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Item 1. Financial Statements

2010-11-09 compared with 2010-08-11 · 536 added, 222 removed, 400 unchanged (65% of the section changed)

1 unchanged sentence

CONSOLIDATED BALANCE SHEETS

June 30, 2010 (unaudited)

June 30, December 31,

September 30, 2010 (unaudited)

September 30, December 31,

Dollars 2010 2009

13 unchanged sentences

Convertible notes (Note 16) 96,128,728 93,693,168

Other 2,266,743 2,279,699

Total liabilities 100,451,962 97,717,721

Noncontrolling interest 2,275,026 2,279,699

Measurement uncertainty (Note 1)

15 unchanged sentences

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

Three Months Ended Six Months Ended

For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)

Three Months Ended Nine Months Ended

Dollars 2010 2009 2010 2009

3 unchanged sentences

Gain on sale of equipment 36,633 406,677

Foreign currency gain (loss) 62,042 (28,971) 144,286 (50,921)

Foreign currency (loss) gain (56,181) 46,779 88,105 (4,142)

85,242 406,813 834,660 2,959,063

Corporate general and administrative 729,920 1,147,667 2,511,437 3,668,635

Venezuelan expenses 426,534 684,351 876,651 1,466,821

Venezuelan operations 327,830 686,147 1,204,481 2,152,968

Equipment holding costs 305,979 12,500 784,968 75,458

1 unchanged sentence

Legal and accounting 81,148 222,286 372,810 1,292,225

Loss on sale of equipment 3,423,544 3,423,544

Arbitration (Note 3) 3,437,287 260,771 5,861,225 260,771

12 unchanged sentences

CONSOLIDATED STATEMENTS OF DEFICIT

For the Six Months Ended June 30, 2010 and 2009 (unaudited)

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Deficit, December 31, 2009 $ (265,630,369)

Net loss for the period (16,641,840)

Deficit, June 30, 2010 $ (275,341,372)

Deficit, September 30, 2010 $ (282,272,209)

Deficit, December 31, 2008 $ (100,180,541)

Net loss for the period (10,062,636)

Deficit, June 30, 2009 $ (104,679,303)

Deficit, September 30, 2009 $ (110,243,177)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

Three Months Ended Six Months Ended

For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)

Three Months Ended Nine Months Ended

Dollars 2010 2009 2010 2009

8 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

Three Months Ended Six Months Ended

For the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)

Three Months Ended Nine Months Ended

Dollars 2010 2009 2010 2009

6 unchanged sentences

Gain on extinguishment of debt (601,936)

Gain on sale of equipment (314,170) (370,044)

(Gain) loss on sale of equipment (36,633) 3,423,544 (406,677) 3,423,544

Amortization of premium on

1 unchanged sentence

Accretion of convertible notes 842,142 2,435,560

Foreign currency loss 35,586 108,078

Foreign currency gain (142,699) (34,621)

Other 8,283 (3,715) (4,673) (8,679)

4 unchanged sentences

Net decrease (increase) in deposits and advances 76,190 386,049 (133,306) 178,761

Net decrease in accounts payable

Net increase (decrease) in accounts payable

and accrued expenses 2,242,781 (1,143,286) 298,681 (4,849,511)

6 unchanged sentences

Decrease in restricted cash 1,742,162 494,076 2,490,970

Interest paid on convertible notes (2,828,841) (2,828,841)

Capitalized interest paid on convertible notes (2,828,841)

Other (7,460) (35,929)

5 unchanged sentences

Change in Cash and Cash Equivalents:

Net decrease in cash and cash equivalents (1,684,721) (18,669,523) (1,664,184) (28,322,270)

Net increase (decrease) in cash and cash equivalents (3,857,959) 1,701,145 (5,522,143) (26,621,125)

Cash and cash equivalents - beginning of period 59,298,629 63,227,897 60,962,813 91,550,167

1 unchanged sentence

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

The Company and Significant Accounting Policies

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010

and 2009 (unaudited)

Expressed in U.S.

The Company and Significant Accounting

Gold Reserve Inc.

(the “Company”) is an exploration stage company incorporated in 1998 under the laws of the Yukon Territory, Canada, and is the successor issuer to Gold Reserve Corporation which was incorporated in 1956.

The Company is engaged in the business of acquiring, exploring and developing mining projects.

From 1992 to 2009 the Company focused substantially all of its management and financial resources on the development of the Brisas gold and copper project located in the Kilometre 88 mining district of the State of Bolivar in south-eastern Venezuela (which we refer to as the “Brisas Project” or “Brisas”).

As further detailed in Note 3, we discontinued development of the Brisas Project after it was expropriated by the Venezuelan government and while we are pursuing our arbitration claim we are also seeking to invest in or acquire alternative mining projects.

(the “Company”) is an exploration

stage company incorporated in 1998 under the laws of the Yukon Territory, Canada, and is the successor issuer to Gold Reserve Corporation which was incorporated in

The Company is engaged in the business of acquiring, exploring and

developing mining projects.

From 1992 to 2009 the Company focused substantially

all of its management and financial resources on the development of the Brisas

gold and copper project located in the Kilometre 88 mining district of the

State of Bolivar in south-eastern Venezuela (which we refer to as the “Brisas

Project” or “Brisas”).

As further detailed in Note 3, we discontinued

development of the Brisas Project after it was expropriated by the Venezuelan

government and while we are pursuing our arbitration claim.

resolving our investment dispute, either through arbitration or settlement,

with Venezuela we are also seeking to invest in or acquire alternative mining

The Company has no revenue producing mining operations at this time.

1 unchanged sentence

dollars unless otherwise noted.

The expense categories shown in the consolidated statements of operations have been revised on a comparative basis to better present the current operations of the Company.

The revisions had no effect on previously reported results of operations.

In February 1999, the shareholders of Gold Reserve Corporation approved a plan of reorganization whereby Gold Reserve Corporation became a subsidiary of Gold Reserve Inc., the successor issuer (the “Reorganization”).

The expense categories shown in the consolidated statements of operations have

been revised on a comparative basis to better present the current operations of

The revisions had no effect

on previously reported results of operations.

February 1999, the shareholders of Gold Reserve Corporation approved a plan of

reorganization whereby Gold Reserve Corporation became a subsidiary of Gold Reserve Inc., the successor issuer (the “Reorganization”).

Generally, each shareholder of Gold Reserve Corporation received one Gold Reserve Inc.

Class A common share for each common share owned of Gold Reserve Corporation.

holders of Gold Reserve Corporation elected, for tax reasons, to receive equity units in lieu of Gold Reserve Inc.

Class A common share for each common

share owned of Gold Reserve Corporation.

holders of Gold Reserve Corporation elected, for tax reasons, to receive

equity units in lieu of Gold Reserve Inc.

Class A common shares.

An equity unit is comprised of one Gold Reserve Inc.

An equity unit

is comprised of one Gold Reserve Inc.

Class B common share and one Gold Reserve Corporation Class B common share.

Each equity unit is substantially equivalent to a Class A common share and is immediately convertible into a Gold Reserve Inc.

Class A common share, upon compliance with certain procedures.

Equity units are not listed for trading on any stock exchange, but, subject to compliance with applicable federal, provincial and state securities laws, may be transferred.

