common stock. In
connection with the transaction, for every $2.00 of the original principal
amount of the debenture, the investor received a warrant to purchase one share
of common stock at a price of $1.00. The warrants are exercisable from July 1,
2010 to December 31, 2014. The Company has received total advances under the
agreement of $13,500,000, and the Company issued an aggregate of 6,750,000
warrants under the debenture advances.

On June 30, 2009, the Company
entered into Amendment 2 on the Senior Secured Convertible Debenture dated
December 21, 2007. Pursuant to the amendment, the accrued interest on the
debentures due June 30, 2009, in the collective aggregate amount of $974,360,
was automatically converted into 974,360 shares of the Companys common stock
effective as of June 30, 2009. The amendment also provided that the accrued
interest for the quarters ended September 30, 2009 and December 31, 2009 shall
be paid in shares of the Companys common stock, to be valued at $1.00 per share
at the time of payment and issuance. Accordingly the Company issued 483,000
shares of its common stock for payment of $483,000 of aggregate accrued interest
for the quarters ended September 30, 2009 and December 31, 2009. Additionally the amendment provided that on March 31,
2010, the note holder had the option to make a six-month election, by providing
written notice of its election thirty days prior to March 31, 2010, to have the
March 31, 2010 and June 30, 2010 quarterly interest payments paid in shares of
the Companys common stock. The note holder chose not to make the election, and
consequently the accrued interest relating to the debentures, totaling $475,125
for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, was
paid in cash. Commencing September 30, 2010, the note holder had the option to
make an annual election, by providing 30 days prior written notice of its
election, to have the subsequent four quarterly interest payments paid in shares
of the Companys common stock. Valuation of the common stock is to be based upon
the Market Price of the stock for the 30 trading days immediately preceding the
payment due date. The note holder chose not to make the election, and
consequently the accrued interest relating to the debentures, totaling $483,000
for the quarters ended September 30, 2010 and December 31, 2010, was paid in
cash.

12

---

The accrued interest due on the
debentures at March 31, 2011, was extended by the debenture holder in late March
2011. Accrued interest on the debentures for the quarter was $236,250, of which
$20,000 was paid by March 31, 2011. The remaining balance is due with additional
interest calculated on the agreed dates of payments as follows:

|On or before April 15, 2011 | $ | 60,000  | 
|--------------------------- | - | ------- | 
|On or before April 30, 2011 |   | 20,000  | 
|On or before May 15, 2011   |   | 70,000  | 
|On or before June 15, 2011  |   | 66,250  | 
|                            | $ | 216,250 | 

The components of the convertible
notes payable and debentures are as follows:

|March 31, 2011                    |   | Principal  |  |   | Unamortized |   |   |            | 
|--------------------------------- | - | ---------- |  | - | ----------- | - | - | ---------- | 
|                                  |   | Amount     |  |   | Discount    |   |   | Net        | 
|Current portion                   | $ | -          |  | $ | -           |   | $ | -          | 
|Long-term portion, net of current |   | 13,950,000 |  |   | (2,861,621  | ) |   | 11,088,379 | 
|                                  |   |            |  |   |             |   |   |            | 
|                                  | $ | 13,950,000 |  | $ | (2,861,621  | ) | $ | 11,088,379 | 

|June 30, 2010                     |   | Principal  |  |   | Unamortized |   |   |            | 
|--------------------------------- | - | ---------- |  | - | ----------- | - | - | ---------- | 
|                                  |   | Amount     |  |   | Discount    |   |   | Net        | 
|Current portion                   | $ | -          |  | $ | -           |   | $ | -          | 
|Long-term portion, net of current |   | 13,950,000 |  |   | (3,793,560  | ) |   | 10,156,440 | 
|                                  |   |            |  |   |             |   |   |            | 
|                                  | $ | 13,950,000 |  | $ | (3,793,560  | ) | $ | 10,156,440 | 

Aggregate yearly maturities of long
term debt based upon payment terms at March 31, 2011, are as follows:

|2011                                | $ | -          |  
|----------------------------------- | - | ---------- | -
|2012                                |   | 13,950,000 |  
|Subtotal                            |   | 13,950,000 |  
|Less: unamortized original discount |   | (2,861,621 | )
|                                    | $ | 11,088,379 |  

As of March 31, 2011, accrued interest
payable on the convertible notes payable and debentures was $222,459.

NOTE 7  NOTES PAYABLE

On June 5, 2008, the Company
agreed to exercise the option to purchase the Planet MIO property, consisting of
thirty-one patented mining claims totaling 523 acres in La Paz County, Arizona.
The Company originally leased the property in 2000 from New Planet Copper Mining
Company under the terms of a Lease with Option to Purchase. The Company agreed
to exercise the purchase option in connection with settlement of an action the
Company commenced in March 2007 seeking to confirm that the lease remained in
good standing. The purchase price was $250,000. The Company signed a promissory note for $200,000 with interest payable at
10% per annum from the date of closing of the transaction. The original
provisions of the note called for a $50,000 payment at the signing of the note,
which occurred in August 2008, and four subsequent principal payments of $50,000
plus interest due each anniversary date of the agreement. In August 2009, the
amortization schedule of the note was amended to reflect four equal annual
payments of principal and interest of $63,094. The due date for the first annual
payment was extended with the interest rate increased to 20% per annum during
the extension period. The Company also agreed to pay an additional $2,000 in
legal and miscellaneous fees to document the amendment. All other provisions of
the original agreement remain unchanged including the provision for a 5% royalty
to be paid on any future production from the property.

13

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On July 25, 2008, the Company
entered into an installment sales contract for $94,613 to purchase certain
equipment. The term of the agreement is for 36 months at an interest rate of
6.75%, with the equipment securing the loan.

On September 30, 2009, the
Company entered into an installment sales contract for $16,825 to purchase
certain equipment. The term of the agreement is for 36 months at an interest
rate of 9.25%, with the equipment securing the loan.

On October 1, 2009, the Company
entered into an agreement to finance insurance premiums in the amount of $72,906
at an interest rate of 6.99% with equal payments due monthly beginning November
1, 2009 and continuing until September 1, 2010. All amounts owed under the
agreement were paid off in full prior to September 30, 2010.

On November 1, 2009, the Company
entered into an agreement to finance insurance premiums in the amount of
$139,856 at an interest rate of 5.99% with equal payments due monthly beginning
December 10, 2009 and continuing until October 10, 2010. All amounts owed under
the agreement were paid off in full prior to September 30, 2010.

On September 27, 2010, the
Company entered into an agreement to finance insurance premiums in the amount of
$77,306 at an interest rate of 6.99% with equal payments due monthly beginning
November 1, 2010 and continuing until September 1, 2011.

