Edgar Filing: CAPITAL GOLD CORP

Unassociated Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 0-13078

CAPITAL GOLD CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	13-3180530
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

76 Beaver Street, 14th floor, New York, NY 10005

(Address of principal executive offices)

Registrant’s telephone number, including area code: (212) 344-2785

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

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

Large accelerated filer o	Accelerated filer x

Non-accelerated filer o	Smaller reporting company o
(do not check if smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date.

Class	Outstanding at March 1, 2009

Common Stock, par value $.0001 per share	193,349,826

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3
	Condensed Consolidated Balance Sheet	4
	Condensed Consolidated Statement of Operations	5
	Condensed Consolidated Statement of Stockholders’ Equity	7
	Condensed Consolidated Statement of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures About Market Risk		44

Item 4. Controls and Procedures		46

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.		46

Item 1A. Risk Factors		46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 3. Defaults Upon Senior Securities		53

Item 4. Submission of Matters to a Vote of Security Holders		54

Item 5. Other Information		54

Item 6. Exhibits		54

SIGNATURES		55

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying financial statements are unaudited for the interim periods, but include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for the fair presentation of results for the three and six months ended January 31, 2009.

Moreover, these financial statements do not purport to contain complete disclosure in conformity with U.S. generally accepted accounting principles and should be read in conjunction with our audited financial statements at and for the fiscal year ended July 31, 2008.

The results reflected for the three and six months ended January 31, 2009 are not necessarily indicative of the results for the entire fiscal year ending July 31, 2009.

- 3 -

Table of Contents

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except for share and per share amounts)

ASSETS
Current Assets:	January 31, 2009 (Unaudited)			July 31, 2008
Cash and Cash Equivalents	$	8,848		$	10,992
Accounts Receivable		1,201			1,477
Stockpiles and Ore on Leach Pads (Note 4)		13,513			12,176
Material and Supply Inventories		1,207			937
Deposits		342			9
Marketable Securities (Note 3)		60			65
Prepaid Expenses		197			219
Loans Receivable – Affiliate (Note 9 and13)		35			39
Other Current Assets (Note 5)		1,200			490
Total Current Assets		26,603			26,404

Mining Concessions (Note 8)		54			59
Property & Equipment – net (Note 6)		22,537			20,918
Intangible Assets – net (Note 7)		342			181
Other Assets:
Deferred Financing Costs		516			599
Mining Reclamation Bonds		82			82
Deferred Tax Asset (Note 17)		768			573
Security Deposits		63			63
Total Other Assets		1,429			1,317
Total Assets	$	50,965		$	48,879
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	786		$	788
Accrued Expenses (Note 10)		4,336			2,673
Derivative Contracts (Note 16)		987			930
Deferred Tax Liability (Note 17)		2,492			2,063
Current Portion of Long-term Debt (Note 15)		4,050			4,125
Total Current Liabilities		12,651			10,579

Reclamation and Remediation Liabilities (Note 11)		1,215			1,666
Other liabilities		43			62
Long-term Debt (Note 15)		6,200			8,375
Total Long-term Liabilities		7,458			10,103

Commitments and Contingencies		—			—

Stockholders’ Equity:
Common Stock, Par Value $.0001 Per Share;
Authorized 300,000,000 shares; Issued and
Outstanding 193,349,826 and 192,777,326 shares, respectively		19			19
Additional Paid-In Capital		63,668			63,074
Accumulated Deficit		(27,363	)		(32,496	)
Deferred Financing Costs		(2,209	)		(2,611	)
Deferred Compensation		(433	)		(549	)
Accumulated Other Comprehensive Income (Note 12)		(2,826	)		760
Total Stockholders’ Equity		30,856			28,197
Total Liabilities and Stockholders’ Equity	$	50,965		$	48,879


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

- 4 -

Table of Contents

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands, except for share and per share amounts)

	For The Three Months Ended
	January 31,
	2009			2008
Revenues
Sales – Gold, net	$	11,369		$	8,043
Costs and Expenses:
Costs Applicable to Sales		3,655			2,419
Depreciation and Amortization		755			881
General and Administrative		1,061			1,371
Exploration		406			496
Total Costs and Expenses		5,877			5,167
Income (Loss) from Operations		5,492			2,876

Other Income (Expense):
Interest Income		11			31
Interest Expense		(227	)		(288	)
Other Income (Expense)		(24	)		14
Loss on change in fair value of derivative		(274	)		(342	)
Total Other Expense		(514	)		(585	)

Income before Income Taxes		4,978			2,291

Income Tax Expense		(1,782	)		(165	)

Net Income	$	3,196		$	2,126

Income Per Common Share
Basic	$	0.02		$	0.01
Diluted	$	0.02		$	0.01

Basic Weighted Average Common Shares Outstanding		193,195,478			174,764,787
Diluted Weighted Average Common Shares Outstanding		198,706,128			196,191,405


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

- 5 -

Table of Contents

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands, except for share and per share amounts)



	For The Six Months Ended
	January 31,
	2009			2008
Revenues
Sales – Gold, net	$	20,544		$	14,569
Costs and Expenses:
Costs Applicable to Sales		6,697			4,568
Depreciation and Amortization		1,458			1,830
General and Administrative		2,438			2,280
Exploration		896			631
Total Costs and Expenses		11,489			9,309
Income from Operations		9,055			5,260

Other Income (Expense):
Interest Income		24			51
Interest Expense		(427	)		(569	)
Other Expense		(232	)		(1	)
Loss on change in fair value of derivative		(578	)		(703	)
Total Other Expense		(1,213	)		(1,222	)

Income before Income Taxes		7,842			4,038

Income Tax Expense		(2,709	)		(165	)

Net Income	$	5,133		$	3,873

Income Per Common Share
Basic	$	0.03		$	0.02
Diluted	$	0.03		$	0.02

Basic Weighted Average Common Shares Outstanding		193,113,019			172,809,806
Diluted Weighted Average Common Shares Outstanding		198,919,865			194,594,693


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

- 6 -

Table of Contents

CAPITAL GOLD CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except for share and per share amounts)

										Accumulated
					Additional					Other			Deferred						Total
	Common Stock				paid-in-		Accumulated			Comprehensive			Financing			Deferred			Stockholders’
	Shares		Amount		capital		Deficit			Income/(Loss)			Costs			Compensation			Equity
Balance at July 31, 2008		192,777,326	$	19	$	63,074	$	(32,496	)	$	760		$	(2,611	)	$	(549	)	$	28,197
Amortization of deferred finance costs		—		—		—		—			—			402			—			402
Equity based compensation		—		—		359		—			—			—			116			475
Common stock issued upon the exercising of options and warrants		350,000		—		122											—			122
Issuance of restricted common stock		222,500		—		113											—			113
Net income for the six months ended January 31, 2009		—		—		—		5,133			—						—			5,133
Change in fair value on interest rate swaps		—		—		—		—			(51	)		—			—			(51	)
Unrealized loss on marketable securities		—		—		—		—			(5	)		—			—			(5	)
Equity adjustment from foreign currency translation		—		—		—		—			(3,530	)		—			—			(3,530	)
Total comprehensive income		—		—		—		—			—			—			—			1,547
Balance at January 31, 2009		193,349,826	$	19	$	63,668	$	(27,363	)	$	(2,826	)	$	(2,209	)	$	(433	)	$	30,856

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

- 7 -

Table of Contents

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands, except for share and per share amounts)

	For The
	Six Months Ended
	January 31,
	2009			2008
Cash Flow From Operating Activities:
Net Income	$	5,133		$	3,873
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization		1,458			1,830
Accretion of Reclamation and Remediation		75			73
Loss on change in fair value of derivative		578			703
Equity Based Compensation		588			327
Changes in Operating Assets and Liabilities:
Decrease in Accounts Receivable		276			—
Decrease (Increase) in Prepaid Expenses		22			(468	)
Increase in Inventory		(852	)		(3,888	)
Increase in Other Current Assets		(709	)		(248	)
(Increase) Decrease in Other Deposits		(334	)		611
Increase in Mining Reclamation Bond		—			(46	)
Increase in Deferred Tax Asset		(195	)		—
(Decrease) Increase in Accounts Payable		(2	)		452
Decrease in Derivative Liability		(572	)		(587	)
Decrease in Other Liability		(18	)		—
Decrease in Reclamation and Remediation		(526	)		—
Increase in Deferred Tax Liability		429			—
Increase in Accrued Expenses		1,663			848
Net Cash Provided By Operating Activities		7,014			3,480