Unless otherwise noted, general references to common shares of the Company include Class A common shares and Class B common shares as a combined group.

Each equity unit is substantially equivalent to a

Class A common share and is immediately convertible into a Gold Reserve Inc.

A common share, upon compliance with certain procedures.

Equity units are not

listed for trading on any stock exchange, but, subject to compliance with

applicable federal, provincial and state securities laws, may be transferred.

Unless otherwise noted, general references to common shares of the Company

include Class A common shares and Class B common shares as a combined group.

Principles of Consolidation .

The consolidated financial statements contained herein have been prepared in accordance with accounting principles generally accepted in Canada, which as described in Note 18, differ in certain material respects from accounting principles generally accepted in the U.S.

These consolidated financial statements include the accounts of the Company, Gold Reserve Corporation, two domestic subsidiaries, Great Basin Energies, Inc.

(“Great Basin”) and MGC Ventures Inc.

(“MGC Ventures”), four Venezuelan subsidiaries, two Barbadian subsidiaries and one Aruban subsidiary which were formed to hold the Company’s interest in its foreign subsidiaries or for future transactions.

All subsidiaries are wholly owned with the exception of Great Basin and MGC Ventures which are 45% and 44% owned, respectively.

All intercompany accounts and transactions have been eliminated on consolidation.

The Company’s policy is to consolidate those subsidiaries where control exists.

The consolidated financial statements contained herein have been prepared in

accordance with accounting principles generally accepted in Canada, which as described in Note 18, differ in certain material respects from accounting

principles generally accepted in the U.S.

consolidated financial statements include the accounts of the Company, Gold Reserve Corporation, two domestic subsidiaries, Great Basin Energies, Inc.

(“Great Basin”)

and MGC Ventures Inc.

(“MGC Ventures”), four Venezuelan subsidiaries, two

Barbadian subsidiaries and one Aruban subsidiary which were formed to hold the

Company’s interest in its foreign subsidiaries or for future transactions.

subsidiaries are wholly owned with the exception of Great Basin and MGC

Ventures which are 45% and 44% owned, respectively.

All intercompany accounts

and transactions have been eliminated on consolidation.

The Company’s policy is

to consolidate those subsidiaries where control exists.

Cash and Cash Equivalents .

The Company considers short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents for purposes of reporting cash equivalents and cash flows.

Cash and cash equivalents are designated as held-for-trading and recorded at fair value.

The Company manages the exposure of its cash and cash equivalents to credit risk by diversifying its holdings into major Canadian and U.S.

financial institutions and corporations

The Company considers short-term, highly liquid investments purchased with an

original maturity of three months or less to be cash equivalents for purposes

of reporting cash equivalents and cash flows.

Cash and cash equivalents are

designated as held-for-trading and recorded at fair value.

The Company manages

the exposure of its cash and cash equivalents to credit risk by diversifying

its holdings into major Canadian and U.S.

financial institutions and

Exploration and Development Costs .

Exploration costs incurred in locating areas of potential mineralization are expensed as incurred.

Exploration costs of properties or working interests with specific areas of potential mineralization are capitalized at cost pending the determination of a property’s economic viability.

Development costs of proven mining properties not yet producing are capitalized at cost and classified as capitalized exploration costs under property, plant and equipment.

Costs related to staffing and maintenance of offices and facilities in Venezuela are charged to operations.

Property holding costs are charged to operations during the period if no significant exploration or development activities are being conducted on the related properties.

Upon commencement of production, capitalized exploration and development costs would be amortized based on the estimated proven and probable reserves benefited.

Properties determined to be impaired or that are abandoned are written-down to the estimated fair value.

Carrying values do not necessarily reflect present or future values.

Exploration costs incurred in locating areas of potential

mineralization are expensed as incurred.

Exploration costs of properties or

working interests with specific areas of potential mineralization are

capitalized at cost pending the determination of a property’s economic

Development costs of proven mining properties not yet producing are

capitalized at cost and classified as capitalized exploration costs under

property, plant and equipment.

Property, plant and equipment are recorded at cost less accumulated depreciation.

Costs related to staffing and maintenance of

offices and facilities in Venezuela are charged to operations.

Property holding

costs are charged to operations during the period if no significant exploration

or development activities are being conducted on the related properties.

commencement of production, capitalized exploration and development costs would

be amortized based on the estimated proven and probable reserves benefited.

Properties determined to be impaired or that are abandoned are written-down to

the estimated fair value.

Carrying values do not necessarily reflect present or

future values.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010

and 2009 (unaudited)

Expressed in U.S.

Property, Plant and Equipment .

Property, plant and equipment are recorded at cost less

accumulated depreciation.

Replacements and major improvements are capitalized.

Maintenance and repairs are charged to expense as incurred.

The cost and accumulated depreciation of assets retired or sold are removed from the accounts and any resulting gain or loss is reflected in operations.

Depreciation is provided using straight-line and accelerated methods over the lesser of the useful life or lease term of the related asset.

Interest and financing costs incurred during the construction and development of qualifying assets are capitalized on an interest avoidance basis.

The amount capitalized during an accounting period is determined by applying an interest rate to the average amount of accumulated qualifying assets during the period.

Adjustments increasing the carrying value of convertible notes upon remeasurement due to a change in estimated life are considered interest costs and are therefore eligible for capitalization.

The Company’s qualifying assets include its costs of developing mining properties and constructing new facilities.

accumulated depreciation of assets retired or sold are removed from the

accounts and any resulting gain or loss is reflected in operations.

Depreciation is provided using straight-line and accelerated methods over the

lesser of the useful life or lease term of the related asset.

financing costs incurred during the construction and development of qualifying

assets are capitalized on an interest avoidance basis.

The amount capitalized

during an accounting period is determined by applying an interest rate to the

average amount of accumulated qualifying assets during the period.

increasing the carrying value of convertible notes upon remeasurement due to a

change in estimated life are considered interest costs and are therefore

eligible for capitalization.

The Company’s qualifying assets include its costs

of developing mining properties and constructing new facilities.

Impairment of Long Lived Assets .

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

If the sum of the expected future net cash flows to be generated from the use or disposition of a long-lived asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized and the asset is written down to fair value.

Fair value is generally determined by discounting estimated cash flows, using quoted market prices where available or making estimates based on the best information available.

The Company reviews long-lived assets for impairment whenever events

or changes in circumstances indicate that the carrying amount of the assets may

not be recoverable.

If the sum of the expected future net cash flows to be

generated from the use or disposition of a long-lived asset (undiscounted and

without interest charges) is less than the carrying amount of the asset, an

impairment loss is recognized and the asset is written down to fair value.

value is generally determined by discounting estimated cash flows, using quoted

market prices where available or making estimates based on the best information

Foreign Currency.

dollar is the Company’s functional currency.

The Company’s foreign subsidiaries are integrated foreign operations and accordingly foreign currency amounts are translated into U.S.

dollars using the temporal method.

Non-monetary assets and liabilities are translated at historical rates, monetary assets and liabilities are translated at current rates and revenue and expense items are translated at average exchange rates during the reporting period, except for depreciation which is translated at historical rates.

Translation gains and losses are included in operating expenses.

Since the Company has discontinued development of the Brisas project, the financial statement impact of transactions in the Venezuelan currency is expected to be reduced in the future.