The following summarizes notes payable
at March 31, 2011 and June 30, 2010:

|                                                                                                                                                                      |  |   | March 31, 2011 |  |   | June 30, 2010 | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------------- |  | - | ------------- | 
|                                                                                                                                                                      |  |   | (Unaudited)    |  |   |               | 
|Note payable for mineral property,
      interest at 10%, payable in 4 annual installments
      of $63,094,
      including interest through August 2012             |  | $ | 109,502        |  | $ | 156,906       | 
|                                                                                                                                                                      |  |   |                |  |   |               | 
|Installment sales contract on equipment,
      interest at 6.75%, payable in 36 monthly installments
      of $2,911,
      including interest through September 2011 |  |   | 14,328         |  |   | 39,180        | 
|                                                                                                                                                                      |  |   |                |  |   |               | 
|Installment sales contract on equipment,
      interest at 9.25%, payable in 36 monthly installments
      of $537,
      including interest through October 2012     |  |   | 9,060          |  |   | 13,141        | 
|                                                                                                                                                                      |  |   |                |  |   |               | 
|Financing contract on insurance premiums
      interest at 6.99%, payable in 11 monthly installments
      of $6,862,
      including interest through September 2010 |  |   | -              |  |   | 13,604        | 
|                                                                                                                                                                      |  |   |                |  |   |               | 
|Financing contract on insurance premiums
      interest at 5.99%, payable in 11 monthly installments
      of $13,098,
      including interest through October 2010  |  |   | -              |  |   | 38,905        | 

14

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|Financing contract on insurance premiums interest at 6.99%, payable in 11 monthly
    installments of $7,276, including interest through September 2011 |  |   | 35,752   |   |   | -        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------- | - | - | -------- | -
|                                                                                                                                                        |  |   |          |   |   |          |  
|Total Outstanding Notes Payable                                                                                                                         |  |   | 168,642  |   |   | 261,736  |  
|Less: Current maturities                                                                                                                                |  |   | (108,124 | ) |   | (138,821 | )
|Obligations of notes payable due after one
      year                                                                                                   |  | $ | 60,518   |   | $ | 122,915  |  

The aggregate maturities of notes
payable as of March 31, 2011, is as follows:

|Year
      ending June 30,      |   |         | 
|------------------------------- | - | ------- | 
|2011                            | $ | 37,079  | 
|2012                            |   | 72,607  | 
|2013                            |   | 58,956  | 
|Total Outstanding Notes Payable | $ | 168,642 | 

NOTE 8  CAPITAL LEASES

The Company utilizes capital
leases for the purchase of equipment. Lease terms and interest rates for the
equipment are 60 months at 6.25%, 36 months at 5.34%, and 36 months at 5.78% .
The assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. The
assets are amortized or depreciated over the lower of their related lease terms
or their estimated productive lives.

Minimum future lease payments
under capital leases, as of March 31, 2011, for each of the following years and
in aggregate, are as follows:

|Year ended June 30,                                    |   |          |  
|------------------------------------------------------ | - | -------- | -
|2011                                                   | $ | 37,391   |  
|2012                                                   |   | 88,405   |  
|2013                                                   |   | 43,041   |  
|2014                                                   |   | 3,587    |  
|Total minimum lease payments                           |   | 172,424  |  
|Amount representing interest                           |   | (8,411   | )
|Present value of future minimum lease
      payments   |   | 164,013  |  
|Current portion of capital lease obligations           |   | (109,100 | )
|Obligations of capital leases due after one
      year | $ | 54,913   |  

NOTE 9  FAIR VALUE MEASUREMENTS

U.S. accounting standards require
disclosure of a fair-value hierarchy of inputs the Company uses to value an
asset or a liability. In September 2006, the FASB issued new accounting
guidance, which establishes a framework for measuring fair value under generally
accepted accounting principles (GAAP) and expands disclosures about fair value
measurements. The Company previously partially adopted this guidance for all
instruments recorded at fair value on a recurring basis. In the second quarter
of fiscal 2010, the Company adopted the remaining provisions of the guidance for
all non-financial assets and liabilities that are not re-measured at fair value
on a recurring basis. The adoption of these provisions did not have an impact on
the Companys consolidated financial statements.

Fair value standards define fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Additionally, the standards establish a three-level fair value
hierarchy that prioritizes the inputs used to measure fair value. This hierarchy
requires that the Company maximize the use of observable inputs and minimize the
use of unobservable inputs. The three levels of the fair-value hierarchy are
described as follows:

15

---

Level 1: Quoted prices (unadjusted) in
active markets for identical assets and liabilities. For the Company, Level 1
inputs include quoted prices on the Companys securities that are actively
traded.

Level 2: Inputs other than Level 1 that
is observable, either directly or indirectly. For the Company, Level 2 inputs
include assumptions such as estimated life, risk free rate and volatility
estimates used in determining the fair values of the Companys option and
warrant securities issued derivative financial instruments.

Level 3: Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. This includes certain pricing models,
discounted cash flows methodologies and similar techniques that use significant
unobservable inputs.

The Companys financial
instruments consist of marketable securities and derivative instruments which
are measured at fair value on a recurring basis. Marketable securities are
comprised of 1,000,000 shares of common stock of Columbus Silver Corporation
which is traded on the TSX Venture Exchange (TSXV: CSC). The stock was purchased
in accordance with a Memorandum of Understanding entered into on September 24,
2010 for the purpose of consummating a business combination. The derivative
instruments consist of certain embedded features contained within its debt
instruments and certain warrant contracts. The derivatives are measured on their
respective origination dates, at the end of each reporting period and at other
points in time when necessary, such as modifications, using Level 3 inputs in
accordance with GAAP. The Company does not report any financial assets or
liabilities that it measures using Level 2 inputs. The fair value measurement of
financial instruments and other assets as of March 31, 2011 are as follows:

|                                          |   |         |  |  |         |  |   |            |  |   | March 31,  | 
|----------------------------------------- | - | ------- |  |  | ------- |  | - | ---------- |  | - | ---------- | 
|                                          |   | Level 1 |  |  | Level 2 |  |   | Level 3    |  |   | 2011       | 
|Marketable Securities                     | $ | 164,898 |  |  | ---     |  |   | ---        |  | $ | 164,898    | 
|Other Assets:                             |   |         |  |  |         |  |   |            |  |   |            | 
|Idle
      equipment, net                 |   | ---     |  |  | ---     |  | $ | 1,223,528  |  | $ | 1,223,528  | 
|                                          |   |         |  |  |         |  |   |            |  |   |            | 
|Value of derivative instruments liability |   | ---     |  |  | ---     |  | $ | 11,524,959 |  | $ | 11,524,959 | 

Idle equipment includes equipment
associated with the Black Canyon mica project and which the Company has ceased
operations and are classified as Level 3 non-financial assets. The fair value of
the idle equipment was determined based upon an independent third party
appraisal. The appraised value was established based upon comparable sales of
similar assets and certain assumptions regarding market demand for these assets.
As this valuation was based upon unobservable inputs, we classified the idle
equipment as Level 3. There was no change in the carrying valuation of the idle
equipment during the nine months ended March 31, 2011.

