---

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 September 30, 2010

[  ]    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:
93,101,777 shares outstanding as of November 8, 2010.

---

SANTA FE GOLD CORPORATIONINDEX TO FORM 10-Q

PART I FINANCIAL INFORMATION

|        |                                                                                                                      | Page
|------- | -------------------------------------------------------------------------------------------------------------------- | ----
|        |                                                                                                                      |     
|Item 1. | Financial Statements                                                                                                 | 3   
|        | Consolidated Balance Sheets, September 30, 2010
      (Unaudited) and June 30, 2010                                  | 3   
|        | Consolidated Statements of
      Operations for the Three Months Ended September 30, 2010 and 2009
      (Unaudited) | 4   
|        | Consolidated Statements of Cash Flows for the
      Three Months Ended September 30, 2010 and 2009 (Unaudited)       | 5   
|        | Notes to the Unaudited
      Consolidated Financial Statements                                                       | 6   
|        |                                                                                                                      |     
|Item 2. | Managements Discussion and
      Analysis and Plan of Operations                                                    | 16  
|        |                                                                                                                      |     
|Item 4. | Controls and Procedures                                                                                              | 19  

PART II

OTHER INFORMATION

|Item 1.        | Legal Proceedings                                                 | 20
|-------------- | ----------------------------------------------------------------- | --
|               |                                                                   |   
|Item 1A.       | Risk Factors                                                      | 20
|               |                                                                   |   
|Item 2.        | Unregistered Sales of Equity
      Securities and Use of Proceeds | 20
|               |                                                                   |   
|Item 3.        | Defaults Upon Senior
    Securities                               | 20
|               |                                                                   |   
|Item 4.        | Submission of Matters to a Vote
      of Security Holders         | 20
|               |                                                                   |   
|Item 5.        | Other Information                                                 | 20
|               |                                                                   |   
|Item 6.        | Exhibits                                                          | 21
|               |                                                                   |   
|SIGNATURES     | 21                                                               
|               |                                                                  
|CERTIFICATIONS | 21                                                               

2

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PARTIFINANCIALINFORMATION

ITEM1. FINANCIALSTATEMENTS

|SANTA FE GOLD CORPORATION  
|---------------------------
|CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                               |   | September 30, |   |   | June 30,    |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | - | - | ----------- | -
|                                                                                                                                                                                                                                                               |   | 2010          |   |   | 2010        |  
|                                                                                                                                                                                                                                                               |   | (Unaudited)   |   |   |             |  
|ASSETS                                                                                                                                                                                                                                                        
|CURRENT ASSETS:                                                                                                                                                                                                                                                |   |               |   |   |             |  
|Cash and cash
      equivalents                                                                                                                                                                                                                                | $ | 3,196,227     |   | $ | 5,540,130   |  
|Accounts receivable                                                                                                                                                                                                                                            |   | 776,822       |   |   | -           |  
|Prepaid expenses
      and other current assets                                                                                                                                                                                                                |   | 317,753       |   |   | 267,208     |  
|Total Current Assets                                                                                                                                                                                                                                           |   | 4,290,802     |   |   | 5,807,338   |  
|MINERAL PROPERTIES                                                                                                                                                                                                                                             |   | 579,000       |   |   | 579,000     |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                                                                                             |   | 13,874,497    |   |   | 3,790,215   |  
|OTHER ASSETS:                                                                                                                                                                                                                                                  |   |               |   |   |             |  
|Construction in process                                                                                                                                                                                                                                        |   | 5,484,652     |   |   | 15,177,362  |  
|Idle equipment,
      net                                                                                                                                                                                                                                      |   | 1,223,528     |   |   | 1,223,528   |  
|Restricted cash                                                                                                                                                                                                                                                |   | 410,374       |   |   | 410,374     |  
|Deferred
      financing costs                                                                                                                                                                                                                                 |   | 388,437       |   |   | 413,017     |  
|Total Other Assets                                                                                                                                                                                                                                             |   | 7,506,991     |   |   | 17,224,281  |  
|Total Assets                                                                                                                                                                                                                                                   | $ | 26,251,290    |   | $ | 27,400,834  |  
|                                                                                                                                                                                                                                                               |   |               |   |   |             |  
|LIABILITIES AND
      STOCKHOLDERS' EQUITY (DEFICIT)                                                                                                                                                                                                           |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                           |   |               |   |   |             |  
|Accounts payable                                                                                                                                                                                                                                               | $ | 653,333       |   | $ | 458,098     |  
|Accrued liabilities                                                                                                                                                                                                                                            |   | 220,053       |   |   | 320,566     |  
|Derivative
      instrument liabilities                                                                                                                                                                                                                        |   | 12,021,414    |   |   | 9,894,041   |  
|Current portion, notes payable                                                                                                                                                                                                                                 |   | 166,111       |   |   | 138,821     |  
|Current portion,
      capital leases                                                                                                                                                                                                                          |   | 140,012       |   |   | 138,117     |  
|Deferred revenue, current
      portion                                                                                                                                                                                                                        |   | 4,000,000     |   |   | 243,107     |  
|Accrued interest
      payable                                                                                                                                                                                                                                 |   | 8,043         |   |   | 20,525      |  
|Total Current Liabilities                                                                                                                                                                                                                                      |   | 17,208,966    |   |   | 11,213,275  |  
|LONG TERM LIABILITIES:                                                                                                                                                                                                                                         |   |               |   |   |             |  
|Senior secured convertible notes
      payable, net of discount of 
                 