The Company’s foreign subsidiaries are integrated foreign operations and

accordingly foreign currency amounts are translated into U.S.

dollars using the

temporal method.

Non-monetary assets and liabilities are translated at

historical rates, monetary assets and liabilities are translated at current

rates and revenue and expense items are translated at average exchange rates

during the reporting period, except for depreciation which is translated at

historical rates.

Translation gains and losses are included in operating

Since the Company has discontinued development of the Brisas project,

the financial statement impact of transactions in the Venezuelan currency is

expected to be reduced in the future.

Stock Based Compensation .

The Company uses the fair value method of accounting for stock options.

The fair value of options granted to employees is computed using the Black-Scholes method as described in Note 11 and is expensed over the vesting period of the option.

For non-employees, the fair value of stock based compensation is recorded as an expense over the vesting period or, if earlier, upon completion of performance.

Consideration paid for shares on exercise of share options, in addition to the fair value attributable to stock options granted, is credited to capital stock.

Fair value of restricted stock issued as compensation is based on the grant date market value and expensed over the vesting period.

The Company also maintains the Gold Reserve Director and Employee Retention Plan.

Units granted under the plan become fully vested and payable upon a change of control.

Each Unit granted to a participant entitles such person to receive a cash payment equal to the fair market value of one Gold Reserve Class A Common Share (1) on the date the Unit was granted or (2) on the date any such participant becomes entitled to payment, whichever is greater.

fair value of options granted to employees is computed using the Black-Scholes

method as described in Note 11 and is expensed over the vesting period of the

For non-employees, the fair value of stock based compensation is

recorded as an expense over the vesting period or, if earlier, upon completion

of performance.

Consideration paid for shares on exercise of share options, in

addition to the fair value attributable to stock options granted, is credited

to capital stock.

Fair value of restricted stock issued as compensation is

based on the grant date market value and expensed over the vesting period.

The Company also maintains the Gold Reserve Director and

Employee Retention Plan.

Units granted under the plan become fully vested and

payable upon a change of control.

Each Unit granted to a participant entitles

such person to receive a cash payment equal to the fair market value of one

Gold Reserve Class A Common Share (1) on the date the Unit was granted or (2)

on the date any such participant becomes entitled to payment, whichever is

Income Taxes .

The Company uses the liability method of accounting for income taxes.

Future tax assets and liabilities are determined based on the differences between the tax basis of assets and liabilities and those amounts reported in the financial statements.

The future tax assets or liabilities are calculated using the substantively enacted tax rates expected to apply in the periods in which the differences are expected to be settled.

Future tax assets are recognized to the extent that they are considered more likely than not to be realized.

uses the liability method of accounting for income taxes.

Future tax assets and

liabilities are determined based on the differences between the tax basis of

assets and liabilities and those amounts reported in the financial statements.

The future tax assets or liabilities are calculated using the substantively

enacted tax rates expected to apply in the periods in which the differences are

expected to be settled.

Future tax assets are recognized to the extent that

they are considered more likely than not to be realized.

Use of Estimates .

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The preparation of financial statements in conformity

with generally accepted accounting principles requires management to make

estimates and assumptions that affect the reported amounts of assets and

liabilities, disclosure of contingent assets and liabilities at the date of the

financial statements and the reported amounts of revenues and expenses during

the reporting period.

Actual results could differ from those estimates.

Measurement Uncertainty.

Any operations we may have are subject to the effects of changes in legal, tax and regulatory regimes, political, labor and economic developments, social and political unrest, currency and exchange controls, import/export restrictions and government bureaucracy in the countries in which we may operate.

In 2009, subsequent to the expropriation and the resulting loss of control and physical access to the Brisas project, we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets including an adjustment for the estimated net realizable value of certain processing and related equipment purchased for the Brisas Project of approximately $14.5 million.

The realizable value of the remaining processing and related equipment may be different than management’s current estimate.

Any operations we may

have are subject to the effects of changes in legal, tax and regulatory

regimes, political, labor and economic developments, social and political

unrest, currency and exchange controls, import/export restrictions and

government bureaucracy in the countries in which we may operate.

In 2009, subsequent

to the expropriation and the resulting loss of control and physical access to

the Brisas project, we recorded a $150.7 million non-cash write-off of the

carrying value of the expropriated assets including an adjustment for the

estimated net realizable value of certain processing and related equipment

purchased for the Brisas Project of approximately $14.5 million.

The realizable

value of the remaining processing and related equipment may be different than

management’s current estimate.

See Notes 3, 9 and 13.

The Company operates and files tax returns in a number of jurisdictions.

The preparation of such tax filings requires considerable judgment and the use of assumptions.

Accordingly, the amounts reported could vary in the future.

The Company operates and

files tax returns in a number of jurisdictions.

The preparation of such tax

filings requires considerable judgment and the use of assumptions.

the amounts reported could vary in the future.

Net Loss Per Share .

Net loss per share is computed by dividing net loss by the combined weighted average number of Class A and B common shares outstanding during each year, which is reduced by the common shares owned by Great Basin and MGC Ventures.

In periods in which a loss is incurred, the effect of potential issuances of shares under options and convertible notes would be anti-dilutive, and therefore basic and diluted losses per share are the same.

Asset Retirement Obligations .

The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.

The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and amortized over the same period as the underlying asset.

Net loss per share is computed by dividing net loss

by the combined weighted average number of Class A and B common shares

outstanding during each year, which is reduced by the common shares owned by Great Basin and MGC Ventures.

In periods in which a loss is incurred, the effect of

potential issuances of shares under options and convertible notes would be

anti-dilutive, and therefore basic and diluted losses per share are the same.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010

and 2009 (unaudited)

Expressed in U.S.

Retirement Obligations .

The fair value of a liability for an asset retirement

obligation is recognized in the period in which it is incurred if a reasonable

estimate of fair value can be made.

The associated asset retirement costs are

capitalized as part of the carrying amount of the long-lived asset and

amortized over the same period as the underlying asset.

Convertible Notes .

Convertible notes are initially recorded at fair value and subsequently measured at amortized cost.

The fair value is allocated between the equity and debt component parts based on their respective fair values at the time of issuance and recorded net of transaction costs.

The equity portion of the notes is estimated using the residual value method.

The fair value of the debt component is accreted to the face value of the notes using the effective interest rate method over the expected life of the notes, with the resulting charge recorded as interest expense.

Interest expense allocable to the qualifying cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.

notes are initially recorded at fair value and subsequently measured at

amortized cost.

The fair value is allocated between the equity and debt

component parts based on their respective fair values at the time of issuance

and recorded net of transaction costs.

The equity portion of the notes is

estimated using the residual value method.

The fair value of the debt component

is accreted to the face value of the notes using the effective interest rate

method over the expected life of the notes, with the resulting charge recorded

as interest expense.

Interest expense allocable to the qualifying cost of

developing mining properties and to constructing new facilities is capitalized

until assets are ready for their intended use.

Comprehensive Income .

Comprehensive income includes net income or loss and other comprehensive income.

Other comprehensive income may include unrealized gains and losses on available-for-sale securities, gains and losses on certain derivative instruments and foreign currency gains and losses from self sustaining foreign operations.