NOTE 10  COMMITMENTS

On March 29, 2011, the Company
amended the definitive gold sale agreement dated September 11, 2009. The
amendment extended the original completion guarantee date from April 2011 to
June 30, 2012. In exchange for the amended completion guarantee date, the
Company agreed to deliver an additional 700 ounces of gold at equivalent sales
terms over and above what is currently due under the agreement. Based upon the
sale terms of the agreement, the Company recorded an accrued liability of
$727,300 based upon the closing gold price on March 31, 2011. The Company will
mark to market the accrued liability on the delivery date of the additional
ounces based upon the closing gold price on such date. Under the terms of the
amendment the delivery is to be made prior to June 30, 2011.

NOTE 11 - STOCKHOLDERS (DEFICIT) EQUITY

Issuances of Common Stock

On August 31, 2010, an individual
exercised an option to purchase 10,000 shares of common stock at $0.60 per share
on a cashless basis. Under the cashless basis exercise, 2,942 shares were
issued.

On September 29, 2010, an
individual exercised an option to purchase 10,000 shares of common stock at
$0.60 per share on a cashless basis. Under the cashless basis exercise, 4,445
shares were issued.

16

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On October 8, 2010, an individual
exercised an option to purchase 75,000 shares of common stock at $0.60 per share
on a cashless basis. Under the cashless basis exercise, 34,822 shares were
issued.

On November 16, 2010, 7,500
shares of common stock were issued to a consultant for services, valued at
$6,750 based on the closing market price on the date of the transaction.

On December 30, 2010, 1,666,668
common shares of common stock were issued to three institutional investors
pursuant to the Companys shelf registration statement on Form S-3. The shares
were sold at $1.20 per share and gross cash proceeds aggregated $2,000,001.
Placement agent fees of $136,000 were paid on the offering.

On December 31, 2010, an
individual forfeited 100,000 shares of stock which were unvested at the time
employment with the Company was terminated.

On January 1, 2011, an individual
exercised an option to purchase 10,000 shares of common stock at $1.165 per
share on a cashless basis. Under the cashless basis exercise, 1,241 shares were
issued.

During January 3 through January
10, 2011, five individuals exercised options, on a cashless basis, to purchase
an aggregate of 70,000 shares of common stock at $0.86 per share. Under the
cashless basis exercises, 19,611 shares were issued.

On February 23, 2011, the Company
issued 10,000 shares of common stock to a consultant for services, valued at
$9,800 based on the closing market price on the date of the transaction.

On March 29, 2011, an individual
exercised options to purchase 100,000 shares of common stock at $0.86 per share
and 200,000 shares at $1.00 per share, both on a cashless basis. Under the cashless basis
exercises, 37,615 shares were issued.

Stock-based compensation for
stock granted in the prior year totaling $75,545 and $396,106 was recorded
respectively for the three months and nine months ended March 31, 2011.

Issuances of Options

On November 10, 2010, the Company granted 150,000 three-year options at an exercise price of $1.30 per share. The options have a six month vesting period from the date of grant. The options were valued at $55,368 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 0.63%, (2) an expected life of 3.0 years, (3) expected stock price volatility of 75.51%, and (4) expected dividend yield of zero. Stock-based compensation of $27,684 and $43,372 was recorded during the three months and nine months ended March 31, 2011, respectively.

On January 1, 2011, the Company granted 75,000 five-year options at an exercise price of $1.21 per share to each of the two outside directors. The options have a six month vesting period from the date of grant. The options were valued at $116,508 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 2.02%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 79.05%, and (4) expected dividend yield of zero. Stock-based compensation of $57,932 was recorded during the three months ended March 31, 2011.

On March 1, 2011, the Company granted 50,000 five-year options at an exercise price of $0.88 per share to an employee. The options have a six month vesting period from the date of grant. The options were valued at $26,734 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 2.11%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 73.03%, and (4) expected dividend yield of zero. Stock-based compensation of $4,529 was recorded during the three months ended March 31, 2011.

Stock-based compensation for
options issued in the prior year totaling $3,183 and $346,476  was recorded
respectively for the three months and nine months ended March 31, 2011.

17

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Issuances of Warrants

On December 30, 2010, in
connection with the registered direct offering to three institutional investors
for 1,666,668 shares of the Companys common stock, the Company issued 833,334
five-year warrants giving the holders the right to purchase common stock at
$1.50 per share. The warrants are exercisable immediately after issuance and
will expire five years from the date of issuance. Using the Black-Scholes option
pricing model, the fair market value of the warrants under the placement at the
time of issuance was determined to be $669,372 with the following assumptions:
(1) risk-free rate of interest of 2.01%, (2) an expected life of 5.0 years, (3)
expected stock price volatility of 79.51%, and (4) expected dividend yield of
zero. In connection with the registered direct offering, the Company issued
100,000 warrants to the placement agent, exercisable at $1.50 per share and with
an exercise period of approximately 3.92 years. The warrants are exercisable
immediately after issuance. Using the Black-Scholes option pricing model, the
fair market value of the placement agent warrants at the time of issuance was
determined to be $62,614 with the following assumptions: (1) risk-free rate of
interest of 1.47%, (2) an expected life of 3.92 years, (3) expected stock price
volatility of 68.65%, and (4) expected dividend yield of zero.

Stock option and warrant
activity, both within the 1989 Stock Option Plan and 2007 Equity Incentive Plan
and outside of these plans, for the nine months ended March 31, 2011, are as
follows:

|                              |  | Stock Options |   |  | Stock Warrants | 
|----------------------------- |  | ------------- | - |  | -------------- | 
|                              |  |               |   |  | Weighted       | 
|                              |  |               |   |  | Average        | 
|                              |  |               |   |  | Exercise       | 
|                              |  | Shares        |   |  | Price          | 
|Outstanding at June 30, 2010  |  | 6,705,000     |   |  | $0.41          | 
|Granted                       |  | 350,000       |   |  | $1.20          | 
|Canceled                      |  | (10,000       | ) |  | $0.86          | 
|Expired                       |  | ---           |   |  | ---            | 
|Exercised                     |  | (475,000      | ) |  | $0.87          | 
|Outstanding at March 31, 2011 |  | 6,570,000     |   |  | $0.42          | 