Cash Flow From Investing Activities:
Purchase of Mining, Milling and Other Property and
Equipment		(3,323	)		(2,809	)
Purchase of Intangibles		(180	)		(90	)
Net Cash Used in Investing Activities		(3,503	)		(2,899	)


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

- 8 -

Table of Contents

CAPITAL GOLD CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
(UNAUDITED)
(in thousands, except for share and per share amounts)

	For The
	Six Months Ended
	January 31,
	2009			2008

Cash Flow From Financing Activities:
Advances to Affiliate		4			8
Repayments on Notes Payable		(2,250	)		—
Proceeds From Issuance of Common Stock		121			2,156
Net Cash (Used in) Provided By Financing Activities		(2,125	)		2,164
Effect of Exchange Rate Changes		(3,530	)		27
(Decrease) Increase In Cash and Cash Equivalents		(2,144	)		2,772
Cash and Cash Equivalents - Beginning		10,992			2,225
Cash and Cash Equivalents – Ending	$	8,848		$	4,997

Supplemental Cash Flow Information:
Cash Paid For Interest	$	465		$	598
Cash Paid For Income Taxes	$	1,569		$	1
Non-Cash Financing Activities:
Change in Fair Value of Derivative Instrument	$	51		$	261


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

- 9 -

Table of Contents

CAPITAL GOLD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(in thousands, except for per share and ounce amounts)

NOTE 1 - Basis of Presentation

Capital Gold Corporation ("Capital Gold," "the Company," "we" or "us") owns rights to property located in the State of Sonora, Mexico. The Company is engaged in the production of gold and other minerals from its properties in Mexico as well as exploration for additional mineral properties. All of the Company's mining activities are being performed in Mexico.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company's management, the accompanying condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the condensed consolidated financial position and results of operations and cash flows for the periods presented. They include the accounts of Capital Gold Corporation and its wholly owned and majority owned subsidiaries, Leadville Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) as well as the accounts within Caborca Industrial S.A. de C.V. (“Caborca Industriale”), a Mexican corporation 100% owned by two of the Company’s officers and directors for mining support services. These services include, but are not limited to, the payment of mining salaries and related costs. Caborca Industrial bills the Company for these services at slightly above cost. This entity is considered a variable interest entity under accounting rules provided under FIN 46, “Consolidation of Variable Interest Entities”.

All significant intercompany accounts and transactions are eliminated in consolidation. Certain items in these financial statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s results of operations, stockholders’ equity or cash flows.

The notes to the consolidated financial statements contained in the Annual Report on Form 10-K/A for the year ended July 31, 2008 should be read in conjunction with these consolidated financial statements. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

NOTE 2 - Equity Based Compensation

In connection with offers of employment to the Company’s executives as well as in consideration for agreements with certain consultants, the Company issues options and warrants to acquire its common stock. Employee and non-employee awards are made at the discretion of the Board of Directors.

Such options and warrants may be exercisable at varying exercise prices currently ranging from $0.33 to $0.85 per share of common stock with certain of these grants becoming exercisable immediately upon grant. Certain grants have vested or are vesting over a period of five years.

The Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) “Share Based Payments” (“SFAS 123R”). Under SFAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as

- 10 -

Table of Contents

expense over the requisite service period. The Company adopted the provisions of SFAS 123R using a modified prospective application. Under this method, compensation cost is recognized for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. Prior periods are not revised for comparative purposes. Because the Company previously adopted only the pro forma disclosure provisions of SFAS 123, it will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption, using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS 123R, except that forfeitures rates will be estimated for all options, as required by SFAS 123R.

The cumulative effect of applying the forfeiture rates is not material. SFAS 123R requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatility is based on the historical volatility of the price of the Company stock. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. The Company uses historical data to estimate expected dividend yield, expected life and forfeiture rates. The estimated per share weighted average grant-date fair values of stock options and warrants granted during the six months ended January 31, 2009 and 2008, were $0.48 and $0.32, respectively. The fair values of the options and warrants granted were estimated based on the following weighted average assumptions:

	Six months ended January 31,
	2009		2008
Expected volatility		69.98 – 79.72%		47.60 – 58.69%
Risk-free interest rate		.86 – 1.56%		3.74%
Expected dividend yield		—		—
Expected life	2.0 – 5.0 years		6.3 years

Stock option and warrant activity for employees during the year ended July 31, 2008, and six months ended January 31, 2009 is as follows (all tables in thousands, except for option, price and term data):

	Number of Options			Weighted Average exercise price		Weighted average remaining contracted term (years)		Aggregate intrinsic value
Outstanding at July 31, 2007		2,500,000		$	.34		1.20	$	255
Options granted		2,500,000			.63
Options exercised		(1,450,000	)		.32		—		—
Options expired		—			—		—		—
Warrants and options outstanding at July 31, 2008		3,550,000		$	.55		4.00	$	334
Options granted		1,000,000		$	.49		—		—
Options exercised		( 250,000	)		.34		—		—
Options expired		( 300,000	)		.35		—		—
Warrants and options outstanding at January 31, 2009		4,000,000		$	.56		5.15	$	263
Warrants and options exercisable at January 31, 2009		1,833,300		$	.54		2.45	$	170

Unvested stock option and warrant balances for employees at January 31, 2009 are as follows:



	Number of Options			Weighted Average Exercise price		Weighted average remaining contracted term (years)		Aggregate Intrinsic value
Outstanding at July 31, 2007		150,000		$	.32		0.67	$	18
Options granted		2,500,000		$	.63		—		—
Options vested		(900,000	)	$	.58		—		—
Unvested Options outstanding at July 31, 2008		1,750,000		$	.63		4.49	$	8
Options granted		1,000,000		$	.49		—		—
Options vested		(583,300	)		.63		—		—
Unvested Options outstanding at January 31, 2009		2,166,700		$	.59		5.77	$	140

- 11 -

Table of Contents

Stock option and warrant activity for non-employees during the year ended July 31, 2008, and six months ended January 31, 2009 is as follows:

	Number of Options			Weighted Average Exercise price		Weighted average remaining contracted term (years)		Aggregate Intrinsic value
Warrants and options outstanding at July 31, 2007		22,535,542		$	.33		1.48	$	2,578
Options granted		1,715,000			.66		—		—
Options exercised		(21,555,542	)		.33		—		—
Options expired		( 680,000	)		.30		—		—
Warrants and options outstanding at July 31, 2008		2,015,000		$	.62		3.54	$	54
Options granted		1,400,000		$	.50		—		—
Options exercised		(100,000	)		.36		—		—
Options expired		(100,000	)		—		—
Warrants and options outstanding at January 31, 2009		3,215,000		$	.58		3.78	$	154
Warrants and options exercisable at January 31, 2009		1,974,958		$	.61		1.92	$	35

Unvested stock options and warrant balances for non-employees at January 31, 2009 are as follows:

	Number of Options			Weighted Average Exercise price		Weighted average remaining contracted term (years)		Aggregate Intrinsic value
Outstanding at July 31, 2007		—			—		—		—
Options granted		650,000		$	.63		—		—
Options vested		(195,000	)	$	.63		—		—
Unvested Options outstanding at July 31, 2008		455,000		$	.63		4.49	$	3
Options granted		1,275,000		$	.49		—		—
Options vested		(457,458	)		.50		—		—
Unvested Options outstanding at January 31, 2009		1,272,542		$	.54		5.38	$	179

The impact on the Company’s results of operations of recording equity based compensation for the six months ended January 31, 2009 and 2008 for employees and non-employees was approximately $588 and $327 and reduced earnings per share by $0.00 and $0.00 per basic and diluted share, respectively.

As of January 31, 2009, there was approximately $983 of unrecognized equity based compensation cost related to options granted to executives and employees which have not yet vested.