The Company presents comprehensive income and its components in the consolidated statements of comprehensive loss.

Financial Instruments.

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts payable, accrued expenses and convertible notes.

Cash and cash equivalents are classified as held for trading and any changes in fair value are charged to the statement of operations.

Marketable equity securities are classified as available for sale with any unrealized gain or loss recorded in other comprehensive income.

Marketable debt securities are classified as held-to-maturity and are measured at amortized cost using the effective interest rate method.

Other financial liabilities are accounted for at cost or amortized cost.

Comprehensive income includes net income or loss and other comprehensive

Other comprehensive income may include unrealized gains and losses on

available-for-sale securities, gains and losses on certain derivative

instruments and foreign currency gains and losses from self sustaining foreign

The Company presents comprehensive income and its components in the

consolidated statements of comprehensive loss.

The Company’s

financial instruments consist of cash and cash equivalents, marketable

securities, accounts payable, accrued expenses and convertible notes.

cash equivalents are classified as held for trading and any changes in fair

value are charged to the statement of operations.

Marketable equity securities

are classified as available for sale with any unrealized gain or loss recorded

in other comprehensive income.

Marketable debt securities are classified as

held-to-maturity and are measured at amortized cost using the effective

interest rate method.

Other financial liabilities are accounted for at cost or

amortized cost.

Disposal of Long-Lived Assets.

Long-Lived assets are classified as held for sale in the period in which certain criteria are met.

Assets held for sale are measured at the lower of carrying amount or fair value less cost to sell and are not depreciated as long as they remain classified as held for sale.

New Accounting Policies

Future Accounting Policies :

CICA Section 1582, Business Combinations.

This Section replaces Section 1581 and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.

CICA Section 1601, Consolidated Financial Statements.

This section establishes standards for the preparation of consolidated financial statements and applies to financial reporting periods beginning on or after January 1, 2011.

The Company is currently evaluating the impact of this Section on its financial statements.

CICA Section 1602, Non-Controlling Interests.

This section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination and applies to financial reporting periods beginning on or after January 1, 2011.

The Company is currently evaluating the impact of this Section on its financial statements.

Expropriation of Brisas Project by Venezuelan Government and Arbitration

From 1992 to 2009 we focused substantially all of our management and financial resources on the development of the Brisas gold and copper project located in the Kilometre 88 mining district of the State of Bolivar in south-eastern Venezuela.

After approval of the Brisas operating plan and the Environmental and Social Impact Study in 2003 and 2007, respectively, the Ministry of Environment issued in March 2007, the Authorization to Affect for the Brisas Project.

In April 2008, the Ministry of Environment revoked the Authorization to Affect without prior notification.

After months of continuous efforts to meet with representatives of the Venezuelan government to resolve the issues related to the revocation of the Authorization to Affect, on April 21, 2009 the Company notified the Venezuelan government of the existence of a dispute under the Agreement between the Government of Canada and the Government of the Republic of Venezuela for the Promotion and Protection of Investments (“Canada – Venezuela Treaty”).

After additional months of efforts to meet with representatives of the Venezuelan government to resolve the issues related to the revocation of the Authorization to Affect, on October 21, 2009 we filed a Request for Arbitration under the Additional Facility Rules of ICSID, against the Bolivarian Republic of Venezuela (“Respondent”).

On October 26, 2009, Venezuelan government personnel arrived at the Brisas Project camp site, claimed ownership of the Brisas Alluvial Concession, seized assets, expelled our personnel and took physical possession of the property.

Subsequently, on November 4, 2009, the Venezuelan government notified the Company through the issuance of an Administrative Act, dated October 20, 2009, of its intent to cancel the Company’s underlying hard rock concession which was formally cancelled in June 2010.

In November 2009 our Request for Arbitration was registered by ICSID (Gold Reserve Inc.

Long-Lived assets are classified as held for sale in

the period in which certain criteria are met.

Assets held for sale are measured

at the lower of carrying amount or fair value less cost to sell and are not

depreciated as long as they remain classified as held for sale.

Accounting Policies

The Company currently prepares its financial

statements in accordance with Canadian GAAP and includes a footnote reconciliation

Effective January 1, 2011, the Company will adopt US GAAP and will

prepare its financial statements in accordance with US GAAP for all subsequent

US and Canadian filings.

Expropriation of Brisas Project by

Venezuelan Government and Related Arbitration

1992 to 2009 we focused substantially all of our management and financial

resources on the development of the Brisas gold and copper project located in

the Kilometre 88 mining district of the State of Bolivar in south-eastern Venezuela.

After approval of the Brisas operating plan and the Environmental and Social

Impact Study in 2003 and 2007, respectively, the Ministry of Environment issued

in March 2007, the Authorization to Affect for the Brisas Project.

2008, the Ministry of Environment revoked the Authorization to Affect without

prior notification.

months of continuous efforts to meet with representatives of the Venezuelan

government to resolve the issues related to the revocation of the Authorization

to Affect, on April 21, 2009 the Company notified the Venezuelan government of

the existence of a dispute under the Agreement between the Government of Canada

and the Government of the Republic of Venezuela for the Promotion and

Protection of Investments (“Canada – Venezuela Treaty”).

additional months of efforts to meet with representatives of the Venezuelan

government to resolve the issues related to the revocation of the Authorization

to Affect, on October 21, 2009 we filed a Request for Arbitration under the

Additional Facility Rules of the International Centre for Settlement of

Investment Disputes (ICSID), against the Bolivarian Republic of Venezuela (“Respondent”).

On October 26, 2009, Venezuelan

government personnel arrived at the Brisas Project camp site, claimed ownership

of the Brisas Alluvial Concession, seized assets, expelled our personnel and

took physical possession of the property.

Subsequently, on November 4, 2009,

the Venezuelan government notified the Company through the issuance of an Administrative

Act, dated October 20, 2009, of its intent to cancel the Company’s underlying

hard rock concession which was formally cancelled in June 2010.

In November 2009 our Request for Arbitration was

registered by ICSID (Gold Reserve Inc.

Bolivarian Republic of Venezuela (ICSID Case No.

ARB(AF)/09/1)).

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

As a result of the expropriation of the Brisas Project by the Venezuelan government we no longer have control or physical access to the project which has caused the Company to discontinue the development of its Venezuelan properties, including Brisas and Choco 5 (which was a grass-roots exploration property also located in the State of Bolivar) and discontinue reporting mineral reserves for Brisas.

In 2009 we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets including an adjustment for the estimated net realizable value of certain processing and related equipment purchased for the Brisas Project of approximately $14.5 million.

The realizable value of the remaining processing and related equipment may be different than managements current estimate.

The Company is seeking compensation in the arbitration for all of the loss and damage resulting from Venezuelas wrongful conduct which includes the full market value of the legal rights to develop the Brisas Project.

Our current arbitration efforts consist of engaging and assisting technical, legal, and financial experts and developing and filing our initial pleadings.

The first session was held with the Tribunal on April 23, 2010 with several procedural matters agreed to, including the tentative time schedule for the Arbitration.

The filing of our initial written submission, known as the Memorial, is planned for September 2010.