Stock options and warrants exercisable at March 31, 2011, are
as follows:

|Outstanding and Exercisable
    Options |  |             | Outstanding and Exercisable
    Warrants | 
|--------------------------------------- |  | ----------- | ---------------------------------------- | 
|                                        |  |             |                                          | 
|                                        |  |             |                                          | 
|                                        |  |             |                                          | 
|Exercise                                |  |             |                                          | 
|Price                                   |  | Outstanding |                                          | 
|Range                                   |  | Number      |                                          | 
|$0.11                                   |  | 4,000,000   |                                          | 
|$0.46                                   |  | 100,000     |                                          | 
|$0.55                                   |  | 175,000     |                                          | 
|$0.60                                   |  | 610,000     |                                          | 
|$0.86                                   |  | 915,000     |                                          | 
|$0.88                                   |  | 50,000      |                                          | 
|$1.165                                  |  | 20,000      |                                          | 
|$1.21                                   |  | 150,000     |                                          | 
|$1.30                                   |  | 125,000     |                                          | 
|$1.30                                   |  | 150,000     |                                          | 

18

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|$1.38               |  | 150,000   |  |  | 150,000   |      |  | 3.76  |  | $1.38 |                      |  |  |      |  |            |       |  |            |  |  |  |  |  |  | 
|------------------- |  | --------- |  |  | --------- | ---- |  | ----- |  | ----- | -------------------- |  |  | ---- |  | ---------- | ----- |  | ---------- |  |  |  |  |  |  | 
|$1.70               |  | 125,000   |  |  | 125,000   |      |  | 2.08  |  | $1.70 |                      |  |  |      |  |            |       |  |            |  |  |  |  |  |  | 
|                    |  | 6,570,000 |  |  | 6,220,000 |      |  |       |  |       |                      |  |  |      |  | 15,942,862 |       |  | 15,942,862 |  |  |  |  |  |  | 
|                    |  |           |  |  |           |      |  |       |  |       |                      |  |  |      |  |            |       | 
|Outstanding Options |  |           |  |  |           | 2.82 |  | $0.42 |  |       | Outstanding Warrants |  |  | 3.15 |  |            | $1.22 | 
|Exercisable Options |  |           |  |  |           | 2.76 |  | $0.38 |  |       | Exercisable Warrants |  |  | 3.15 |  |            | $1.22 | 

As of March 31, 2011, the
aggregate intrinsic value of all stock options and warrants vested and expected
to vest was approximately $5,515,451 and the aggregate intrinsic value of
currently exercisable stock options and warrants was approximately $5,515,451.
The intrinsic value of each option share is the difference between the fair
market value of the common stock and the exercise price of such option or
warrant share to the extent it is "in-the-money". Aggregate intrinsic value
represents the value that would have been received by the holders of
in-the-money options had they exercised their options on the last trading day of
the quarter and sold the underlying shares at the closing stock price on such
day. The intrinsic value calculation is based on the $1.09 closing stock price
of the Common Stock on March 31, 2011. The total number of in-the-money options
and warrants vested and exercisable as of March 31, 2011, was 16,286,976.

The total intrinsic value of
options exercised during the three months ended March 31, 2011, was $66,150.
Intrinsic value of exercised shares is the total value of such shares on the
date of exercise less the cash received from the option or warrant holder to
exercise the options. The options were exercised on a cashless basis and no cash
proceeds were received from the exercise of the stock options.

The total fair value of options
and warrants granted during the three months ended March 31, 2011, was
approximately $77,964. The total grant-date fair value of option and warrant
shares vested during the three months ended March 31, 2011, was approximately
$-0-.

NOTE 12  CONTEMPLATED ACQUISITION

The Company entered into a
non-binding Memorandum of Understanding on September 24, 2010 with Columbus
Silver Corporation (TSXV: CSC) (Columbus Silver), pursuant to which the
Company will acquire all the outstanding shares of common stock of Columbus
Silver in exchange for the Companys common stock. The contemplated exchange
ratio is one share of Santa Fe common stock for every 5.82515 shares of Columbus
Silvers common stock. It is contemplated that Santa Fe will issue a total of
8,787,527 shares in the transaction, the value of which shares will be
determined by the closing market price of the Companys common stock on the
effective closing date of the contemplated transaction. Following completion of
the transaction, it is estimated that the Company will be owned 91.37% by
current Company shareholders and 8.63% by Columbus Silver shareholders. In
accordance with the Memorandum of Understanding, the Company purchased 1,000,000
shares of Columbus Silver common stock on October 28, 2010 in a private
placement valued at $98,058, or CDN$0.10 per share. The proceeds of the issuance
are to be used by Columbus Silver as bridge financing for operational expenses
through December 31, 2010. On January 27, 2011, the Company advanced $200,000 to
Columbus Silver in exchange for a promissory note bearing interest at 4% per
annum. See NOTE 4.

Currently the Company is
negotiating a revocation of cease trade orders against the Company issued by the
British Columbia and Ontario Securities Commission in 2003 after the Company did
not make required regulatory filings. Until the cease trade orders are revoked
steps cannot be taken to consummate the proposed transaction.

NOTE 13  SUBSEQUENT EVENTS

The company has evaluated events
and transactions that occurred subsequent to March 31, 2011 for possible
disclosure or recognition in the consolidated financial statements. The Company
has determined that there were no such events or transactions that warrant
disclosure or recognition in the consolidated financial statements.

19

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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q may contain certain forward-looking
statements as such term is defined in the private securities litigation reform
act of 1995 and by the securities and exchange commission in its rules,
regulations and releases, which represent the Companys expectations or beliefs,
including but not limited to, statements concerning the Companys operations,
economic performance, financial condition, growth and acquisition strategies,
investments, and future operational plans. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as may, will, expect, believe, anticipate, intent,
could, estimate, might, Plan, predict or continue or the negative or
other variations thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond the Companys control, and
actual results may differ materially depending on a variety of important
factors, including uncertainty related to acquisitions, governmental regulation,
managing and maintaining growth, the operations of the company and its
subsidiaries, volatility of stock price and any other factors discussed in this
and other registrant filings with the securities and exchange commission. The
company does not intend to undertake to update the information in this Form 10-Q
if any forward-looking statement later turns out to be inaccurate.

The following discussion
summarizes the results of our operations for the three and nine month periods
ended March 31, 2011, and compares those results to the three and nine month
periods ended March 31, 2010. It also analyzes our financial condition at March
31, 2011. This discussion should be read in conjunction with the Managements
Discussion and Analysis, including the audited financial statements for the
years ended June 30, 2010 and 2009 and Notes to the financial statements, in our
Form 10-K for the year ended June 30, 2010.

Overview

Santa Fe Gold Corporation (the
Company, our or we) is a U.S. mining company, incorporated in August 1991
in the state of Delaware, with a general business strategy to acquire and
develop mining properties amenable to low cost production. We currently are
focused on: (1) continuing the ramp up of production at our Summit silver-gold
property located in New Mexico, (2) conducting further studies on our Ortiz gold
project located in New Mexico and (3) continuing to raise working capital for
operating and administrative expenses.