NOTE 3 - Marketable Securities

Marketable securities are classified as current assets and are summarized as follows:

	(in thousands)
	January 31, 2009		July 31, 2008
Marketable equity securities, at cost	$	50	$	50
Marketable equity securities, at fair value (See Notes 9 & 13)	$	60	$	65

- 12 -

Table of Contents

NOTE 4 - Ore on Leach Pads and Inventories (“In-Process Inventory”)

	(in thousands)
	January 31, 2009		July 31, 2008
Ore on leach pads	$	13,513	$	12,176
Total	$	13,513	$	12,176

Costs that are incurred in or benefit the productive process are accumulated as ore on leach pads and inventories. Ore on leach pads and inventories are carried at the lower of average cost or market. The current portion of ore on leach pads and inventories is determined based on the amounts to be processed within the next 12 months.

NOTE 5 – Other Current Assets

Other current assets consist of the following:

	(in thousands)
	January 31, 2009		July 31, 2008
Value added tax to be refunded	$	1,194	$	425
Other		6		65
Total Other Current Assets	$	1,200	$	490

NOTE 6 – Property and Equipment

Property and Equipment consist of the following:

	(in thousands)
	January 31, 2009			July 31, 2008
Process equipment and facilities	$	23,084		$	21,693
Mining equipment		2,248			974
Mineral properties		141			141
Construction in progress		1,876			1,277
Computer and office equipment		343			316
Improvements		16			16
Furniture		47			38
Total		27,755			24,455
Less: accumulated depreciation		(5,218	)		(3,537	)
Property and equipment, net	$	22,537		$	20,918

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the Units of Production (“UOP”) and straight-line method at rates sufficient to depreciate such costs over the estimated productive lives, which do not exceed the related estimated mine lives, of such facilities based on proven and probable reserves.

- 13 -

Table of Contents

Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, costs incurred prospectively to develop the property are capitalized as incurred and are amortized using the UOP method over the estimated life of the ore body based on estimated recoverable ounces or pounds in proven and probable reserves.

The Company paid $337 as an initial deposit on the procurement of new secondary crusher for the El Chanate mine. The total cost for this piece of equipment is approximately $1,012 (See Note 19).

Depreciation expense for the six months ended January 31, 2009 and 2008 was approximately $1,681 and $1,274, respectively.

NOTE 7 - Intangible Assets

Intangible assets consist of the following:

	(in thousands)
	January 31, 2009			July 31, 2008
Repurchase of Net Profits Interest	$	500		$	500
Water Rights		241			134
Mobilization Payment to Mineral Contractor		70			70
Reforestation fee		73			—
Investment in Right of Way		18			18
Total		902			722
Accumulated Amortization		(560	)		(541	)
Intangible assets, net	$	342		$	181

Purchased intangible assets consisting of rights of way, water rights, easements and net profit interests are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the economic lives of the respective assets, generally five years or using the UOP method. It is the Company’s policy to assess periodically the carrying amount of its purchased intangible assets to determine if there has been an impairment to their carrying value. Impairments of other intangible assets are determined in accordance with SFAS 144. There was no impairment at January 31, 2009.

Amortization expense for the six months ended January 31, 2009 and 2008 was approximately $19 and $391, respectively. The Repurchase of Net Profits Interest was fully amortized as of April 30, 2008.

- 14 -

Table of Contents

NOTE 8 - Mining Concessions

Mining concessions consist of the following:

	(in thousands)
	January 31, 2009			July 31, 2008
El Chanate	$	45		$	45
El Charro		25			25
Total		70			70
Less: accumulated amortization		(16	)		(11	)
Total	$	54		$	59

The El Chanate concessions are carried at historical cost and are being amortized using the UOP method. They were acquired in connection with the purchase of the stock of Minera Chanate.

MSR acquired an additional mining concession – El Charro in 2005. El Charro lies within the current El Chanate property boundaries. MSR is required to pay 1.5% net smelter royalty in connection with the El Charro concession.

Amortization expense for the six months ended January 31, 2009 and 2008 was approximately $5 and $4, respectively.

NOTE 9 - Loans Receivable - Affiliate

Loans receivable - affiliate consist of expense reimbursements due from a publicly owned corporation in which the Company has an investment. The Company's president and chairman of the board of directors was an officer and director of that corporation until March 10, 2008. These loans are non-interest bearing and due on demand (see Notes 3 & 13).

NOTE 10 – Accrued Expenses

Accrued expenses consist of the following:


	(in thousands)
	January 31, 2009		July 31, 2008

Net profit interest	$	1,000	$	753
Net smelter return		263		189
Mining contractor		216		193
Income tax payable		1,568		777
Utilities		132		110
Interest		34		72
Salaries, wages and employee benefits		780		334
Other liabilities		343		245
	$	4,336	$	2,673

- 15 -

Table of Contents

NOTE 11 - Reclamations and Remediation Liabilities (“Asset Retirement Obligations”)

Reclamation costs are allocated to expense over the life of the related assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and closure costs. The Asset Retirement Obligation is based on when the spending of the reclamation for an existing environmental disturbance and activity to date will occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the Asset Retirement Obligation at each mine site. The Company reviewed the estimated present value of the El Chanate mine reclamation and closure costs as of July 31, 2008. This review resulted in an increase in the Asset Retirement Obligation by approximately $293. As of January 31, 2009, approximately $1,215 was accrued for reclamation obligations relating to mineral properties in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” For the six months ended January 31, 2009, the Company reclaimed certain areas at its El Chanate mine representing approximately $23. Accretion expense for the six months ended January 31, 2009 and 2008 was approximately $75 and $73, respectively.

NOTE 12 – Accumulated Other Comprehensive Income

Accumulated other comprehensive income (loss) consists of foreign translation gains and losses, unrealized gains and losses on marketable securities and fair value changes on derivative instruments and is summarized as follows:

	Foreign currency items			Unrealized gain (loss) on securities			Change in fair value on interest rate swaps			Accumulated other comprehensive income
Balance as of July 31, 2008	$	681		$	15		$	64		$	760
Income (loss)		(3,530	)		(5	)		(51	)		(3,586	)
Balance as of January 31, 2009	$	(2,849	)	$	10		$	13		$	(2,826	)

The Company has not recognized any income tax benefit or expense associated with other comprehensive income items for the year ended July 31, 2008 and the six months ended January 31, 2009.

NOTE 13 - Related Party Transactions

In August 2002, the Company purchased marketable equity securities of a related company. The Company also recorded approximately $4 and $3 in expense reimbursements including office rent from this entity for the six months ended January 31, 2009 and 2008, respectively (see Notes 3 and 9).

The Company utilizes Caborca Industrial, a Mexican corporation that is 100% owned by Gifford A. Dieterle, the Company’s Chief Executive Officer, and Jeffrey W. Pritchard, the Company’s Executive Vice President, for mining support services. These services include but are not limited to the payment of mining salaries and related costs. Caborca Industrial bills the Company for these services at slightly above cost. Mining expenses charged by Caborca Industrial and eliminated upon consolidation amounted to approximately $2,387 and $1,522 for the six months ended January 31, 2009 and 2008, respectively.

- 16 -

Table of Contents

The Company incurred approximately $11 during the six months ended January 31, 2009, for services provided related to marketing materials. The firm providing the services is owned and operated by relatives of the Company’s Chief Operating Officer, John Brownlie.

At the recommendation of the Compensation Committee and upon approval by the Board of Directors, on January 20, 2009, effective as of January 1, 2009, the Company entered into (i) amended and restated employment agreements with Gifford Dieterle, President and Treasurer, and Jeffrey Pritchard, Executive Vice President and (ii) amended and restated engagement agreements with Christopher Chipman, Chief Financial Officer, John Brownlie, Chief Operating Officer, and Scott Hazlitt, Vice President of Mine Development (collectively, the “Amended Agreements”).

Each of the Amended Agreements modify the previous employment agreement or engagement agreement in three ways. First, the Company removed a provision from the Agreement Regarding Change in Control, which is attached as an exhibit to each of the Amended Agreements, that provided that, upon a change in control of the Company, the exercise price of all issued and outstanding options would decrease to $0.01. Second, the Company made the terms of each of the Amended Agreements consistent so that each Amended Agreement expires on December 31, 2011. Finally, the Amended Agreements incorporate amendments made in December 2008 to the employment agreements and engagement agreements to bring such agreements into documentary compliance with Section 409A of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the “Code”).