The Canada-Venezuela Treaty requires as a precondition to bringing an arbitration claim under the Treaty that an investor and any enterprise the investor owns directly or indirectly that has suffered losses that form the basis of a claim by the investor to "waive[ ] its right to initiate or continue any other proceedings in relation to the measure that is alleged to be in breach of [the Treaty] before the courts or tribunals of the Contracting Party concerned or in a dispute settlement procedure of any kind."

As a result, the Company and its relevant subsidiaries waived their right to commence or continue before Venezuelan courts or tribunals with other legal or administrative challenges to the conduct that forms the basis of the ICSID claim, including the revocation of the Authorization to Affect and the denial of the extension of the Brisas Alluvial and El Pauji Concessions.

The Tribunal held the first session with the parties on April 23, 2010 during which time several procedural matters were agreed to, including the time schedule for the Arbitration.

In compliance with that schedule, we filed our initial written submission, known as the Memorial, on September 24, 2010.

The Respondent is required to file its reply to the Companys Memorial by March 7, 2011.

Thereafter, further written submissions are scheduled to be made prior to the oral hearings, which are scheduled to commence on December 5, 2011.

As a precondition to bringing an arbitration claim under the Canada-Venezuela Treaty the Company waived its right to commence or continue before Venezuelan courts or tribunals with other legal or administrative challenges to the conduct that forms the basis of this ICSID claim, including the revocation of the Authorization to Affect and the denial of the extension of the Brisas Alluvial and El Pauji Concessions.

Both concessions were part of the Brisas Project.

Cash and Cash Equivalents

June 30, December 31,

September 30, December 31,

Bank deposits $ 48,124,779 $ 53,900,646

1 unchanged sentence

Total $ 55,440,670 $ 60,962,813

The above amounts exclude restricted cash of approximately $9 million and $9.5 million as at June 30, 2010 and December 31, 2009, respectively.

The above amounts exclude restricted cash of approximately $9 million and $9.5 million as at September 30, 2010 and December 31, 2009, respectively.

See Note 13, Commitments.

At June 30, 2010 and December 31, 2009, the Company had approximately $217,000 and $59,000 respectively, in Venezuela and banks outside Canada and the U.S.

At September 30, 2010 and December 31, 2009, the Company had approximately $151,000 and $59,000 respectively, in Venezuela and banks outside Canada and the U.S.

Marketable Debt Securities

June 30, December 31,

September 30, December 31,

Amortized cost $ 10,032,392 $ 10,175,020

1 unchanged sentence

Marketable Equity Securities

June 30, December 31,

September 30, December 31,

Fair value at beginning of year $ 598,825 $ 1,342,760

1 unchanged sentence

Dispositions, at cost (345,936) (2,102,548)

Realized (gain) loss on sale (106,551) (2,274,848)

Unrealized gain (loss) 555,735 1,498,168

Realized gain on sale (148,593) (2,274,848)

Unrealized gain 1,234,952 1,498,168

Fair value at balance sheet date $ 2,020,383 $ 598,825

The Companys marketable equity securities are classified as available-for-sale and are recorded at quoted market value with gains and losses recorded within other comprehensive income until realized.

As of June 30, 2010 and December 31, 2009 marketable securities had a cost basis of $1,204,985 and $876,049, respectively.

As of September 30, 2010 and December 31, 2009 marketable securities had a cost basis of $1,211,249 and $876,049, respectively.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

Financial Instruments

The fair values as at June 30, 2010 and December 31, 2009 along with the carrying amounts shown on the consolidated balance sheets for each classification of financial instrument are as follows:

June 30, 2010 December 31, 2009

The fair values as at September 30, 2010 and December 31, 2009 along with the carrying amounts shown on the consolidated balance sheets for each classification of financial instrument are as follows:

September 30, 2010 December 31, 2009

Carrying Fair Carrying Fair

13 unchanged sentences

Level 1 inputs are quoted prices in active markets for identical assets or liabilities, Level 2 inputs are inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability and Level 3 inputs are unobservable inputs for the asset or liability that reflect the entitys own assumptions.

June 30, 2010 Level 1 Level 2 Level 3

September 30, 2010 Level 1 Level 2 Level 3

Cash and cash equivalents $ 55,440,670 $ 55,440,670

14 unchanged sentences

If the notes were to reach their contractual maturity date of June 15, 2022, additional interest payments would amount to $56.3 million over the additional ten year term of the notes.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

Payments due by Period

8 unchanged sentences

The Companys cash, value added tax and other monetary assets and liabilities that are held in Venezuelan and Canadian currency are subject to fluctuations against the US dollar.

A 10% weakening of those currencies against the US dollar would have increased (decreased) the Companys net gain or loss from the translation of foreign currency denominated financial instruments, for the six months ended June 30, 2010 and 2009, by the amounts shown below.

A 10% weakening of those currencies against the US dollar would have increased (decreased) the Companys net gain or loss from the translation of foreign currency denominated financial instruments, for the nine months ended September 30, 2010 and 2009, by the amounts shown below.

Venezuelan Bolívar $ (13,383) $ 64,552

15 unchanged sentences

There were no changes to the Companys capital management during 2010.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

Property, Plant and Equipment

Cost Depreciation Net

June 30, 2010

September 30, 2010

United States

22 unchanged sentences

Total $ 39,902,423 $ (1,780,321) $ 38,122,102

Machinery and equipment deposits include amounts paid for infrastructure and milling equipment either in the manufacturing stage or being stored by the manufacturer.

Machinery and equipment deposits include amounts paid for infrastructure and milling equipment either in the manufacturing stage or completed and being stored.

The realizable value of the remaining processing and related equipment may be different than managements current estimate.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

The KSOP Plan, adopted in 1990 for the benefit of employees, is comprised of two parts, (1) a salary reduction component, or 401(k), and (2) an employee share ownership component, or ESOP.

3 unchanged sentences

The Company allocated shares or made cash contributions to eligible participants for the Plan years 2010, 2009 and 2008 valued at $0, $57,292 and $269,679, respectively.

As of June 30, 2010, 22,246 common shares remain unallocated to plan participants.

As of September 30, 2010, 22,246 common shares remain unallocated to plan participants.

Stock Based Compensation

5 unchanged sentences

The 1997 Plan remains available for insiders, employees and consultants of the Company.

Combined share option transactions for the six months ended June 30, 2010 and 2009 are as follows:

Combined share option transactions for the nine months ended September 30, 2010 and 2009 are as follows:

Weighted Weighted

17 unchanged sentences

Exercise price for exercisable shares $0.29 - $ 5.36 $ 0.29 - $ 5.36

The following table relates to stock options at June 30, 2010:

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

The following table relates to stock options at September 30, 2010:

Weighted Average

9 unchanged sentences

$0.29 - $5.36 3,890,153 1.82 $2.54 3,462,364 $2.81

The Company recorded compensation expense during the six months ended June 30, 2010 and 2009 of $81,172 and $384,742, respectively, for stock options granted.

During the six months ended June 30, 2010 and 2009, 0 and 547,500 new options were granted, respectively.

The Company recorded compensation expense during the nine months ended September 30, 2010 and 2009 of $91,862 and $475,398, respectively, for stock options granted.

During the nine months ended September 30, 2010 and 2009, 0 and 547,500 new options were granted, respectively.