We commenced processing
operations at the Banner Mill in March 2010. Commissioning of the mill proceeded
satisfactorily and in July 2010, the mill facilities were placed into service
and depreciation started to be recognized on the plant. The Company plans to
ramp up production from the Summit mine and increase throughput at the Banner
Mill, and expects the Summit project will achieve commercial production in 2011.

Basis of Presentation and Going Concern

The financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities and commitments in the normal course of
business. Should the Company be unable to continue as a going concern, it may be
unable to realize the carrying value of its assets and to meet its liabilities
as they become due.

20

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The Company has incurred a net loss of $6,099,882 for the nine months ended March 31, 2011, and has a total accumulated deficit of $61,229,332 and a working capital deficit of $14,405,015 at March 31, 2011, which includes non-cash derivative instrument liabilities aggregating $11,524,959 and deferred revenue of $3,804,674.

The Company has increased
revenue-generating operations during the current quarter as we ramp up to
commercial production at our Summit mine site and attain full throughput at our
Banner Mill. To continue as a going concern, the Company is dependent on
continued fund raising for project development and payment of general and
administration expenses until production at the Summit mine site ramps up to
full production and profitable operations are achieved. The Company has no
commitment from any party to provide additional working capital and there is no
assurance that such funding will be available if needed, or if available, that
its terms will be favorable or acceptable to the Company.

The Companys consolidated
financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
in existence.

Derivative Financial Instruments

In connection with the issuance
of debt or equity instruments, we may issue options or warrants to purchase our
common stock. In certain circumstances, these options or warrants may be
classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as
conversion options, which in certain circumstances, may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.

The identification of, and
accounting for, derivative instruments is complex. Our derivative instrument
liabilities are revalued at the end of each reporting period, with changes in
the fair value of the derivative liability recorded as charges or credits to
income, in the period in which the changes occur. For warrants that are
accounted for as derivative instrument liability, we determined the fair value
of these warrants using the Black-Scholes option pricing model. That model
requires assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life of
the warrants. The identification of, and accounting for, derivative instruments
and the assumptions used to value them can significantly affect our consolidated
financial statements.

RESULTS OF OPERATIONS

Operating Results for the Three Months Ended March 31, 2011
and 2010

Sales

We had revenues of $2,894,007 for
the three months ended March 31, 2011, as compared to $261,532 for the three
months ended March 31, 2010. The increase of $2,632,475 is due to increased
production at the Summit mine and related shipments of precious metals
concentrate, flux material and the sale of refined gold. Sales for the current
quarter consisted of concentrate sales of $2,340,341, flux material of $443,291
and refined gold of $110,375.

The definitive gold sale
agreement entered into on September 11, 2009 stipulates that we deliver the
contractual production quantity in refined gold. See the Liquidity and
Capital Resources section within this Item 2 for additional information. The
Summit Project is not currently configured or permitted to produce refined gold.
To fulfill the contractual terms per the definitive gold sale agreement, refined  gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of
$400 per ounce plus the upfront advance, representing deferred revenue, which is
to be credited by the difference between the market price and the fixed price of
gold for the number of ounces delivered. The revenue component of $110,375 for
the delivery of refined gold is comprised of $32,187 representing sales of gold
at the fixed price of $400 per ounce, and $78,188 representing the realization
of deferred revenue related to the upfront cash advance.

Operating Costs and Expenses

Costs applicable to sales were
incurred aggregating $1,604,449 for the three months ended March 31, 2011, as
compared to $-0- for the three months ended March 31, 2010. The increase of
$1,604,449 is attributable to the costs associated with the shipments of concentrate and flux material
for smelting feedstock totaling $396,357, and the cost of purchasing refined
gold  of $1,208,092 in order to satisfy the delivery
requirements of the definitive gold sale agreement. Of this amount,
approximately $727,000 is attributable to the completion guarantee extension as
discussed in NOTE 9 to the consolidated financial statements. The Summit project
has not yet completed development of its initial targets and ramp-up is still
underway. Costs applicable to sales are higher than normally expected. We
anticipate these costs will decrease in relation to sales once we achieve full
production at the mine and corresponding full throughput at the mill site later
in calendar 2011.

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Exploration and mining costs were
$597,266 for the three months ended March 31, 2011, as compared to $275,425 for
the three months ended March 31, 2010, an increase of $321,841. The increase is
attributable to expanding production operations at the Summit mine site,
increased throughput at the Banner Mill and a corresponding decrease in
capitalized payroll burden. The increase in costs is primarily comprised of:
$245,467 related royalties; $49,611 related to exploration associated costs;
repairs and maintenance aggregating $10,990 and equipment leases of $13,574.

General and administrative expenses increased to $679,757 for the three months ended March 31, 2011, from $655,407 for the comparative three month period ended March 31, 2010, an increase of $24,350. The increase is mainly attributable to investor relations expenses of $73,145; labor burden of $21,801, employee stock compensation of $75,545 and costs associated with options of $27,415.  These increases were offset by decreased expenses in the following areas: consulting fees of $99,463; audit, accounting and legal fees aggregating $44,589; general and administration costs incurred in foreign subsidiaries of $13,458, and corporate filing fees of $12,600.

Depreciation and amortization
expense increased to $577,857 for the quarter ended March 31, 2011, as compared
to $127,641 for the quarter ended March 31, 2010, an increase of $450,216. The
increase is attributable primarily to recognizing depreciation of $379,007 on
the Banner mill processing facilities which were placed into service during the
first quarter of our current fiscal year and additional capitalized equipment at
the mine site.

Other Income and
Expenses

Other income and (expenses) for
the three months ended March 31, 2011, were 3,927,624 as compared to $3,356,285
for the comparable three months ended March 31, 2010. The increase in net other
income of $571,339 is primarily attributable to the increase gain recognized on
derivative instruments liability of $790,774. The increase was offset by
increase in interest expense of $155,440 and an increase in accretion of
discounts on notes payable of $62,008.

The increase in interest expense
was due primarily to the fact that the portion of interest expense on the
debentures related to the construction of the mill facilities was previously
capitalized. In July 2010 based upon the commissioning of the mill proceeding
satisfactorily over the previous quarter, the mill facilities were placed into
service and the capitalization of interest expense related to the mill
construction ceased, contributing $162,000 of interest expense to the current
three month period.