NOTE 14 - Stockholders' Equity

Common Stock

At various stages in the Company’s development, shares of the Company’s common stock have been issued at fair market value in exchange for services or property received with a corresponding charge to operations, property and equipment or additional paid-in capital depending on the nature of services provided or property received.

During the six months ended January 31, 2009, the Company issued 222,500 restricted shares to employees under its 2006 Equity Incentive Plan. The restricted shares granted vested immediately. The fair value of the Company’s stock ranged from $0.34 to $0.52 on the date of grant resulting in the Company recording approximately $113 in equity compensation expense.

The Company received proceeds of approximately $122 during the six months ended January 31, 2009 from the exercising of an aggregate of 350,000 options issued to officers and directors.

During the six months ended January 31, 2009 and 2008, the Company recorded approximately $116 and $349 in equity compensation expense related to the vesting of restricted stock grants and stock options, respectively.

2006 Equity Incentive Plan

The 2006 Equity Incentive Plan (the “Plan”), approved by stockholders on February 21, 2007, is intended to attract and retain individuals of experience and ability, to provide incentive to the Company’s employees, consultants, and non-employee directors, to encourage employee and director proprietary interests in the Company, and to encourage employees to remain in the Company’s employ.

- 17 -

Table of Contents

The Plan authorizes the grant of non-qualified and incentive stock options, stock appreciation rights and restricted stock awards (each, an “Award”). A maximum of 10,000,000 shares of common stock are reserved for potential issuance pursuant to Awards under the Plan. Unless sooner terminated, the Plan will continue in effect for a period of ten years from its effective date.

The Plan is administered by the Company’s Board of Directors which has delegated the administration to the Company’s Compensation Committee. The Plan provides for Awards to be made to the Company’s employees, directors and consultants and its affiliates, as the Board may select.

Stock options awarded under the Plan may vest and be exercisable at such times (not later than 10 years after the date of grant) and at such exercise prices (not less than Fair Market Value at the date of grant) as the Board may determine. Unless otherwise determined by the Board, stock options shall not be transferable except by will or by the laws of descent and distribution. The Board may provide for options to become immediately exercisable upon a "change in control," as defined in the Plan.

The exercise price of an option must be paid in cash. No options may be granted under the Plan after the tenth anniversary of its effective date. Unless the Board determines otherwise, there are certain continuous service requirements and the options are not transferable.

The Plan provides the Board with the general power to amend the Plan, or any portion thereof, at any time in any respect without the approval of the Company’s stockholders, provided however, that the stockholders must approve any amendment which increases the fixed maximum percentage of shares of common stock issuable pursuant to the Plan, reduces the exercise price of an Award held by a director, officer or ten percent stockholder or extends the term of an Award held by a director, officer or ten percent stockholder. Notwithstanding the foregoing, stockholder approval may still be necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934, as amended or any applicable stock exchange listing requirements. The Board may amend the Plan in any respect it deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. Rights under any Award granted before amendment of the Plan cannot be impaired by any amendment of the Plan unless the Participant consents in writing. The Board is empowered to amend the terms of any one or more Awards; provided, however, that the rights under any Award shall not be impaired by any such amendment unless the applicable Participant consents in writing and further provided that the Board cannot amend the exercise price of an option, the Fair Market Value of an Award or extend the term of an option or Award without obtaining the approval of the stockholders if required by the rules of the TSX or any stock exchange upon which the common stock is listed.

On November 1, 2008, the Company issued two year options to purchase the Company’s common stock at an exercise price of $0.65 per share to an investor relations firm for services provided. These options are for the purchase of 100,000 shares. The Company utilized the Black-Scholes Method to fair value the 100,000 options received by this firm and recorded approximately $6 as equity based compensation expense. The grant date fair value of each stock option was $0.06.

On December 3, 2008, the Company issued two year options to purchase the Company’s common stock at an exercise price of $0.35 per share to its then SEC counsel. These options are for the purchase of 25,000 shares. The Company utilized the Black-Scholes Method to fair value the 25,000 options received by these individuals and recorded approximately $4 as equity based compensation expense. The grant date fair value of each stock option was $0.16.

- 18 -

Table of Contents

On January 20, 2009, at the recommendation of the Compensation Committee and on the approval by the Board of Directors, the Company’s executive officers and directors were granted 2,275,000 stock options under our 2006 Equity Incentive Plan as incentive compensation. The stock options were awarded as follows: Gifford Dieterle – 500,000, John Brownlie – 500,000, Jeffrey Pritchard – 500,000, Christopher Chipman – 250,000, Scott Hazlitt – 250,000, Ian Shaw – 75,000, John Postle – 50,000, Mark T. Nesbitt – 50,000, Roger Newell -50,000 and Robert Roningen – 50,000. The stock options have a term of five years and vest as follows: one-third vested upon issuance and the balance vests on a one-third basis annually thereafter. The exercise price of the stock options is $0.49 per share (per the Plan, the closing price on the Toronto Stock Exchange on the trading day immediately prior to the day of determination converted to U.S. Dollars). In the event of a termination of continuous service (other than as a result of a change of control, as defined in the Plan, unvested stock options shall terminate and, with regard to vested stock options, the exercise period shall be the lesser of the original expiration date or one year from the date continuous service terminates. Upon the happening of a change of control, all unvested stock options and unvested restricted stock grants immediately vest. The Company utilized the Black-Scholes method to fair value the 2,250,000 options received by these individuals totaling $647,000. The grant date fair value of each stock option was $0.29.

NOTE 15 - Debt

Long term debt consists of the following:

	(in thousands)
	January 31, 2009		July 31, 2008

Total debt	$	10,250	$	12,500

Less current portion		4,050		4,125

Long-term debt	$	6,200	$	8,375

In September 2008, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) involving our wholly owned Mexican subsidiaries MSR and Oro, as borrowers (“Borrowers”), the Company, as guarantor, and Standard Bank PLC (“Standard Bank”), as the lender. The Credit Agreement amends and restates the prior credit agreement between the parties dated August 15, 2006 (the “Original Agreement”). Under the Original Agreement, MSR and Oro borrowed money in an aggregate principal amount of up to US$12,500 (the “Term Loan”) for the purpose of constructing, developing and operating the El Chanate gold mining project in Sonora State, Mexico. The Company guaranteed the repayment of the Term Loan and the performance of the obligations under the Original Agreement. As of January 31, 2009, the outstanding amount on the term note was $10,250 and accrued interest on this facility was approximately $34.

The Credit Agreement also established a new senior secured revolving credit facility that permits the Borrowers to borrow up to $5,000 during the one year period after the closing of the Credit Agreement. Term Loan principal shall be repaid quarterly commencing on September 30, 2008 and consisting of four payments in the amount of $1,125, followed by eight payments in the amount of $900

- 19 -

Table of Contents

and two final payments in the amount of $400. There is no prepayment fee. There was no amount outstanding on the revolving credit facility as of January 31, 2009. Principal under the Term Loan and the Revolving Loans shall bear interest at a rate per annum equal to the LIBO Rate plus 2.5% and 2.0% per annum, respectively.

The Credit Facility contains covenants customary for a term note, including but not limited to restrictions (subject to certain exceptions) on incurring additional debt, creating liens on its property, disposing of any assets, merging with other companies and making any investments. The Company is required to meet and maintain certain financial covenants, including (i) a ratio of current assets to current liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly minimum tangible net worth at all times of at least U.S.$15,000, and (iii) a quarterly average minimum liquidity of U.S.$500.

In connection with the amendment of the Company’s credit arrangement proceedings in September 2008, MSR, as a condition precedent to closing, obtained a six month waiver letter from the Lender of any default or event of default as a result of not being in compliance with regulations of Mexican federal law with regard to certain filing and environmental bonding issues in connection with the operation of mining the El Chanate concessions as well as certain insurance requirements. MSR has not yet complied with these regulations due to the absence of professionals in the area qualified to conduct studies to facilitate compliance. MSR has agreed to make a commercially reasonable effort to come into compliance with these requirements. The Company believes it has met the insurance requirements required by the Lender. MSR has made significant progress on compliance with the aforementioned Mexican federal law regulations and believes it will be compliant by April 2009. The original waiver letter expired on March 9, 2009; therefore, on March 6, 2009, the Company obtained a three month extension from the Lender.