The fair value of options granted in 2009 was calculated at $323,449 using the Black-Scholes model based on the following assumptions:

7 unchanged sentences

As of June 30, 2010 an aggregate of 1,732,500 unvested Units have been granted to directors and executive officers of the Company and 315,000 Units have been granted to other employees.

As of September 30, 2010 an aggregate of 1,732,500 unvested Units have been granted to directors and executive officers of the Company and 315,000 Units have been granted to other employees.

The value of these units, based on the grant date value of the Class A shares, was approximately $8.9 million

2 unchanged sentences

The Chief Executive Officer, President, Vice President-Finance and Vice President-Administration of the Company are also officers and/or directors and shareholders of MGC Ventures.

The Company owned 12,062,953 common shares of MGC Ventures at June 30, 2010 and December 31, 2009, which represented 44% of its outstanding shares.

The Company owned 12,062,953 common shares of MGC Ventures at September 30, 2010 and December 31, 2009, which represented 44% of its outstanding shares.

The Company believes it has control over MGC Ventures due to the combined shareholdings of the Company and its officers and directors.

MGC Ventures owned 258,083 common shares of the Company at June 30, 2010 and December 31, 2009.

In addition, MGC Ventures owned 280,000 common shares of Great Basin at June 30, 2010 and December 31, 2009.

MGC Ventures owned 258,083 common shares of the Company at September 30, 2010 and December 31, 2009.

In addition, MGC Ventures owned 0 and 280,000 common shares of Great Basin at September 30, 2010 and December 31, 2009, respectively.

During the last three years, the Company sublet a portion of its office space to MGC Ventures for $6,000 per year.

1 unchanged sentence

The Chief Executive Officer, President, Vice President-Finance and Vice President-Administration of the Company are also officers and/or directors and shareholders of Great Basin.

The Company owned 15,661,595 common shares of Great Basin at June 30, 2010 and December 31, 2009, which represented 45% of its outstanding shares.

The Company owned 15,661,595 common shares of Great Basin at September 30, 2010 and December 31, 2009, which represented 45% of its outstanding shares.

The Company believes it has control over Great Basin due to the combined shareholdings of the Company and its officers and directors.

Great Basin owned 491,192 common shares of the Company at June 30, 2010 and December 31, 2009.

Great Basin also owned 170,800 common shares of MGC Ventures at June 30, 2010 and December 31, 2009.

Great Basin owned 491,192 common shares of the Company at September 30, 2010 and December 31, 2009.

Great Basin also owned 0 and 170,800 common shares of MGC Ventures at September 30, 2010 and December 31, 2009, respectively.

During the last three years, the Company sublet a portion of its office space to Great Basin for $6,000 per year.

In mid 2007, we commenced procurement efforts for the Brisas Project and placed orders totaling approximately $125 million for a gyratory crusher, pebble crushers, SAG and ball mills, mill motors, and other equipment for the Brisas Project.

Since the revocation of the Authorization to Affect, the Company has sold certain equipment (one SAG mill, primary crusher, regrind mill, two ball mills (35,000 tonne per day through-put) and related motors as well as mobile equipment) originally costing approximately $61.4 million.

The Company recovered approximately $35.1 million of progress payments and the purchaser assumed the Company's remaining payment obligations of approximately $21.9 million resulting in a combined loss on sale of equipment of approximately $4.4 million.

As of June 30, 2010, the Company has equipment commitments totaling $61.7 million and has made payments on these orders of $52.7 million.

Payments on the remaining commitments of $9 million are due within one year.

In connection with a portion of these commitments, the Company opened an irrevocable standby letter of credit with a Canadian chartered bank providing security on the performance of obligations.

As of June 30, 2010 and December 31, 2009, the Company had restricted cash of $9 million and $9.5 million, respectively, as required by this letter of credit.

Shareholder Rights Plan

The Company instituted a shareholder rights plan (the “Rights Plan”) in 1999.

Since the original approval by the shareholders, the Rights Plan and the Rights Plan agreement have been amended and continued from time to time.

In June 2009, the shareholders approved certain amendments to the Rights Plan including continuing the Shareholder Rights Plan until June 30, 2012.

In December 2008, the Company’s Board of Directors amended the Rights Plan by extending the definition of “Permitted Bid” to include a bid by an entity which has confidential information about the Company that has executed a confidentiality and standstill agreement within three months prior to the commencement of the bid.

The Rights Plan is intended to give adequate time for shareholders of the Company to properly assess the merits of a take-over bid without pressure and to allow competing bids to emerge.

The Rights Plan is designed to give the Board of Director’s time to consider alternatives to allow shareholders to receive full and fair value for their common shares.

One right is issued in respect of each outstanding share.

The rights become exercisable only when a person, including any party related to it or acting jointly with it, acquires or announces its intention to acquire 20% or more of the Company’s outstanding shares without complying with the “permitted bid” provisions of the Rights Plan.

Each right would, on exercise, entitle the holder, other than the acquiring person and related persons, to purchase Class A common shares of the Company at a 50% discount to the market price at the time.

Common Shares and Equity Units

During the six months ended June 30, 2010, the Company issued 141,666 shares at an average price of $0.29 per share upon exercise of stock options and 201,500 shares at an average price of $1.18 per share as compensation.

As of June 30, 2010, there were a total of 58,038,163 Class A and 500,236 Class B shares issued.

During the six months ended June 30, 2009, the Company issued 551,500 shares at an average price of $0.71 per share as compensation.

Convertible Notes

In May 2007, the Company issued $103,500,000 aggregate principal amount of its 5.50% Senior subordinated convertible notes.

The notes are unsecured, bear interest at a rate of 5.50% annually, pay interest semi-annually in arrears and are due on June 15, 2022.

The notes are convertible into Class A common shares of the Company at the initial conversion rate, subject to adjustment, of 132.626 shares per $1,000 principal amount (equivalent to a conversion price of $7.54).

Upon conversion, the Company will have the option, unless there has occurred and is then continuing an event of default under the Company’s indenture, to deliver common shares, cash or a combination of common shares and cash for the notes surrendered.

The note holders have the option to require the Company to repurchase the notes on June 15, 2012, at a price equal to 100% of the principal amount of the notes plus accrued but unpaid interest.

The Company may elect to satisfy its obligation to pay the repurchase price, in whole or in part, by delivering Common Shares.

In the event of a change of control of the Company, the Company may be required to offer to repurchase the notes at a purchase price equal to 100% of the principal amount of the notes plus accrued but unpaid interest unless there has occurred and is continuing certain events of default under the Company’s indenture.

At any time on or after June 16, 2010, and until June 15, 2012, the Company may redeem the notes, in whole or in part, for cash at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest if the closing sale price of the Common Shares is equal to or greater than 150% of the conversion price then in effect and the closing price for the Company’s Common Shares has remained above that price for at least twenty trading days in the period of thirty trading days preceding the Company’s notice of redemption.

Beginning on June 16, 2012, the Company may, at its option, redeem all or part of the notes for cash at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest.

The covenants contained in the 5.50% subordinated note indenture are limited to administrative issues such as payments of interest, maintenance of office or agency location, delivery of reports and other related issues.

Likewise, events of default are defined as failure to pay interest and principal amounts when due, default in the performance of covenants, failure to convert notes upon holder’s exercise of conversion rights and similar provisions or the Company’s failure to give notice of a fundamental change which is generally defined as events related to a change of control in the Company.