Loss on Derivative Financial
Instruments

We recognized a gain on
derivative financial instruments of $4,425,628 for the three months ended March
31, 2011, as compared to a gain of $3,634,854 for the prior years comparable
period, resulting in an increased gain of $790,774. The non-cash gain arises
from adjustments to record the derivative financial instruments at fair values
in accordance with current accounting standards. The derivative financial
instruments arose in connection with senior secured convertible notes and the
issuance of warrants attached to stock subscriptions and warrants issued under
our registered direct offerings. Otherwise, we generally do not use derivative
financial instruments for other purposes, such as hedging cash flow or
fair-value risks. The increase in the derivative gain for the three months ended
March 31, 2011, is attributable mainly to adjustments to record the change in
fair value for the embedded conversion feature of derivative financial
instruments, the warrants previously issued under our registered direct
offerings, changes in the market price of our common stock, which is a component
of the calculation model, and the issuance of additional warrants resulting in
derivative treatment. We use the Black-Scholes option pricing model to estimate
the fair value of this derivative. Because Black-Scholes uses our stock price,
changes in the stock price will result in volatility in the earnings in future
periods as we continue to reflect the derivative financial instruments at fair
values.

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Operating Results for the Nine Months Ended March 31, 2011
and 2010

Sales

We had revenues of $4,144,269 for
the nine months ended March 31, 2011, as compared to $274,978 for the nine
months ended March 31, 2010. The increase of $3,869,291 is due to increased
production at the Summit mine and related shipments of precious metals
concentrate, flux material and the sale of refined gold. Sales for the current
nine month period consisted of concentrate sales of $2,832,032, flux material of
$1,037,383 and refined gold of $274,854 in accordance with the definitive gold
sale agreement entered into on September 11, 2009. We had no aggregate material
sales during the current nine month period as compared to aggregate material
sales of $11,265 for the prior comparable period.

The definitive gold sale
agreement entered into on September 11, 2009, stipulates that we deliver the
contractual production quantity in refined gold. See the Liquidity and
Capital Resources section within this Item 2 for additional information. The
Summit Project is not currently configured or permitted to produce refined gold.
To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery.  The agreement calls for the sale of gold at the fixed price of
$400 per ounce plus the upfront advance, representing deferred revenue, which is
to be credited by the difference between the market price and the fixed price of
gold for the number of ounces delivered. The revenue component of $274,854 for
the delivery of refined gold is comprised of $79,528 representing sales of gold
at the fixed price of $400 per ounce, and $195,326 representing the realization
of deferred revenue related to the upfront cash advance.

Operating Costs and Expenses

Costs applicable to sales were
incurred aggregating $2,303,871 for the nine months ended March 31, 2011, as
compared to $264, attributable to aggregate sales, for the nine months ended
March 31, 2010. The increase of $2,303,607 is attributable to the costs
associated with the shipments of concentrate and flux material for smelting
feedstock totaling $931,301, and the cost of purchasing refined gold  of $1,372,570 in order to satisfy the delivery requirements of the
definitive gold sale agreement. Of this amount, approximately $727,000 is
attributable to the completion guarantee extension as discussed in NOTE 9 to the
consolidated financial statements. The Summit project has not yet completed
development of its initial targets and ramp-up is still underway. Costs
applicable to sales are higher than normally expected. We anticipate these costs
will decrease in relation to sales once we achieve full production at the mine
and corresponding full throughput at the mill site later in calendar 2011.

Exploration and mining costs were
$1,669,663 for the nine months ended March 31, 2011, as compared to $449,259 for
the nine months ended March 31, 2010, an increase of $1,220,404. The increase is
attributable to expanding production operations at the Summit mine site,
increased throughput at the Banner Mill and a corresponding decrease in
capitalized payroll burden. The increase in costs is primarily comprised of:
$183,648 related to payroll burden; $103,514 in shop supplies; vehicle operating
costs of $13,036; repairs and maintenance aggregating $71,757; general mill and
mine costs of $64,635; royalty fees of $364,527; leased equipment of $14,089;
liability insurance of $9,972; property and resource taxes aggregating $53,945;
and $186,853 for exploration associated costs.

General and administrative expenses increased to $2,171,297 for the nine months ended March 31, 2011, from $1,726,510 for the comparative nine months ended March 31, 2010, an increase of $444,787. The increase is primarily attributable to increased expenses in the following areas: employee stock compensation of $338,951 and amortized costs associated with options of $255,475, both related primarily to awards granted from the 2007 Equity Incentive Plan on June 8, 2010; investor relations costs of $135,474. These increases were offset by decreases in audit and accounting fees of $65,433; legal and SEC related costs of $93,896; consulting fees of $114,047.

Depreciation and amortization
expense increased to $1,725,858 for the nine months ended March 31 2011, as
compared to $342,121 for the nine months ended March 31, 2010, an increase of
$1,383,737. The increase is attributable primarily to recognizing depreciation
of $1,256,897 on the Banner mill processing facilities which were placed into
service during the first quarter of our current fiscal year and additional
equipment that entered into service.

Other Income and
Expenses

Other income and (expenses) for
the nine months ended March 31, 2011, were $(2,373,462) as compared to
$(175,206) for the comparable nine months ended March 31, 2010. The increase in
net expenses of $2,198,256 is primarily attributable to an increase in interest expense of $469,629; an increase in
accretion of discounts on notes payable of $157,502 and the loss recognized on
derivative instruments liability of $1,570,092.

23

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The increase in interest expense
was due primarily to the fact that the portion of interest expense on the
debentures related to the construction of the mill facilities was previously
capitalized. In July 2010 based upon the commissioning of the mill proceeding
satisfactorily over the previous quarter, the mill facilities were placed into
service and the capitalization of interest expense related to the mill
construction ceased, contributing $493,200 in interest expense to the current
nine month period.

Loss on Derivative Financial
Instruments

We recognized a loss on
derivative financial instruments of $898,934 for the nine months ended March 31,
2011, as compared to a gain of $671,158 for the prior years comparable period,
resulting in an increased loss of $1,570,092. The non-cash loss arises from
adjustments to record the derivative financial instruments at fair values in
accordance with current accounting standards. The derivative financial
instruments arose in connection with senior secured convertible notes and the
issuance of warrants attached to stock subscriptions and warrants issued under
our registered direct offerings. Otherwise, we generally do not use derivative
financial instruments for other purposes, such as hedging cash flow or
fair-value risks. The increase in the derivative loss for the nine months ended
March 31, 2011, is attributable mainly to adjustments to record the change in
fair value for the embedded conversion feature of derivative financial
instruments; the warrants previously issued under our registered direct
offerings; changes in the market price of our common stock, which is a component
of the calculation model; and the issuance of additional warrants resulting in
derivative treatment. We use the Black-Scholes option pricing model to estimate
the fair value of this derivative. Because Black-Scholes uses our stock price,
changes in the stock price will result in volatility in the earnings in future
periods as we continue to reflect the derivative financial instruments at fair
values.

Liquidity and Capital Resources

To continue with the deployment
of our business strategies, we will require significant additional working
capital. We also will require additional working capital for employment of
necessary corporate personnel, and related general and administrative expenses
until we reach profitable operations.

As of March 31, 2011, we have
cash and cash equivalents of $473,631, accounts receivable for product sales of
$2,783,632, a working capital deficit of $14,405,015, which includes a non-cash
financial derivative liability of $11,524,959 and deferred revenue of
$3,804,674, and an accumulated deficit of $61,229,332.

We are continuing to pursue a
joint venture or sale of the Black Canyon mica project. Management has
determined to deploy its resources in the area of precious metals based upon the
current and projected market trends in this area.

We continue to seek funding to
advance our business plan and strategies. Historically, we have relied upon
equity related financing to fund our deployment of our business plan. Currently
we have no arrangements to borrow funds for working capital requirements. We
will require additional funding to meet our corporate general and administrative
commitments, to continue feasibility studies on our mineral properties and to
initiate exploration programs. We expect the Summit project will achieve
commercial production in calendar year 2011 and that our operations for the
remaining fiscal year 2011 will be funded mainly from anticipated sales of
precious metals, the sale of our equity securities and possibly through the
exercise of certain options and warrants. We believe we will be able to finance
our continuing future activities, although there are no assurances of success in
this regard or in our ability to obtain continued financing through capital
markets, joint ventures, or other acceptable arrangements. If our plans are not
successful, future operations and liquidity may be adversely impacted. In the
event that we are unable to obtain required capital, we may be forced to reduce
our exploration and operating expenditures or to cease development operations
altogether.

On September 11, 2009, we entered
into a definitive gold sale agreement with Sandstorm Resources Ltd. (TSX-V: SSL)
(Sandstorm) to sell a portion of the life-of-mine gold production (but not
silver production) from our Summit silver-gold mine. Under the agreement we
received an upfront cash deposit of $4.0 million, plus we will receive ongoing
production payments equal to the lesser of $400 per ounce or the prevailing
market price, for each ounce of gold delivered pursuant to the agreement for the
life of the mine. Gold production subject to the agreement includes 50% of the
first 10,000 ounces of gold produced, and 22% of the gold thereafter. The amount
of payable gold can be reduced from 22% to 15% provided that within 36 months the Summit mine reaches certain performance
levels in any consecutive 12 month period, in compliance with prefeasibility
estimates, including 1) the rate of ore mined and processed must average 400
tons per day or more, and 2) payable gold production must exceed 11,500 ounces
during such consecutive 12 month period. We will receive credit against the
$4,000,000 upfront cash deposit for the difference between the market price and
$400 per ounce for those gold deliveries where the prevailing market price
exceeds $400 per ounce. These credits will be recognized as revenue, in addition
to the ongoing production payments received for gold delivered pursuant to the
agreement. In certain circumstances, including failure to meet minimum
production rates, interruption in production due to permitting issues and
customary events of default, the agreement may be terminated. In such event, we
may be required to return to Sandstorm the upfront cash deposit of $4.0 million
less a credit for gold delivered up to the date of that event, which is
determined using the difference between the market price and $400 per ounce for
gold deliveries where the prevailing market price exceeded $400 per ounce.

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On January 14, 2010, the Company
entered into definitive security purchase agreements with 23 institutional
investors (collectively, Purchasers") to sell an aggregate of $10.0 million of
units, each unit consisting of one Share and one-half of a Warrant to purchase a
Share by way of a registered direct offering. Pursuant to the transaction, we
sold to the Purchasers an aggregate of 7,692,310 Shares and Warrants to purchase
up to 3,846,155 additional Shares. The Warrants are exercisable at an exercise
price of $1.70 per share upon issuance and have a term of five years. In
connection with the placement we issued 461,539 warrants to Placement Agents,
exercisable at $1.625 per share and having a term of approximately 4.9 years.
These Placement Agent warrants vested six months from the date of issuance. We
received net proceeds from the offering of approximately $9,375,000, after
deducting placement agent fees and other offering expenses.

The securities were issued
pursuant to the Company's effective S-3 Registration Statement under which the
securities are registered. The units, including the Shares and Warrants
(including the Placement Agent warrants) and shares issuable upon exercise of
the Warrants were issued pursuant to a prospectus supplement dated as of January
20, 2010, which was filed with the Securities and Exchange Commission ("SEC") in
connection with a takedown from the Companys shelf registration statement on
Form S-3, which became effective on December 29, 2009, and the base prospectus
contained in such registration statement.

On December 29, 2010, we entered
into a definitive security purchase agreements with three institutional
investors to sell an aggregate of $2 million of units, each unit consisting of
one share and one-half warrant per share to purchase a share by way of the
placement. Under the agreement, we sold 1,666,668 shares and warrants to
purchase 833,334 additional shares of our common stock. The warrants will be
exercisable at an exercise price of $1.50 per share immediately upon the
issuance of the stock and will expire five years from the date they are first
exercisable. In connection with the transaction, the Company paid the Placement
Agent a fee of $136,000 and issued 100,000 warrants exercisable at $1.50 per
share which have an exercise period of approximately 3.92 years. The warrants
are exercisable immediately after issuance. We received $1,864,001 net cash
proceeds from the placement.

The units, including the shares and warrants (including the
Placement Agent warrants) and shares issuable upon exercise of the Warrants are
issued pursuant to the prospectus supplement dated as of December 29, 2010,
which was filed with the Securities and Exchange Commission (SEC) in
connection with a takedown from the Companys shelf registration statement on
Form S-3 (File No. 333-163112), which became effective on December 29, 2009, and
the base prospectus contained in such registration statement.

We are utilizing the net proceeds
for general corporate purposes, including but not limited to, working capital
for the Summit silver-gold project; acquisition of additional feed sources for
expansion of the Lordsburg mill; advancement of the Ortiz gold project; and
pursuit of acquisition opportunities.

On March 29, 2011, the Company
amended the definitive gold sale agreement dated September 11, 2009. The
amendment extended the original completion guarantee date from April 2011 to
June 30, 2012. In exchange for the amended completion guarantee date, the
Company agreed to deliver an additional 700 ounces of gold at equivalent sales
terms over and above what is currently due under the agreement. Based upon the
sale terms of the agreement, the Company recorded an accrued liability of
$727,300 based upon the closing gold price on March 31, 2011. The Company will
mark to market the accrued liability on the delivery date of the additional
ounces based upon the closing gold price on such date. Under the terms of the
amendment the delivery is to be made prior to June 30, 2011.

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Factors Affecting Future Operating Results

We continue to deploy our plan to
place the Company on an improved financial footing. In addition to the
significant capital raisings already achieved and the securities placements in
January and December 2010, an important element of the plan includes continuing
to raise working capital funding as may be required to provide for operations on
our various property sites. If we continue to secure required financing on
acceptable terms, we believe we will be in a position to execute our business
plan on our property sites.

The Company entered into a
non-binding Memorandum of Understanding on September 24, 2010 with Columbus
Silver Corporation (TSXV: CSC) (Columbus Silver), pursuant to which the
Company will acquire all the outstanding shares of common stock of Columbus
Silver in exchange for the Companys common stock. The contemplated exchange
ratio is one share of Santa Fe common stock for every 5.82515 shares of Columbus
Silvers common stock. It is contemplated that Santa Fe will issue a total of
8,787,527 shares in the transaction, the value of which shares will be
determined by the closing market price of the Companys common stock on the
effective closing date of the contemplated transaction. Following completion of
the transaction, it is estimated the Company will be owned 91.37% by current
Company shareholders and 8.63% by Columbus Silver shareholders. In accordance
with the Memorandum of Understanding, the Company purchased 1,000,000 shares of
Columbus Silver common stock on October 28, 2010 in a private placement valued
at $98,058. Proceeds of the issuance were used by Columbus Silver as bridge
financing for operational expenses through December 31, 2010. On January 27,
2011, the Company advanced $200,000 to Columbus Silver in exchange for a
promissory note bearing interest at 4% per annum. All accrued interest and
principal is due and payable on December 31, 2012. The loan was extended for the
purpose of providing Columbus Silver with working capital in connection with a
Memorandum of Understanding (MOU) dated September 23, 2010, in contemplation
of a business combination (the Transaction). In the event that either party to
the MOU informs the other that it will not proceed with the Transaction, either
the maker or the Holder will have the ability, by providing written notice to
the other, to require that the Maker apply to the TSX Venture Exchange to have
the entire outstanding principal amount and accrued unpaid interest of this Note
paid in common shares of the Maker pursuant to Exchange Policy 4.3, Shares for
Debt, or its successor policy or instrument. Currently the Company is
negotiating a revocation of cease trade orders against the Company issued by the
British Columbia and Ontario Securities Commission in 2003 after the Company did
not make required regulatory filings. Until the cease trade orders are revoked,
steps cannot be taken to consummate the proposed transaction by us.

Off-Balance Sheet Arrangements

During the three months ended
March 31, 2011, we did not engage in any off-balance sheet arrangements defined
in Item 303(a) (4) of the SECs Regulation S-K.

ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

There has been no material change
in the market risks discussed in Item 7A of Santa Fe Golds Form 10-K for the
fiscal year ended June 30, 2010.

ITEM 4  CONTROLS AND PROCEDURES

We maintain disclosure controls
and procedures (as defined in Rules 13a-15(d) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended (the Exchange Act)) that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that our disclosure controls and
procedures are effective in alerting management on a timely basis to material
information required to be disclosed in our periodic reports. Under the
supervision of, and the participation of our management, our Chief Executive
Officer and Principal Financial Officer, or persons performing similar
functions, has conducted an evaluation of our disclosure controls and procedures
as of March 31, 2011. This evaluation included certain areas in which we have
made, and are continuing to make, changes to improve and enhance controls. Based
on this evaluation, our Chief Executive Officer and Principal Financial Officer
has concluded that our disclosure controls and procedures are effective in
providing reasonable assurance that information required to be disclosed by us
in reports we file with the Securities and Exchange Commission is recorded,
processed, summarized and reported within the time periods required, and are
effective in alerting management on a timely basis to material information
required to be disclosed in our periodic reports.

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During the quarter ended March
31, 2011, there were no changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Investing in our common stock
involves a high degree of risk. You should carefully consider the risks and
uncertainties described in our annual report on Form 10-K for the year ended
June 30, 2010, in addition to the other information included in this quarterly
report. If any of the risks described actually occurs, our business, financial
condition or results of operations would likely suffer. In that case, the
trading price of our common stock could fall.

As of March 31, 2011, there have
not been any material changes to the risk factors disclosed in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2010, although we may disclose
changes to such risk factors or disclose additional risk factors from time to
time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF
PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

Mine Safety
  Disclosures

The Dodd-Frank Wall Street Reform
and Consumer Protection Act (The Act) requires the operators of mines,
including gold and silver mines, to include in each periodic report filed with
the Securities and Exchange Commission certain specified disclosures regarding
the companys history of mine safety.

In evaluating these disclosures,
consideration should be given to factors such as: (i) the number of citations
and orders may vary depending on the size of the mine, (ii) the number of
citations issued will vary from inspector to inspector and mine to mine, and
(iii) citations and orders can be contested and appealed, and in that process,
are often reduced in severity and amount, and are sometimes dismissed.

Specified disclosures relating to
The Act and pertaining to the Summit Mine for the quarter ended March 31, 2011
are as follows: (i) Total number of violations of mandatory health or safety
standards that could significantly and substantially (S&S) contribute to
a safety or health hazard under the Federal Mine Safety and Health Act of 1977
(the Mine Safety Act) for which the Company received a citation from the Mine
Safety and Health Administration (MSHA): - Seven (These are violations that
could "significantly and substantially" contribute to a safety or health hazard
as issued.); (ii) Total number of orders and citations issued under Section
104(b) of the Mine Safety Act (a failure to abate): - None; (iii) Total number
of citations and orders for unwarrantable failure to comply with mandatory
health and safety standards under Section 104(b): - None; (iv) Total number of
imminent danger orders under Section 107(a) of the Mine Safety Act issued to the
Company: - None; (v) Total dollar value of proposed assessments from MSHA: - No
assessments received; (vi) Total number of mining related fatalities: -
None; (vii) Mines for which the operator has received written notice of a
pattern of violations or the potential to have such a pattern: - None; (viii)
Pending legal action before the Mine Safety and Health Review Commission: - We
have multiple citation protests pending before the Commission.

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ITEM 6. EXHIBITS

(a) The following exhibits are filed as
part of this report:

| | 10.68 | Amendment No. 1 dated March 29, 2011, to Gold Sale
       Agreement dated September 11, 2009, by and between Registrant and
      Purchaser.             
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                          
| | 31.1  | Certification
        of Chief Executive Officer and Principal Accounting Officer of Periodic
        Report pursuant to Rule 13a-14a and Rule 15d-14(a).
| |       |                                                                                                                                                          
| | 32.1  | Certification
        of Chief Executive Officer and Principal Accounting Officer pursuant to
        18 U.S.C.  Section 1350.                          

SIGNATURES:

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

|                   | /s/ W.
      Pierce Carson                  
|------------------ | --------------------------------------------
|Dated: May 9, 2011 | W. Pierce Carson,                           
|                   | Chief Executive Officer, President, Director
|                   | and
      Principal Accounting Officer      

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