As of January 31, 2009, except for the aforementioned waiver, the Company and its related entities were in compliance with all debt covenants and default provisions.

The Loan is secured by all of the tangible and intangible assets and property owned by MSR and Oro. As additional collateral for the Loan, the Company, together with its subsidiary, Leadville Mining & Milling Holding Corporation, has pledged all of its ownership interest in MSR and Oro.

In March 2006, the Company entered into a gold price protection arrangement to protect it against future fluctuations in the price of gold and interest rate swap agreements in October 2006 in accordance with the terms of the credit arrangements with Standard Bank (See Note 16 for more details on these transactions).

NOTE 16 - Sales Contracts, Commodity and Financial Instruments

Gold Price Protection Agreement

In March 2006, in conjunction with the Company’s credit facility, the Company entered into two identically structured derivative contracts with Standard Bank (See Note 15). Both derivatives consisted of a series of forward sales of gold and a purchase gold cap. Under these contracts, the Company agreed to sell a total volume of 121,927 ounces of gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis during the period from March 2007 to September 2010. The Company also agreed to purchase gold caps. The caps allow the Company to buy gold at a price of $535 per ounce covering the same volume and horizon as the forward sales. This combination of forward sales with purchased call options synthesizes a put position, which, in turn, serves to put a floor on the Company’s sales price. The volume of these derivative positions represents about 68% and 90% of sales during the six months ended

- 20 -

Table of Contents

January 31, 2009 and 2008, respectively, such that these derivative positions mitigate the Company’s gold price risk, rather than eliminate or reverse the natural exposure of the Company.

Under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), these contracts must be carried on the balance sheet at their fair value. The Company records these changes in fair value and any cash settlements within Other Income or Expense. The contracts were not designated as hedging derivatives, and therefore special hedge accounting is not applied.

The following is a reconciliation of the derivative contracts regarding the Company’s Gold Price Protection agreement:

	(in thousands)
Liability balance as of July 31, 2008	$	738
Loss on change in fair value of derivative		569
Net cash settlements		(588	)
Liability balance as of January 31, 2009	$	719

For the six months ended January 31, 2009 and 2008, the Company has paid Standard Bank approximately $588 and $591 on the settlement of 16,811 and 16,895 ounces, respectively. Since inception, the Company has paid Standard Bank an aggregate of approximately $2,229 on the settlement of 63,694 ounces. These expenses were incurred concurrently with sales revenues that reflected actual sales of physical gold at market prices well above the option strike price of $535 per ounce. The remaining ounces to settle with regard to this agreement amounted to 58,233 as of January 31, 2009.

Rather than modifying the original Gold Price Protection agreement with Standard Bank to satisfy these forward sale obligations, the Company has opted for a net cash settlement between the call option purchase price of $535 and the forward sale price of $500, or $35.00 per oz.

See Note 19 - Subsequent Events for more information regarding the close-out of this arrangement.

Interest Rate Swap Agreement

On October 11, 2006, prior to our initial draw on the Credit Facility, the Company entered into interest rate swap agreement covering about 75% of the expected variable rate debt exposure. Only 50% coverage is required under the Credit Facility. The termination date on this swap position is December 31, 2010. However, the Company intends to use discretion in managing this risk as market conditions vary over time, allowing for the possibility of adjusting the degree of hedge coverage as it deems appropriate. In any case, the Company’s use of interest rate derivatives will be restricted to use for risk management purposes.

The Company uses variable-rate debt to finance a portion of the El Chanate Project. Variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. As a result of these arrangements, the Company will continuously monitor changes in interest rate exposures and evaluate hedging opportunities. The Company’s risk management policy permits it to use any combination of interest rate swaps, futures, options, caps and similar instruments, for the purpose of fixing interest rates on all or a portion of variable rate debt, establishing caps or maximum effective interest rates, or otherwise constraining interest expenses to minimize the variability of these effects.

- 21 -

Table of Contents

The interest rate swap agreements are accounted for as cash flow hedges, whereby “effective” hedge gains or losses are initially recorded in other comprehensive income (“OCI”) and later reclassified to the interest expense component of earnings coincidently with the earnings impact of the interest expenses being hedged. “Ineffective” hedge results are immediately recorded in earnings also under interest expense. No component of hedge results will be excluded from the assessment of hedge effectiveness. The amount expected to be reclassified from other comprehensive income to earnings during the year ending July 31, 2009 from these two swaps was determined to be immaterial.

The following is a reconciliation of the derivative contract regarding the Company’s Interest Rate Swap agreement:

	(in thousands)
Liability balance as of July 31, 2008	$	192
Change in fair value of derivative		95
Interest expense (income)		50
Net cash settlements		(69	)
Liability balance as of January 31, 2009	$	268

The Company is exposed to credit losses in the event of non-performance by counterparties to these interest rate swap agreements, but the Company does not expect any of the counterparties to fail to meet their obligations. To manage credit risks, the Company selects counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors the market position with each counterparty as required by SFAS 133.

The Effect of Derivative Instruments on the Statement of Financial Performance (in thousands):

Quarter Ended	Derivatives in Cash Flow Hedging Relationships	Effective Results Recognized in OCI			Location of Results Reclassified from AOCI to Earnings	Amount Reclassified from AOCI to Income			Ineffective Results Recognized in Earnings		Location of Ineffective Results
4/30/08	Interest Rate contracts	$	28		Interest Income (Expense)		(24	)		—		N/A
7/31/08	Interest Rate contracts	$	19		Interest Income (Expense)		(49	)		—		N/A
10/31/08	Interest Rate contracts	$	(38	)	Interest Income (Expense)		(38	)		—		N/A
1/31/09	Interest Rate contracts	$	(95	)	Interest Income (Expense)		(35	)		—		N/A

Quarter Ended	Derivatives Not Designated in Hedging Relationships	Location of Results	Amount of Gain (Loss)
4/30/08	Gold contracts	Other Income (Expense)	$	(337	)
7/31/08	Gold contracts	Other Income (Expense)	$	(319	)
10/31/08	Gold contracts	Other Income (Expense)	$	(304	)
1/31/09	Gold contracts	Other Income (Expense)	$	(274	)

- 22 -

Table of Contents

Fair Value of Derivative Instruments in a Statement of Financial Position and the Effect of Derivative Instruments on the Statement of Financial Performance (in thousands):

	Liability Derivatives
April 30, 2008	Balance Sheet Location	Fair Values
Derivatives designated as hedging instruments
Interest rate derivatives	Current Liabilities	$	274
Derivatives designated as non-hedging instruments
Gold derivatives	Current Liabilities	$	702

July 31, 2008	Balance Sheet Location	Fair Values
Derivatives designated as hedging instruments
Interest rate derivatives	Current Liabilities	$	192
Derivatives designated as non- hedging instruments
Gold derivatives	Current Liabilities	$	738

	Liability Derivatives
October 31, 2008	Balance Sheet Location	Fair Values
Derivatives designated as hedging instruments
Interest rate derivatives	Current Liabilities	$	199
Derivatives designated as non- hedging instruments
Gold derivatives	Current Liabilities	$	734

January 31, 2009	Balance Sheet Location	Fair Values
Derivatives designated as hedging instruments
Interest rate derivatives	Current Liabilities	$	268
Derivatives designated as non-hedging instruments
Gold derivatives	Current Liabilities	$	719

NOTE 17 – Income Taxes

The Company’s Income tax (expense) benefit for the six months ended consisted of:

	(in thousands)
	January 31, 2009			January 31, 2008
Current:
United States	$	—		$	—
Foreign		(1,924	)		(165	)
		(1,924	)		(165	)
Deferred:
United States		—			—
Foreign		(785	)		—
		—			—
Total	$	(2,709	)	$	(165	)

- 23 -

Table of Contents

The Company’s Income (loss) from operations before income tax for the six months ended consisted of:

	(in thousands)
	January 31, 2009			January 31, 2008

United States	$	(2,965	)	$	(2,780	)
Foreign		10,807			6,818
Total	$	7,842		$	4,038

The Company’s current intent is to permanently reinvest its foreign affiliate’s earnings; accordingly, no U.S. income taxes have been provided for the unremitted earnings of the Company’s foreign affiliate.