Canadian accounting standards require the Company to allocate the notes between their equity and debt component parts based on their respective fair values at the time of issuance.

The liability component was computed by discounting the stream of future payments of interest and principal at the prevailing market rate for a similar liability that does not have an associated equity component.

The equity portion of the notes was estimated using the residual value method at approximately $29 million, net of issuance costs.

The expected life of the notes is an estimate and is subject to change, if warranted by facts and circumstances related to the potential early redemption of the notes by either the Company or the holders.

Interest and accretion expense allocable to the qualifying cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.

The Company capitalized interest and accretion on the notes until October, 2009, when the Company filed for arbitration and when the Venezuelan government expropriated Brisas.

Thereafter all interest and accretion on the notes has been expensed.

As of June 30, 2010, convertible notes with a face value of $1,151,000 had been settled in cash or repurchased by the Company at a total cost of approximately $451,000.

Takeover Defense and Related Litigation

On December 15, 2008, Rusoro Mining Ltd.

(“Rusoro”) commenced an unsolicited offer to acquire all of the outstanding shares and equity units of the Company in consideration for three shares of Rusoro for each Company share or equity unit.

On December 16, 2008, the Company filed an action in the Ontario Superior Court of Justice against Rusoro and Rusoro’s financial advisor Endeavour Financial International Corporation (“Endeavour”) seeking an injunction restraining Rusoro and Endeavour from proceeding with Rusoro’s unsolicited offer, significant monetary damages, and various other items.

Endeavour was the Company’s financial advisor from 2004 until shortly after the commencement of Rusoro’s offer.

On February 10, 2009, the Ontario Superior Court of Justice granted an interlocutory injunction restraining Rusoro from proceeding with any hostile takeover bid to acquire the shares of the Company until the conclusion and disposition at trial of the action commenced by the Company.

The injunction was granted by the Court following a motion by the Company on the basis that Rusoro had access to or benefited from the use of the Company’s confidential information as a result of Rusoro’s relationship with Endeavour.

The Court also issued an interlocutory injunction restraining Endeavour from having any involvement with a hostile takeover bid for the Company.

The Court further required that Rusoro, Endeavour and their agents return to the Company both all the confidential information of the Company and also anything produced from that confidential information and pay the court costs.

Following the issuance of the interlocutory injunctions, Rusoro withdrew its unsolicited offer to acquire the outstanding shares and equity units of the Company.

On February 15, 2009, Rusoro and Endeavour both served a motion with the Ontario Superior Court of Justice seeking permission to appeal to the Divisional Court the February 10, 2009 order that was granted against them.

The Company opposed these motions which were heard in Toronto on April 2, 2009.

On April 6, 2009 the permission to appeal was denied.

Rusoro has filed a counterclaim against the Company for, among other things, damages of Cdn $102.5 million allegedly arising from the Company’s successful motion for an interlocutory injunction.

Endeavour has filed a $0.5 million counter claim against the Company relating to the lost opportunity to earn a success fee from the successful completion of the Rusoro offer.

The Company recently added two additional defendants and amended the claim for monetary damages.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010

and 2009 (unaudited)

Expressed in U.S.

mid 2007, we commenced procurement efforts for the Brisas Project and placed

orders totaling approximately $125 million for a gyratory crusher, pebble

crushers, SAG and ball mills, mill motors, and other equipment for the Brisas

Since the revocation of the Authorization to Affect, the Company has

sold certain equipment originally costing approximately $61.4 million.

Company recovered approximately $35.1 million of progress payments and the

purchaser assumed the Company's remaining payment obligations of approximately

$21.9 million resulting in a combined loss on sale of equipment of approximately

$4.4 million.

As of September 30, 2010, the Company had remaining equipment

commitments of approximately $9 million due within one year.

opened an irrevocable standby letter of credit with a Canadian chartered bank

providing security on the performance of a portion of these obligations.

September 30, 2010 and December 31, 2009, the Company had restricted cash of $9

million and $9.5 million, respectively, as required by this letter of credit.

The Company instituted a shareholder rights plan (the

“Rights Plan”) in 1999.

Since the original approval by the shareholders, the

Rights Plan and the Rights Plan agreement have been amended and continued from

time to time.

In June 2009, the shareholders approved certain amendments to the

Rights Plan including continuing the Shareholder Rights Plan until June 30,

In December 2008, the Company’s Board of Directors amended the Rights

Plan by extending the definition of “Permitted Bid” to include a bid by an entity

which has confidential information about the Company that has executed a

confidentiality and standstill agreement within three months prior to the

commencement of the bid.

The Rights Plan is intended to give adequate time for

shareholders of the Company to properly assess the merits of a take-over bid

without pressure and to allow competing bids to emerge.

The Rights Plan is

designed to give the Board of Director’s time to consider alternatives to allow

shareholders to receive full and fair value for their common shares.

is issued in respect of each outstanding share.

The rights become exercisable

only when a person, including any party related to it or acting jointly with

it, acquires or announces its intention to acquire 20% or more of the Company’s

outstanding shares without complying with the “permitted bid” provisions of the

Each right would, on exercise, entitle the holder, other than the

acquiring person and related persons, to purchase Class A common shares of the

Company at a 50% discount to the market price at the time.

Shares and Equity Units

the nine months ended September 30, 2010, the Company issued 141,666 shares at

an average price of $0.29 per share upon exercise of stock options and 231,000

shares at an average price of $1.15 per share as compensation.

As of September

30, 2010, there were a total of 58,067,663 Class A and 500,236 Class B shares

During the nine months ended September 30, 2009, the Company issued 551,500

shares at an average price of $0.71 per share as compensation.

May 2007, the Company issued $103,500,000 aggregate principal amount of its

5.50% Senior subordinated convertible notes.

The notes are unsecured, bear

interest at a rate of 5.50% annually, pay interest semi-annually in arrears and

are due on June 15, 2022.

The notes are convertible into Class A common shares

of the Company at the initial conversion rate, subject to adjustment, of

132.626 shares per $1,000 principal amount (equivalent to a conversion price of

Upon conversion, the Company will have the option, unless there has

occurred and is then continuing an event of default under the Company’s

indenture, to deliver common shares, cash or a combination of common shares and

cash for the notes surrendered.

The note holders have the

option to require the Company to repurchase the notes on June 15, 2012, at a

price equal to 100% of the principal amount of the notes plus accrued but

unpaid interest.

The Company may elect to satisfy its obligation to pay the

repurchase price, in whole or in part, by delivering Common Shares.

event of a change of control of the Company, the Company may be required to

offer to repurchase the notes at a purchase price equal to 100% of the principal

amount of the notes plus accrued but unpaid interest unless there has occurred

and is continuing certain events of default under the Company’s indenture.

At any time on or after June

16, 2010, and until June 15, 2012, the Company may redeem the notes, in whole

or in part, for cash at a redemption price equal to 100% of the principal

amount being redeemed plus accrued and unpaid interest if the closing sale

price of the Common Shares is equal to or greater than 150% of the conversion

price then in effect and the closing price for the Company’s Common Shares has

remained above that price for at least twenty trading days in the period of

thirty trading days preceding the Company’s notice of redemption.