       $3,497,196 and $3,793,560, respectively                                                                                                                           |   | 10,452,804    |   |   | 10,156,440  |  
|Notes payable, net of current
      portion                                                                                                                                                                                                                    |   | 63,536        |   |   | 122,915     |  
|Capital leases,
      net of current portion                                                                                                                                                                                                                   |   | 93,142        |   |   | 128,909     |  
|Deferred revenue, net of current
      portion                                                                                                                                                                                                                 |   | -             |   |   | 3,756,893   |  
|Asset retirement
      obligation                                                                                                                                                                                                                              |   | 84,059        |   |   | 84,059      |  
|Total Liabilities                                                                                                                                                                                                                                              |   | 27,902,507    |   |   | 25,462,491  |  
|STOCKHOLDERS' (DEFICIT) EQUITY :                                                                                                                                                                                                                               |   |               |   |   |             |  
|Common stock, $.002
      par value, 200,000,000 shares authorized; 93,066,955 and 
                
      93,059,568 shares issued and outstanding, respectively; Includes
      non-vested 
                 shares of
    765,000 and 765,000, respectively |   | 184,605       |   |   | 184,590     |  
|Additional paid
      in capital                                                                                                                                                                                                                               |   | 57,245,334    |   |   | 56,883,203  |  
|Accumulated (deficit)                                                                                                                                                                                                                                          |   | (59,081,156   | ) |   | (55,129,450 | )
|Total Stockholders'
      (Deficit) Equity                                                                                                                                                                                                                     |   | (1,651,217    | ) |   | 1,938,343   |  
|                                                                                                                                                                                                                                                               | $ | 26,251,290    |   | $ | 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 STATEMENTS OF OPERATIONS
|(Unaudited)                          

|                                                                                  |   | For the Three Months Ended |  
|--------------------------------------------------------------------------------- | - | -------------------------- | -
|                                                                                  |   | September 30,              |  
|                                                                                  |   | 2010                       |  
|                                                                                  |   |                            |  
|SALES                                                                             | $ | 776,822                    |  
|                                                                                  |   |                            |  
|OPERATING COSTS AND EXPENSES:                                                     |   |                            |  
|Costs applicable to sales                                                         |   | 395,087                    |  
|Exploration and
      mine and mill start up costs                                |   | 390,019                    |  
|General and administrative                                                        |   | 765,084                    |  
|Depreciation and
      amortization                                               |   | 572,157                    |  
|                                                                                  |   | 2,122,347                  |  
|                                                                                  |   |                            |  
|LOSS FROM OPERATIONS                                                              |   | (1,345,525                 | )
|                                                                                  |   |                            |  
|OTHER INCOME (EXPENSE):                                                           |   |                            |  
|(Loss) on
      disposal of assets                                                |   | -                          |  
|Interest income                                                                   |   | 4,508                      |  
|Miscellaneous
      income                                                        |   | -                          |  
|Foreign currency translation
      (loss) gain                                    |   | (1,305                     | )
|Gain (loss) on
      derivative instrument liabilities                            |   | (2,127,373                 | )
|Accretion of discounts on
      notes payable                                     |   | (296,364                   | )
|Interest expense                                                                  |   | (185,647                   | )
|                                                                                  |   | (2,606,181                 | )
|                                                                                  |   |                            |  
|LOSS BEFORE PROVISION FOR INCOME TAXES                                            |   | (3,951,706                 | )
|                                                                                  |   |                            |  
|PROVISION FOR INCOME TAXES                                                        |   | -                          |  
|                                                                                  |   |                            |  
|NET LOSS                                                                          | $ | (3,951,706                 | )
|                                                                                  |   |                            |  
|Basic and Diluted Per Share data 
             Net Loss - basic
      and diluted | $ | (0.04                      | )
|                                                                                  |   |                            |  
|Weighted Average Common Shares Outstanding: 
           Basic and diluted         |   | 93,060,656                 |  

The accompanying notes are an integral part of the consolidated
  financial statements.
  4

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|SANTA FE GOLD CORPORATION            
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|(Unaudited)                          

|                                                                              |   | For the Three Months Ended |  
|----------------------------------------------------------------------------- | - | -------------------------- | -
|                                                                              |   | September 30,              |  
|                                                                              |   | 2010                       |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                         |   |                            |  
|Net loss                                                                      | $ | (3,951,706                 | )
|Adjustments to reconcile net loss to net cash                                 |   |                            |  
|used in operating activities:                                                 |   |                            |  
|Depreciation                                                                  |   | 572,157                    |  
|Stock based compensation                                                      |   | 362,146                    |  
|Accretion of
      discount on notes payable                                  |   | 296,364                    |  
|Foreign currency translation (gain) loss                                      |   | -                          |  
|Loss on derivative
      instrument liabilities                               |   | 2,127,373                  |  
|Loss on disposal of assets                                                    |   | -                          |  
|Amortization of
      deferred financing costs                                |   | 24,580                     |  
|Net change in operating assets
      and liabilities:                         |   |                            |  
|Accounts
      receivable                                                     |   | (776,822                   | )
|Prepaid expenses and other current assets                                     |   | (50,545                    | )
|Accounts payable
      and accrued liabilities                                |   | 94,722                     |  
|Accrued interest payable                                                      |   | (12,482                    | )
|Net Cash Used in Operating Activities                                         |   | (1,314,213                 | )
|                                                                              |   |                            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |   |                            |  
|Proceeds from disposal of
      assets                                        |   | -                          |  
|Purchase of property, plant and equipment                                     |   | (249,119                   | )
|Construction in progress                                                      |   | (714,610                   | )
|Net Cash Used in Investing Activities                                         |   | (963,729                   | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |   |                            |  
|Proceeds from issuance of stock                                               |   | -                          |  
|Proceeds from notes payable                                                   |   | 77,306                     |  
|Proceeds from deferred revenue                                                |   | -                          |  
|Payments on notes payable                                                     |   | (109,395                   | )
|Payments on capital leases                                                    |   | (33,872                    | )
|Net Cash (Used in) Provided by
      Financing Activities                     |   | (65,961                    | )
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |   | (2,343,903                 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF
      PERIOD                          |   | 5,540,130                  |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                      | $ | 3,196,227                  |  
|                                                                              |   |                            |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                           |   |                            |  
|Cash paid for interest                                                        | $ | 253,000                    |  
|                                                                              |   |                            |  
|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                        | $ | -                          |  

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

5

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SANTA FE GOLD CORPORATIONNOTES TO THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS September 30, 2010(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 three month period ended September 30, 2010, 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 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
$3,951,706 for the three months ended September 30, 2010, has a working capital
deficit of $12,918,164 which includes a non-cash financial derivative liability
of $12,021,414 and deferred revenue of $4,000,000, and has a total accumulated
deficit of $59,081,156 at September 30, 2010. The Company generated revenues of
$776,822 from the initial sales of precious metals in the three months ended
September 30, 2010. 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.

6

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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.

Fair Value Measurements

The carrying values of cash and
cash equivalents, restricted cash, accounts payable and accrued liabilities
approximated their related fair values as of September 30, 2010, 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.

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 deposit 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 $4,000,000 at September
30, 2010.

7

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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.

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 Company has not evaluated the impact of this
guidance 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 did not, or are not believed by management to have a
material impact on the Companys present or future consolidated financial
statement.

NOTE 3 - DERIVATIVE INSTRUMENT LIABILITIES

The fair market value of the
derivative instruments liability at September 30, 2010, was determined to be
$12,021,414 with the following assumptions: (1) risk free interest rate of 0.26%
to 1.05%, (2) remaining contractual life of 0.95 to 4.31 years, (3) expected
stock price volatility of 82.79%, 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 three months ended September 30, 2010, of
$(2,127,373) and a corresponding increase in the derivative instruments
liability.

8

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|                            |   | Derivative      |  |   | Derivative         |  |   | Derivative         |  
|--------------------------- | - | --------------- |  | - | ------------------ |  | - | ------------------ | -
|                            |   | Liability as of |  |   | Liability as of    |  |   | (Loss) Through     |  
|                            |   | June 30, 2010   |  |   | September 30, 2010 |  |   | September 30, 2010 |  
|Convertible Debentures:     |   |                 |  |   |                    |  |   |                    |  
|Purchase Agreement Warrants | $ | 6,585,752       |  | $ | 7,875,647          |  | $ | (1,289,895         | )
|Amendment 2 Warrants        |   | 637,296         |  |   | 783,432            |  |   | (146,136           | )
|Embedded Conversion Option  |   | 2,670,993       |  |   | 3,362,335          |  |   | (691,342           | )
|Totals                      | $ | 9,894,041       |  | $ | 12,021,414         |  | $ | (2,127,373         | )

The derivative liability is comprised of the following as of:

| |                                                           |   | September 30, |  |   | June 30,  | 
| | --------------------------------------------------------- | - | ------------- |  | - | --------- | 
| |                                                           |   | 2010          |  |   | 2010      | 
| | Current portion of derivative instruments
      liability | $ | 12,021,414    |  | $ | 9,894,041 | 
| | Long-term portion of derivative instruments liability     |   | -             |  |   | -         | 
| |                                                           | $ | 12,021,414    |  | $ | 9,894,041 | 

NOTE 4 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 received the total advances under the
agreement of $13,500,000, and the Company issued an aggregate of 6,750,000
warrants under the debenture advances.

9

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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 shall 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 $241,500 for the quarter ended
September 30, 2010, was paid in cash.

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

|September 30, 2010                |   | Principal  |  |   | Unamortized |   |   |            | 
|--------------------------------- | - | ---------- |  | - | ----------- | - | - | ---------- | 
|                                  |   | Amount     |  |   | Discount    |   |   | Net        | 
|Current portion                   | $ | -          |  | $ | -           |   | $ | -          | 
|Long-term portion, net of current |   | 13,950,000 |  |   | (3,497,196  | ) |   | 10,452,804 | 
|                                  |   |            |  |   |             |   |   |            | 
|                                  | $ | 13,950,000 |  | $ | (3,497,196  | ) | $ | 10,452,804 | 

|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 September 30, 2010, are as follows:

|2010                                | $ | -          |  
|----------------------------------- | - | ---------- | -
|2011                                |   | -          |  
|2012                                |   | 13,950,000 |  
|Subtotal                            |   | 13,950,000 |  
|Less: unamortized original discount |   | (3,497,196 | )
|                                    | $ | 10,452,804 |  

As of September 30, 2010, accrued interest payable on the
convertible notes payable and debentures was $6,333.

NOTE 5  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.

10

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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, 2010.

The following summarizes notes payable at September 30, 2010
and June 30, 2010:

|                                                                                                                                                                                                              |  | September 30, |  |  | June 30,  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- |  |  | --------- | 
|                                                                                                                                                                                                              |  | 2010          |  |  | 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   |  | 31,027        |  |  | 39,180    | 
|                                                                                                                                                                                                              |  |               |  |  |           | 
|Installment sales contract on
      equipment,
      
                  interest
      at 9.25%, payable in 36 monthly installments
      
            of
      $537, including interest through October 2012 |  | 11,812        |  |  | 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    | 

11

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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 |   | 77,306   |   |   | -        |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------- | - | - | -------- | -
|                                                                                                                                                                                                           |   |          |   |   |          |  
|Total Outstanding Notes Payable                                                                                                                                                                            |   | 229,647  |   |   | 261,736  |  
|Less: Current maturities                                                                                                                                                                                   |   | (166,111 | ) |   | (138,821 | )
|Obligations of notes payable due after one
      year                                                                                                                                                      | $ | 63,536   |   | $ | 122,915  |  

The aggregate maturities of notes payable as of September 30,
2010, is as follows:

|Year
      ending June 30,      |   |         | 
|------------------------------- | - | ------- | 
|2011                            | $ | 106,733 | 
|2012                            |   | 63,958  | 
|2013                            |   | 58,956  | 
|Total Outstanding Notes Payable | $ | 229,647 | 

NOTE 6  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 September 30, 2010, for each of the following years
and in aggregate, are as follows:

|Year ended June 30,                                    |   |          |  
|------------------------------------------------------ | - | -------- | -
|2011                                                   | $ | 112,126  |  
|2012                                                   |   | 88,405   |  
|2013                                                   |   | 43,041   |  
|2014                                                   |   | 3,586    |  
|Total minimum lease payments                           |   | 247,158  |  
|Amount representing interest                           |   | (14,004  | )
|Present value of future minimum lease
      payments   |   | 233,154  |  
|Current portion of capital lease obligations           |   | (140,012 | )
|Obligations of capital leases due after one
      year | $ | 93,142   |  

NOTE 7  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:

12

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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 measures financial
instruments that it considers to be derivatives at fair value on a recurring
basis which 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 1 or Level 2 inputs. The derivatives
and their respective derivative values measured using Level 3 inputs as of
September 30, 2010 are as follows:

|                                          |  |         |  |  |         |  |  |            |  |  | September 30, | 
|----------------------------------------- |  | ------- |  |  | ------- |  |  | ---------- |  |  | ------------- | 
|                                          |  | Level 1 |  |  | Level 2 |  |  | Level 3    |  |  | 2010          | 
|Other Assets:                             |  |         |  |  |         |  |  |            |  |  |               | 
|Idle
      equipment, net                 |  | ---     |  |  | ---     |  |  | 1,223,528  |  |  | 1,223,528     | 
|                                          |  |         |  |  |         |  |  |            |  |  |               | 
|Value of derivative instruments liability |  | ---     |  |  | ---     |  |  | 12,021,414 |  |  | 12,021,414    | 

Idle equipment includes equipment
associated with the mica project which the Company ceased operations and are
classified as Level 3. 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 three months ended September
30, 2010.

NOTE 8 - STOCKHOLDERS (DEFICIT)

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.

Issuances of Options

During the three months ended
September 30, 2010, the Company issued no new options.

Issuances of Warrants

During the three months ended
September 30, 2010, the Company issued no new warrants.

Stock option and warrant
activity, both within the 1989 Stock Option Plan and 2007 Equity Incentive Plan
and outside of these plans, for the three months ended September 30, 2010, are
as follows:

13

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|                                  | Stock Options |          | Stock Warrants
|--------------------------------- | ------------- | -------- | --------------
|                                  |               | Weighted |               
|                                  |               | Average  |               
|                                  | Shares        | Price    |               
|Outstanding at June 30, 2010      | 6,705,000     | $0.41    |               
|Granted                           | ---           | ---      |               
|Canceled                          | ---           | ---      |               
|Expired                           | ---           | ---      |               
|Exercised                         | (20,000)      | $0.60    |               
|Outstanding at September 30, 2010 | 6,685,000     | $0.41    |               

Stock options and warrants exercisable at September 30, 2010,
are as follows:

|                    | Outstanding and
      Exercisable Options |             |                  |          | Outstanding and
      Exercisable Warrants |         
|------------------- | ----------------------------------------- | ----------- | ---------------- | -------- | ------------------------------------------ | --------
|                    |                                           |             | Weighted         |          |                                            |         
|                    |                                           |             | Average          |          |                                            |         
|                    |                                           |             | Contractual      | Weighted |                                            |         
|Exercise            |                                           |             | Remaining        | Average  |                                            | Exercise
|Price               | Outstanding                               | Exercisable | Life             | Exercise |                                            | Price   
|Range               | Number                                    | Number      | (in
      Years) | Price    |                                            | Range   
|$0.11               | 4,000,000                                 | 4,000,000   | 3.02             | $0.11    |                                            | $1.00   
|$0.46               | 100,000                                   | 100,000     | 1.82             | $0.46    |                                            | $1.06   
|$0.55               | 175,000                                   | 175,000     | 2.25             | $0.55    |                                            | $1.25   
|$0.60               | 685,000                                   | 685,000     | 3.18             | $0.60    |                                            | $1.625  
|$0.86               | 1,095,000                                 | ---         | 4.69             | $0.86    |                                            | $1.70   
|$1.00               | 200,000                                   | 200,000     | 3.79             | $1.00    |                                            |         
|$1.165              | 30,000                                    | 30,000      | 3.64             | $1.165   |                                            |         
|$1.30               | 125,000                                   | 62,500      | 2.58             | $1.30    |                                            |         
|$1.38               | 150,000                                   | 150,000     | 4.25             | $1.38    |                                            |         
|$1.70               | 125,000                                   | 62,500      | 2.58             | $1.70    |                                            |         
|                    | 6,685,000                                 | 5,465,000   |                  |          |                                            |         
|                    |                                           |             |                  |          |                                            |         
|Outstanding Options |                                           | 3.31        | $0.41            |          | Outstanding Warrants                       |         
|Exercisable Options |                                           | 3.05        | $0.30            |          | Exercisable Warrants                       |         

As of September 30, 2010, the
aggregate intrinsic value of all stock options and warrants vested and expected
to vest was approximately $5,276,762 and the aggregate intrinsic value of
currently exercisable stock options and warrants was approximately $5,046,812.
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 $1.07 closing stock price
of the Common Stock on September 30, 2010. The total number of in-the-money
options and warrants vested and exercisable as of September 30, 2010, was
15,646,976.

14

---

The total intrinsic value of
options exercised during the three months ended September 30, 2010, was $7,300.
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 grant-date fair value
of option and warrant shares vested during the three months ended September 30,
2010, was approximately $4,370,356.

NOTE 9  SUBSEQUENT EVENTS

On October 6, 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.

In accordance with the Memorandum of Understanding entered into on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”), the Company purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058. The stock was valued at CDN$0.10 per share with the proceeds of the issuance to be used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. The closing of the business combination  is expected to occur in the first quarter of calendar year 2011.

15

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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION

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
SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION PRESENTED IN THE COMPANYS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 2010.

General

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, mill operations were expanded to two shifts per
day, five days a week, at which time 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 expect the Summit project will achieve commercial production in
our calendar year 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.

The Company has incurred an
operational loss of $3,951,706 for the fiscal year ended September 30, 2010, and
has a total accumulated deficit of $59,081,156 and a working capital deficit of
$12,918,164 at September 30, 2010, which includes non-cash derivative instrument
liabilities aggregating $12,021,414 and deferred revenue of $4,000,000.

Currently, the Company has no
significant revenue-generating operations. 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.

16

---

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 September 30,
2010 and 2009

Sales

We had revenues of $776,822 for
the three months ended September 30, 2010, as compared to $4,476 for the three
months ended September 30, 2009. The increase of $772,346 is due to precious
metals recovery from trial shipments of concentrate of $412,809 and trial
shipments of flux material for smelter feedstock of $364,013; these were offset
by a decrease in aggregate sales of $4,476.

Operating Costs and
Expenses

Costs applicable to sales were
incurred aggregating $395,087 for the three months ended September 30, 2010, as
compared to $264 for the three months ended September 30, 2009. The increase of
$394,823 is directly attributable to the trial shipments of concentrate and flux
material for smelter feedstock.

Exploration and mining costs were
$390,019 for the three months ended September 30, 2010, as compared to $132,250
for the three months ended September 30, 2009, an increase of $257,769. The
increase is attributable to exploration costs of $80,624, related primarily to the potential expansion of feed sources for the Banner mill, and start-up costs related to
the commissioning of the mill of $177,145, comprised of increases in payroll and
related costs of $52,393; shop supplies of $59,781; repairs and maintenance of
$26,669; and general operating expenses aggregating $25,283.

General and administrative
expenses increased to $765,084 for the three months ended September 30, 2010,
from $389,908 for the comparative three months ended September 30, 2009, an
increase of $375,176. The increase is attributable primarily to increased
expenses in the following areas: employee stock compensation of $131,703 and
amortized costs associated with options of $124,101, both related primarily to
awards granted from the 2007 Equity Incentive Plan on June 8, 2010; investor
relations costs of $48,408; payroll and related expenses of $29,445; director
fees of $12,500; deferred finance costs of $9,290; office costs of $7,190; and
corporate filing fees of $5,260. These increases where offset by a decrease in
consulting fees of $8,243.

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Depreciation and amortization
expense increased to $572,157 for the quarter ended September 30, 2010, as
compared to $105,911 for the quarter ended September 30, 2009, an increase of
$466,246. The increase is attributable primarily to recognizing depreciation of
$440,284 on the Banner mill processing facilities which were placed into service
during the current quarter.

Other Income and Expenses

Other income and (expenses) for
the three months ended September 30, 2010, were $(2,606,181) as compared to
$(2,394,941) for the comparable three months ended September 30, 2009. The net
change of $211,240 is primarily attributable to an increase in interest expense
of $171,373; an increase in accretion of discounts on notes payable of $37,700;
and the loss recognized on derivative instruments liability of $5,827. These
expenses were offset by an increase in interest income of $3,876.

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 operations were expanded to
two shifts per day, five days a week, at which time the mill facilities were
placed into service and the capitalization of interest expense related to the
mill construction ceased, contributing $165,600 to the increase in interest
expense.

Loss on Derivative Financial
Instruments

We recognized a loss on
derivative financial instruments of $2,127,373 for the three months ended
September 30, 2010, as compared to a loss of $2,121,546 for the prior years
comparable period, resulting in a difference of $5,827. 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 offering. Otherwise, we generally do not use derivative
financial instruments for other purposes, such as hedging cash flow or
fair-value risks. The decrease in the derivative income in the three months
ended September 30, 2010, is attributable mainly to adjustments to record the
embedded conversion feature of derivative financial instruments at fair value in
accordance with current accounting standards, warrants issued under our
registered direct offering, and changes in the market price of our common stock,
which is a component of the calculation model and offset by 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.

PLAN OF OPERATIONS

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.

As of September 30, 2010, we have
cash and cash equivalents of $3,196,227, a working capital deficit of
$12,918,164, which includes a non-cash financial derivative liability of
$12,021,414 and deferred revenue of $4,000,000, and an accumulated deficit of
$59,081,156.

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. 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
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.

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On September 11, 2009, we entered
into a definitive gold sale agreement to sell a portion of the life-of-mine gold
production only from our Summit silver-gold mine. Under the terms of the
agreement, we received $4.0 million in the form of an upfront cash deposit. We
will receive credit against the $4.0 million upfront deposit for the difference
between the prevailing 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 ongoing production payments received for
gold delivered pursuant to the agreement. The agreement funded $500,000 in
September 2009, and $3.5 million in October 2009.

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 the Placement. 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 private placement we issued 461,539 warrants to Placement
Agents, exercisable at $1.625 per share and have a term of approximately 4.9
years. These 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 Santa Fe's shelf registration statement on Form
S-3, 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.

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 placement in
January 2010, an important element of the plan includes continuing to raise
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.

Off-Balance Sheet Arrangements

During the three months ended
September 30, 2010, we did not engage in any off-balance sheet arrangements
defined in Item 303(a) (4) of the SECs Regulation S-K.

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 September 30, 2010.
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.

During the quarter ended
September 30, 2010, 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.

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PART IIOTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Not Applicable

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 September 30, 2010 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”):  - Ten  (These are violations that could "significantly and substantially" contribute to a safety or health hazard as issued.  Some "S & S" violations have been reduced to non - "S & S" after being contested.); (ii) Total number of orders and citations issued under Section 104(b) of the Mine Safety Act (a “failure to abate”): - One; (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: - $2,834; (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: - None, although 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:
| | --- | --------------------------------------------------------------
| |     |                                                               
| |     | 31.1                                                          
| |     |                                                               
| |     | 32.1                                                          

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.

|Dated: November 8, 2010 | SANTA FE GOLD
      CORPORATION
|----------------------- | -------------------------------
|                        |                                
|                        | By:                            
|                        |                                
|                        |                                
|                        |                                

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