The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative effect of applying the provisions of this interpretation are required to be reported separately as an adjustment to the opening balance of retained earnings in the year of adoption. The adoption of this standard did not have an impact on the financial condition or the results of the Company’s operations.

On October 1, 2007, the Mexican Government enacted legislation which introduces certain tax reforms as well as a new minimum flat tax system. This new flat tax system integrates with the regular income tax system and is based on cash-basis net income that includes only certain receipts and expenditures. The flat tax is set at 17.5% of cash-basis net income as determined, with transitional rates of 16.5% and 17.0% in 2008 and 2009, respectively. If the flat tax is positive, it is reduced by the regular income tax and any excess is paid as a supplement to the regular income tax. If the flat tax is negative, it may serve to reduce the regular income tax payable in that year or can be carried forward for a period of up to ten years to reduce any future flat tax.

Companies are required to prepay income taxes on a monthly basis based on the greater of the flat tax or regular income tax as calculated for each monthly period. There is the possibility of implementation amendments by the Mexican Government and the estimated future income tax liability recorded at the balance sheet date may change.

Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse. The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are, on a more likely than not basis, not expected to be realized. Net deferred tax benefits related to the U.S. operations have been fully reserved. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

NOTE 18 – Recently Issued Accounting Pronouncements

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2009. In February 2008, the FASB staff issued FSP No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Company’s beginning January 1, 2009, and are not expected to have a significant impact on the Company.

- 24 -

Table of Contents

In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the application of FAS 157 in an inactive market. The intent of this FSP is to provide guidance on how the fair value of a financial asset is to be determined when the market for that financial asset is inactive. FSP FAS 157-3 states that determining fair value in an inactive market depends on the facts and circumstances, requires the use of significant judgment and in some cases, observable inputs may require significant adjustment based on unobservable data. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when determining fair value of an asset in an inactive market. FSP FAS 157-3 was effective upon issuance. The Company has incorporated the principles of FSP FAS 157-3 in determining the fair value of financial assets when the market for those assets is not active.

FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are described below:


	Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

	Level 2	Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

	Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value at January 31, 2009 (in thousands)
Assets:	Total		Level 1		Level 2		Level 3
Cash equivalents	$	4,314	$	4,314	$	—	$	—
Marketable securities		60		60		—		—
	$	4,374	$	4,374	$	—	$	—
Liabilities:
Gold price protection	$	719	$	—	$	719	$	—
Interest rate swap		268		—		268		—
	$	987	$	—	$	987	$	—

- 25 -

Table of Contents

The Company’s cash equivalent instruments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The cash instruments that are valued based on quoted market prices in active markets are primarily money market securities.

The Company’s marketable equity securities are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.

The Company’s derivative instrument is valued using pricing models. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. The Company’s derivative (Gold Price Protection arrangement) trades in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment. Such instruments are classified within Level 2 of the fair value hierarchy.

The Company has an interest rate swap contract to hedge a portion of the interest rate risk exposure on its outstanding loan balance. The hedged portion of the Company’s debt is valued using pricing models which require inputs, including risk-free interest rates and credit spreads. Because the inputs are derived from observable market data, the hedged portion of the debt is classified within Level 2 of the fair value hierarchy.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 were adopted January 1, 2009. The Company did not elect the Fair Value Option for any of its financial assets or liabilities, and therefore, the adoption of FAS 159 had no impact on the Company’s consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued FASB Statement No. 161, “Disclosure about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”) which provides revised guidance for enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and the related hedged items are accounted for under FAS 133, and how derivative instruments and the related hedged items affect an entity’s financial position, financial performance and cash flows. FAS 161 is effective and was adopted for the Company’s fiscal year ended July 31, 2008.

The FASB has issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. Statement 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. The hierarchy under Statement 162 is as follows:

* FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB, and Rules and interpretive releases of the SEC for SEC registrants.

- 26 -

Table of Contents

* FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position.

* AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the EITF, and Appendix D EITF topics.

Statement 162 is effective 60 days following the SEC's approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company believes the adoption of this standard will not have an impact on the financial condition or the results of the Company’s operations.

The FASB issued FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts. This new standard clarifies how FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts.

Statement 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for disclosures about the insurance enterprise's risk-management activities, which are effective the first period (including interim periods) beginning after May 23, 2008. Except for the required disclosures, earlier application is not permitted. The Company believes the adoption of this standard will not have an impact on the financial condition or the results of the Company’s operations.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141, “Business Combinations” (“FAS 141”). FSP 142-3 is effective for the Company’s fiscal year beginning January 1, 2009 and will be applied prospectively to intangible assets acquired after the effective date. The Company does not expect the adoption of FSP 142-3 to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 19 – Subsequent Events

In February 2009, the Company paid $337 as the second deposit on the procurement of a new secondary crusher for the El Chanate mine. The amount paid towards this commitment is $674. The total cost for this piece of equipment is approximately $1,012.

On February 24, 2009, the Company settled with Standard Bank, Plc., the remaining 58,233 ounces of gold under the original Gold Price Protection arrangements entered into in March 2006. The purpose of these arrangements at the time was to protect the Company in the event the gold price dropped below $500 per ounce. Total remuneration to unwind these arrangements was approximately $1,900. In conjunction with the settlement of the gold price protection agreement, the Company will incur an other expense of approximately $1,200 during the fiscal quarter ended April 30, 2009.

- 27 -

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(in thousands, except for per share and ounce amounts)

Cautionary Statement on Forward-Looking Statements

Certain statements in this report constitute “forwarding-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Certain of such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. All statements, other than statements of historical fact, included in this report regarding our financial position, business and plans or objectives for future operations are forward-looking statements. Without limiting the broader description of forward-looking statements above, we specifically note that statements regarding exploration, costs, grade, production and recovery rates, permitting, financing needs and the availability of financing on acceptable terms or other sources of funding are all forward-looking in nature.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, the factors discussed below in Part II; Item 1A. “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and other factors referenced in this report. We do not undertake and specifically decline any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

General

Through wholly owned subsidiaries, Capital Gold Corporation (the “Company” or “we”) owns 100% of 16 mining concessions located in the Municipality of Altar, State of Sonora, Republic of Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square miles). We commenced mining operations on two of these concessions in late March 2007 and achieved gold production and revenue from operations in early August 2007. We sometimes refer to the operations on these two concessions as the El Chanate Project.

On August 30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ delivered to us an updated resource block model and an updated mine plan and mine production schedule (the “2007 Report”). According to the 2007 Report, our proven and probable reserve tonnage increased by approximately 98% from 19.9 million to 39.5 million metric tonnes with a gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one tonne of ore). The updated pit design for the revised plan in the 2007 Report is based on a plant recovery of gold that varies by rock types, but is expected to average 66.8%. A gold price of US$550 (three year average as of July 31, 2007 as determined by IMC) per ounce was used to re-estimate the reserves compared with a gold price of $450 per ounce used in the previous estimate.

The following production summary estimate has been extracted from the 2007 Report. Please note that the reserves as stated are an estimate of what can be economically and legally recovered from the mine and, as such, incorporate losses for dilution and mining recovery. The 832,280 ounces of contained gold represent ounces of gold contained in ore in the ground, and therefore do not reflect losses in the recovery process. Total gold produced is estimated to be 555,960 ounces, or approximately 66.8%

- 28 -

Table of Contents

of the contained gold. The gold recovery rate is expected to average approximately 66.8% for the entire ore body. Individual portions of the ore body may experience varying recovery rates ranging from about 73% to 48%. Oxidized and sandstone ore types may have recoveries of about 73%; fault zone ore type recoveries may be about 64%; siltstone ore type recoveries may be about 48% and latite intrusive ore type recoveries may be about 50%.

	Metric	U.S.
Materials Reserves Proven Probable Total Reserves Waste Total Contained Gold Production Ore Crushed Operating Days/Year Gold Plant Average Recovery Average Annual Production Total Gold Produced	26.7 Million Tonnes @ 0.68 g/t* 12.8 Million Tonnes @ 0.61 g/t* 39.5 Million Tonnes @ 0.66 g/t* 24.1 Million Tonnes 63.6 Million Tonnes 25.89 Million grams 2.6 Million Tonnes /Year 7,500 Mt/d 365 Days per year 66.8 % 1.35 Million grams 17.29 Million grams	29.4 Million Tons @ 0.0198 opt* 14.1 Million Tons @ 0.0179 opt* 43.5 Million Tons @ 0.0192 opt* 26.6 Million Tons 70.1 Million tons 832,280 Oz 2.87 Million Tons/Year 8,267 t/d 365 Days per year 66.8 % 43,414 Oz 555,960 Oz

* “g/t” means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means metric tonnes per day and “t/d” means tons per day. The reserve estimates are based on a recovered gold cutoff grade of 0.17 to 0.21 grams per metric tonne, depending on the operating year, and as described below.

** Based on mining rate of 7,500 metric tonnes per day of ore. It does not take into account the anticipated increase of 10,000 metric tonnes per day or more.

El Chanate Project

Production Summary

In the mineral resource block model developed, with blocks 6m (meters) x 6m x 6m high, Measured and Indicated resources (corresponding to Proven and Probable reserves, respectively, when within the pit design) were classified in accordance with the following scheme:

Blocks with 2 or more drill holes within a search radius of 80m x 70m x 40m and with a relative kriging (a geostatistical calculation technique) standard deviation less than or equal to 0.45 were classified as Measured (corresponding to Proven);

Blocks with 1 hole within the search radius of 80m x 70m x 40m and with a relative kriging standard deviation of 0.60 or less, blocks with 2 holes and a kriging standard deviation of 0.70 or less, blocks with 3 holes and a kriging standard deviation of 0.80 or less, blocks with 4 holes and a relative kriging standard deviation of 0.90 or less and all blocks with 5 or more holes within the search radius were classified as Indicated (corresponding to Probable), unless they met the above criterion for Proven;

- 29 -

Table of Contents

Blocks with a grade estimate that did not meet the above criteria were classified as Inferred (and were classed as waste material in the mining reserves estimate);

Blocks outside the above search radii or outside suitable geological zones were not assigned a gold grade or a resource classification.

The proven and probable reserve estimates are based on a recovered gold cutoff grade of 0.17 to 0.21 grams/tonne, depending on the operating year. The variation is due to balancing the mine and plant production capacities on a year by year basis for the plan. (A recovered gold cutoff grade was used for reserves calculation as the head gold grade cutoff varies with the different ore types due to their variable gold recoveries.) The internal (in-pit) and break even cutoff grade calculations are as follows:

Cutoff Grade Calculation

Basic Parameters

Gold Price

Shipping and Refining

Gold Recovery

Royalty

Operating Costs per Tonne of Ore

Mining *

Processing/Leach Pad

G&A

Total

Internal Cutoff Grade

Head Grade Cutoff (66.8% recov.)

Recovered Gold Grade Cutoff

Internal Cutoff Grade

US$550/oz

US$ 4.14/oz

66.8%

4% of NSR

$ per Tonne of Ore

0.070

1.980

0.800

2.850

Grams per Tonne

0.25

0.17

Break Even Cutoff Grade

US$550/oz

US$ 4.14/oz

66.8%

4% of NSR

$ per Tonne of Ore

1.360

1.980

0.800

4.140

Grams per Tonne

0.37

0.25

* The calculation of an internal cutoff grade does not include the basic mining costs (which are considered to be sunk costs for material within the designed pit). The $0.07 per tonne cost included is the incremental (added) cost of hauling ore over hauling waste, and which is included in the calculation.

We commenced production at the El Chanate property on July 31, 2007. For the six months ended January 31, 2009 and 2008, we sold 24,690 and 18,744 ounces of gold, respectively. Gold production at El Chanate is currently at a level of approximately 5,000 ounces of gold per month. We have implemented steps which we anticipate will effectively increase annualized production rates to approximately 70,000 ounces per year in 2009. We have paid $674 over the past few months as deposits on the procurement of a new secondary crusher with the intention of increasing the throughput within the crushing circuit The total cost for this piece of equipment is approximately $1,012. We completed the leach pad expansion and ADR plant improvements in January 2009. Management has been, and anticipates that it will continue to, fund expansion costs with its cash on hand as well as through revenues from gold sales.

- 30 -

Table of Contents

The following table represents a summary of our proven and probable mineral reserves.

Proven and probable mineral reserve (Ktonnes of ore)	January 31, 2009			July 31, 2008
Ore		—			—
Beginning balance (Ktonnes)		35,286			38,785
Additions		—			—
Reductions		(1,905	)		(3,499	)
Ending Balance		33,381			35,286

Contained gold
Beginning balance (thousand of ounces)		719			814
Additions		—			—
Reductions		(53	)		(95	)
Ending Balance		666			719

In September 2008, we initiated a 10 hole deep core drilling campaign at our El Chanate mine consisting of 2,500 meters, which targeted the southern extremity of the main pit. Once this data has been compiled and analyzed, it will be combined with results from a previous drilling campaign initiated in December 2007 which consisted of 26 reverse circulation holes amounting to 4,912 meters. These drill holes were mainly positioned to test the outer limits of the currently known ore zones within the main pit. All data will be combined with the intention of increasing proven and probable reserves.

We recently leased 12 mining concessions totaling 1,790 hectares located northwest of Saric, Sonora. In addition, we own a claim for approximately 2,200 additional hectares adjacent to this property. These concessions and this claim are about a 60 mile drive northeast of the El Chanate project. Mineralization is evident throughout and is hosted by shear zones and quartz veins in granite intrusive. A short drill program, along with geochemical work, remains underway.

We continue to actively investigate other exploration projects in northern Mexico.

Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited interim financial statements and related notes included elsewhere in this report.

The Company reports total cash cost on a sales basis. Total cash cost includes mine site operating costs such as mining, processing, administration, royalties and production taxes, but is exclusive of amortization, reclamation, capital and exploration costs. Total cash cost is then divided by ounces sold to arrive at the total cash cost of sales. The measure, along with sales, is considered to be a key indicator of a company’s ability to generate operating earnings and cash flow from its mining operations. This data is furnished to provide additional information and is a non-GAAP measure. It should not be considered in isolation as a substitute for measures of performance prepared in accordance with GAAP and is not necessarily indicative of operating costs presented under GAAP.

Three months ended January 31, 2009 compared to three months ended January 31, 2008

Net income for the three months ended January 31, 2009 and 2008 was approximately $3,196 and $2,126, respectively, representing an increase of approximately 50% over the prior period. Net income before income taxes was $4,978 and $2,291 for the three months ended January 31, 2009 and 2008, respectively, which represented an increase of 117%. Net income and net income before tax increased primarily as a result of higher revenues and ounces sold during the current quarter as compared to the same period a year ago. There was minimal income tax expense in the prior period due to a net operating loss carryforward within our wholly-owned subsidiary, MSR, that offset tax that would otherwise have been due. This loss carry-forward was fully utilized as of December 31, 2007. Net income per common share was $0.02 and $0.01 for the three months ended January 31, 2009 and 2008, on both a basic and diluted basis, respectively.

- 31 -

Table of Contents

Revenues & Costs Applicable to Sales

Gold sales in the current period totaled approximately $11,369 as compared to $8,043 in the prior period representing an increase of approximately $3,326 or 41%. We sold 13,277 ounces at an average realizable price per ounce of approximately $856 in the current period. We sold 9,550 ounces at an average realizable price per ounce of $843 during the same period last year.

Costs applicable to sales were approximately $3,655 and $2,419, respectively, for the three months ended January 31, 2009 and 2008, an increase of approximately $1,236 or 51%, which increased in conjunction with our increase in revenues. Our cash cost and total cost per ounce sold, including royalties, was $251 and $290, respectively, for the three months ended January 31, 2009. For the three months ended January 31, 2008, cash and total cost per ounce sold was $252 and $315, respectively. Cash costs in the current period were consistent with the same period in the prior year. Total costs per ounce sold decreased versus the same period last year primarily due to 3,727 more gold ounces being sold during the current period versus the prior period.

Revenues from by-product sales (silver) are credited to Costs applicable to sales as a by-product credit. Silver sales totaled 20,000 ounces amounting to approximately $225 during the three months ended January 31, 2009. There were no silver sales during the same period last year.

Depreciation and Amortization

Depreciation and amortization expense during the three months ended January 31, 2009 and 2008 was approximately $755 and $881, respectively. The primary reason for the decrease of approximately $126 was due to amortization charges recorded in the prior period related to the repurchase of the 5% net profit interest acquired in 2006 for $500. This was fully amortized during the quarterly period ended April 30, 2008. Depreciation and amortization also includes deferred financing costs resulting from the credit arrangements entered into with Standard Bank Plc. This accounted for approximately $247 and $272 of depreciation and amortization expense during the three months ended January 31, 2009 and 2008, respectively.

General and Administration Expense

General and administrative expenses during the three months ended January 31, 2009 were approximately $1,061, a decrease of approximately $310 or 23% from the three months ended January 31, 2008. The decrease in general and administrative expenses was primarily due to smaller bonuses paid in the three months ended January 31, 2009 compared to the three months ended January 31, 2008.

Exploration Expense

Exploration expense during the three months ended January 31, 2009 and 2008 was approximately $406 and $496, respectively, or a decrease of $90 or 18%. Exploration costs during the current period mainly consisted of on-going exploration and geochemical work being conducted on our leased concessions located northwest of Saric, Sonora. Exploration expense in the prior period included a drilling campaign initiated in December 2007 which consisted of 26 reverse circulation holes amounting to 4,912 meters which represented the primary reason for costs decreasing during the current period.

- 32 -

Table of Contents

Other Income and Expense

Our loss on the change in fair value of derivative instruments during the three months ended January 31, 2009 and 2008, was approximately $274 and $342, respectively, and was reflected as an “Other Expense.” This was primarily due to the change in fair value of our two identically structured derivative contracts with Standard Bank which correlates to fluctuations in the gold price. These contracts were not designated as hedging derivatives; and therefore, special hedge accounting does not apply.

Interest expense was approximately $227 for the three months ended January 31, 2009 compared to approximately $288 for the same period a year earlier. This decrease was mainly due to lower interest charges incurred during the current period related to our credit arrangements with Standard Bank. As of January 31, 2009, there was $10,250 outstanding on our term note.

Six months ended January 31, 2009 compared to six months ended January 31, 2008

Net income for the six months ended January 31, 2009 and 2008 was approximately $5,133 and $3,873, respectively, representing an increase of approximately 33% over the prior period. Net income before income taxes was $7,842 and $4,038 for the six months ended January 31, 2009 and 2008, respectively, which represented an increase of 94%. Net income and net income before tax increased primarily as a result of higher revenues and ounces sold during the six months ended January 31, 2009, as compared to the same period a year ago. There was minimal income tax expense in the prior period due to a net operating loss carryforward within our wholly-owned subsidiary, MSR, that offset tax that would otherwise would have been due. This loss carry-forward was fully utilized as of December 31, 2007. Net income per common share was $0.03 and $0.02 for the six months ended January 31, 2009 and 2008, on both a basic and diluted basis, respectively.

Revenues & Costs Applicable to Sales

Gold sales in the current period totaled approximately $20,544 as compared to $14,569 in the prior period representing an increase of approximately $5,975 or 41%. We sold 24,690 ounces at an average realizable price per ounce of approximately $832 in the current period. We sold 18,744 ounces at an average realizable price per ounce of $779 during the same period last year.

Costs applicable to sales were approximately $6,697 and $4,568, respectively, for the six months ended January 31, 2009 and 2008, an increase of approximately $2,129 or 47%, which increased in conjunction with our increase in revenues. Our cash cost and total cost per ounce sold, including royalties, was $260 and $299, respectively, for the six months ended January 31, 2009. For the six months ended January 31, 2008, cash and total cost per ounce sold was $246 and $314, respectively. The primary reason we experienced a cash cost increase this period versus the prior period was attributable to the Company incurring $806 on the net profit interest due to Royal Gold. As of January 31, 2009, we had approximately $1,000 accrued towards this net profit interest which represents the total amount due under our agreement.

Revenues from by-product sales, which consist of silver, are credited to Costs applicable to sales as a by-product credit. By-product sales amounted to $524 and $145 for the six months ended January 31, 2009 and 2008, on silver ounces sold of 45,334 and 10,000, respectively.

- 33 -

Table of Contents

Depreciation and Amortization

Depreciation and amortization expense during the six months ended January 31, 2009 and 2008 was approximately $1,458 and $1,830, respectively. The primary reason for the decrease of approximately $372 or 20% was due to amortization charges recorded in the prior period related to the repurchase of the 5% net profit interest acquired in 2006 for $500. This was fully amortized during the quarterly period ended April 30, 2008 and $378 was amortized through January 31, 2008. Depreciation and amortization also includes deferred financing costs resulting from the credit arrangements entered into with Standard Bank Plc. This accounted for approximately $484 and $544 of depreciation and amortization expense during the six months ended January 31, 2009 and 2008, respectively.

General and Administration Expense

General and administrative expenses during the six months ended January 31, 2009 were approximately $2,438, an increase of approximately $158 or 7% from the six months ended January 31, 2008. The increase in general and administrative expenses resulted primarily from: 1) higher salaries and wages due to the hiring of additional finance and administrative personnel, 2) the effect of compensation increases to executives enacted in the prior year to levels more commensurate with industry rates, and 3) higher stock compensation expense resulting from the vesting of certain stock options and restricted stock grants issued to officers, directors and employees in the prior year. The above mentioned increases in compensation, as well as the stock option and restricted stock awards, were granted based upon recommendations from an independent report on executive compensation in the prior year. This independent report, requested by our Compensation Committee, was obtained in order to assist us in attracting and retaining individuals of experience and ability, to provide incentive to our employees and directors, to encourage employee and director proprietary interests in the Company, and to encourage employees to remain in our employ.

Exploration Expense

Exploration expense during the six months ended January 31, 2009 and 2008 was approximately $896 and $631, respectively, or an increase of $265 or 42%. The primary reason for the increase can be attributable to increased activity during the current period associated with on-going exploration and geochemical work being conducted on our leased concessions located northwest of Saric, Sonora. Exploration expense for the current period also included costs incurred from a 10 hole deep core drilling campaign at our El Chanate mine totaling 2,500 meters which targeted the southern extremity of the main pit. Exploration expense in the prior period included a drilling campaign initiated in December 2007 which consisted of 26 reverse circulation holes amounting to 4,912 meters. These drill holes were mainly positioned to test the outer limits of the currently known ore zones within the main pit. All data will be combined with the intention of increasing proven and probable reserves.

Other Income and Expense

Our loss on the change in fair value of derivative instruments during the six months ended January 31, 2009 and 2008, was approximately $578 and $703, respectively, and was reflected as an “Other Expense.” This was primarily due to the change in fair value of our two identically structured derivative contracts with Standard Bank, which correlates to fluctuations in the gold price. These contracts were not designated as hedging derivatives and, therefore, special hedge accounting does not apply.

Interest expense was approximately $427 for the six months ended January 31, 2009 compared to approximately $569 for the six months ended January 31, 2008. This decrease was mainly due to lower interest charges incurred during the current period related to our credit arrangements with Standard Bank. As of January 31, 2009, there was $10,250 outstanding on our term note.

- 34 -

Table of Contents

Changes in Foreign Exchange Rates

During the six months ended January 31, 2009 and 2008, we recorded equity adjustments from foreign currency translations of approximately $3,530 and $27, respectively. These translation adjustments are related to changes in the rates of exchange between the Mexican Peso and the U.S. dollar and are included as a component of other comprehensive income. The Mexican Peso and the U.S. dollar exchange rate as of January 31, 2009 was 14.2847. As of July 31, 2008, such exchange rate was 10.0483.

Summary of Quarterly Results

(000’s except per share Data)

	For the three		For the three		For the six		For the six
	months ended		months ended		months ended		months ended
	January 31, 2009		January 31, 2008		January 31, 2009		January 31, 2008

Revenues	$	11,369	$	8,043	$	20,544	$	14,569
Net Income	$	3,196	$	2,126	$	5,133	$	3,873
Basic net income per share	$	0.02	$	0.01	$	0.03	$	0.02
Diluted net income per share	$	0.02	$	0.01	$	0.03	$	0.02
Gold ounces sold	$	13,277	$	9,550	$	24,690	$	18,744
Average price received	$	856	$