June 16, 2012, the Company may, at its option, redeem all or part of the notes

for cash at a redemption price equal to 100% of the principal amount being

redeemed plus accrued and unpaid interest.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010

and 2009 (unaudited)

Expressed in U.S.

covenants contained in the 5.50% subordinated note indenture are limited to

administrative issues such as payments of interest, maintenance of office or

agency location, delivery of reports and other related issues.

Likewise, events

of default are defined as failure to pay interest and principal amounts when

due, default in the performance of covenants, failure to convert notes upon

holder’s exercise of conversion rights and similar provisions or the Company’s

failure to give notice of a fundamental change which is generally defined as

events related to a change of control in the Company.

accounting standards require the Company to allocate the notes between their

equity and debt component parts based on their respective fair values at the

time of issuance.

The liability component was computed by discounting the

stream of future payments of interest and principal at the prevailing market

rate for a similar liability that does not have an associated equity component.

The equity portion of the notes was estimated using the residual value method

at approximately $29 million, net of issuance costs.

The fair value of the debt

component is accreted to the face value of the notes using the effective

interest rate method over the expected life of the notes, with the resulting

charge recorded as interest expense.

The expected life of the notes is an estimate

and is subject to change, if warranted by facts and circumstances related to

the potential early redemption of the notes by either the Company or the

Interest and accretion expense allocable to the qualifying cost of

developing mining properties and to constructing new facilities is capitalized

until assets are ready for their intended use.

The Company capitalized interest

and accretion on the notes until October, 2009, when the Company filed for

arbitration and when the Venezuelan government expropriated Brisas.

all interest and accretion on the notes has been expensed.

As of September 30,

2010, convertible notes with a face value of $1,151,000 had been settled in cash

or repurchased by the Company at a total cost of approximately $451,000.

Defense and Related Litigation

December 15, 2008, Rusoro Mining Ltd.

(“Rusoro”) commenced an unsolicited offer

to acquire all of the outstanding shares and equity units of the Company in

consideration for three shares of Rusoro for each Company share or equity unit.

On December 16, 2008, the Company filed an action in the Ontario Superior Court

of Justice against Rusoro and Rusoro’s financial advisor Endeavour Financial

International Corporation (“Endeavour”) seeking an injunction restraining

Rusoro and Endeavour from proceeding with Rusoro’s unsolicited offer,

significant monetary damages, and various other items.

Endeavour was the

Company’s financial advisor from 2004 until shortly after the commencement of

Rusoro’s offer.

February 10, 2009, the Ontario Superior Court of Justice granted an

interlocutory injunction restraining Rusoro from proceeding with any hostile

takeover bid to acquire the shares of the Company until the conclusion and

disposition at trial of the action commenced by the Company.

The injunction was

granted by the Court following a motion by the Company on the basis that Rusoro

had access to or benefited from the use of the Company’s confidential

information as a result of Rusoro’s relationship with Endeavour.

The Court also

issued an interlocutory injunction restraining Endeavour from having any

involvement with a hostile takeover bid for the Company.

The Court further

required that Rusoro, Endeavour and their agents return to the Company both all

the confidential information of the Company and also anything produced from

that confidential information and pay the court costs.

Following the issuance

of the interlocutory injunctions, Rusoro withdrew its unsolicited offer to

acquire the outstanding shares and equity units of the Company.

February 15, 2009, Rusoro and Endeavour both served a motion with the Ontario

Superior Court of Justice seeking permission to appeal to the Divisional Court the February 10, 2009 order that was granted against them.

opposed these motions which were heard in Toronto on April 2, 2009.

2009 the permission to appeal was denied.

Rusoro has filed a counterclaim

against the Company for, among other things, damages of Cdn $102.5 million

allegedly arising from the Company’s successful motion for an interlocutory

Endeavour has filed a $0.5 million counter claim against the

Company relating to the lost opportunity to earn a success fee from the

successful completion of the Rusoro offer.

The Company recently added two

additional defendants and amended the claim for monetary damages.

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

Differences Between Canadian and U.S.

4 unchanged sentences

Canadian GAAP Change U.S.

June 30, 2010

September 30, 2010

Current assets $ 68,193,234 $ $ 68,193,234

5 unchanged sentences

100,451,962 4,354,006 104,805,968

Noncontrolling interest F 2,275,026 (2,275,026)

Shareholders equity

8 unchanged sentences

KSOP debt (110,691) (110,691)

10,957,712 (4,925,999) 6,031,713

Total Gold Reserve Inc.

equity 4,484,564 (4,354,006) 130,558

Noncontrolling interest F 2,275,026 2,275,026

Total Equity 4,484,564 (2,078,980) 2,405,584

$ 107,211,552 $ $ 107,211,552

8 unchanged sentences

97,717,721 6,048,554 103,766,275

Noncontrolling interest F 2,279,699 (2,279,699)

Shareholders equity

1 unchanged sentence

Equity component of convertible notes C 28,652,785 (28,652,785)

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

Less, common shares & equity units

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KSOP debt (110,691) (110,691)

19,917,600 (6,048,554) 13,869,046

Total Gold Reserve Inc.

equity 19,917,600 (6,048,554) 13,869,046

Noncontrolling interest F 2,279,699 2,279,699

Total Equity 19,917,600 (3,768,855) 16,148,745

$ 119,915,020 $ $ 119,915,020

6 unchanged sentences

GAAP (15,222,398) (9,940,250)

Basic and diluted net loss per share

GAAP $ (0.26) $ (0.17)

Consolidated Summarized Statements of Comprehensive Loss

Net loss under U.S.

GAAP (15,222,398) (9,940,250)

Other comprehensive income (loss)

6 unchanged sentences

GAAP $ (14,136,039) $ (10,650,165)

Basic and diluted net loss per share

GAAP $ (0.15) $ (0.08)

Consolidated Summarized Statements of Cash Flows

8 unchanged sentences

GAAP $ 8,708,068 $ (13,371,932)

Selected Notes to Consolidated Financial Statements

For the Nine Months Ended September 30, 2010 and 2009 (unaudited)

Expressed in U.S.

A Effective September 30, 2008, the Company adopted EIC 172, which requires that the tax benefit of tax loss carryforwards recognized to offset unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale securities, be recognized in net income (loss).

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GAAP, the notes are classified as a liability net of issuance costs and accreted to face value over the term ending on the first put date of the notes.

As of June 30, 2010 and December 31, 2009, an additional $23.7 million and $22.6 million, respectively of accretion expense had been incurred for Canadian GAAP purposes over the amount incurred under U.S.

As of September 30, 2010 and December 31, 2009, an additional $24.3 million and $22.6 million, respectively of accretion expense had been incurred for Canadian GAAP purposes over the amount incurred under U.S.

D Prior to the Brisas expropriation and related arbitration filing, the Company capitalized interest on its convertible notes on an interest avoidance basis.

8 unchanged sentences

Warrants that expired unexercised were subsequently recorded as contributed surplus.

F Under Canadian GAAP, the noncontrolling interest is shown on the balance sheet between liabilities and equity.

Under US GAAP, the nononcontrolling interest is reclassified to equity and shown as a separate component from the equity of the parent.

Additional Balance Sheet disclosure - U.S.

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements