The Brisas Project has been expropriated by the Venezuelan government, and we no longer have control or physical access to the project. As a result, we no longer report mineral reserves for Brisas, and we have discontinued the development of our Venezuelan properties, including Brisas and Choco 5 (which was a grass-roots exploration property also located in the State of Bolivar).  On October 21, 2009, we filed a Request for Arbitration under the Additional Facility Rules of ICSID against the Bolivarian Republic of Venezuela to seek compensation as a result of the expropriation and other violations of the Canada-Venezuela Treaty.  Our request was registered by ICSID in November 2009.  For more information, see “Item 3. Legal Proceedings – ; Arbitration.”  The information contained elsewhere in this Annual Report on Form 10-K relating to our past development efforts, regulatory process and reported mineral reserves of Brisas and Choco 5 are presented only for informational and historical purposes and should not be construed as an indication of our expectations regarding the future development and operation of these properties or the outcome of the arbitration proceedings.

The Venezuelan Ministry of Mines (“MIBAM”) approved the Brisas operating plan during 2003 and in early 2007 the Venezuelan Ministry of Environment (“MinAmb”) approved the Brisas Environmental and Social Impact Study for the Exploitation and Processing of Gold and Copper Ore (“Estudio de Impacto Ambiental y Sociocultural” or “ESIA”).  In March 2007, MinAmb issued the Authorization for the Affectation of Natural Resources for the Construction of Infrastructure and Services Phase of the Brisas Project (the “Authorization to Affect”).  In 2007, we commenced significant pre-construction procurement efforts with the assistance of our EPCM contractor, awarding contracts for Brisas site preparation and construction camp facilities and placing orders for processing equipment, early - -works construction equipment and various other site equipment totaling approximately $125.3 million, accelerated detailed project engineering, hired a number of senior technical staff, completed the sale of approximately $103.5 million of 5.50% senior subordinated convertible notes (“convertible notes”) and $74 million (net of expenses) in new equity, launched a number of environmental and social initiatives and commenced preparation of the Brisas site for construction activities. In April 2008, the MinAmb revoked the 2007 Authorization to Affect. Venezuelan legal counsel advised management that the revocation of the Authorization to Affect was groundless and legally unsupported.

After months of continuous effort to meet with the Venezuelan government and resolve the issues related to the 2008 revocation of the Authorization to Affect and the more recent denial in May 2009 of the normal course extension of the Brisas Alluvial and the El Pauji Concessions (which by Venezuelan law were already renewed), on October 21, 2009 we filed for arbitration against Venezuela at ICSID under the Canada-Venezuela Treaty. In evident retaliation, Venezuelan government personnel arrived at the Brisas Project camp site on October 26, 2009, 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 us through the issuance of an Administrative Act, dated October 20, 2009, of its intent to cancel o ur underlying hard rock concession.

As a result of the expropriation of the Brisas Project by the Venezuelan government and our loss of control and physical access to the project we recorded a $150.7 million non-cash write-off of the capital costs associated with 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. Since acquiring the Brisas Alluvial Concession in 1992, we have spent close to $300 million on the project (including equipment recorded in the Consolidated Balance Sheet and financial, legal and engineering costs incurred in support of our Venezuelan operations and the write-down of previously capitalized costs associated with our Venezuelan operations recorded in the Consolidated Statement of Operations). For more background in formation on the Brisas Project, see “Item 2. Properties.”

The costs incurred since 1992 include property and mineral rights, easements, acquisition costs, equipment expenditures, litigation settlement costs, general and administrative costs and extensive exploration costs including geology, geophysics and geochemistry, approximately 975 drill holes totaling over 200,000 meters of drilling, independent audits of drilling, sampling, assaying procedures and ore reserves methodology, environmental baseline work/socioeconomic studies, hydrology studies, geotechnical studies, mine planning, advanced stage grinding and metallurgical test work, tailings dam designs, milling process flow sheet designs, Environmental Impact Statement and Bankable Feasibility Study, including a number of subsequent updates, and an independent CSA National Instrument 43-101 report which was most recently updated in March 2008. Deta iled engineering for Brisas was approximately 85% complete at the date of its expropriation by the Venezuelan government.

We have no commercial production at this time and, as a result, we have not recorded revenue or cash flows from mining operations and continue to experience losses from operations, a trend we expect to continue unless and until the investment dispute regarding Brisas is resolved favorably to the Company and/or we acquire or invest in an alternative project. Historically we have financed the Company’s operations through the issuance of common stock, other equity securities and convertible debt. The Company has only one operating segment, the exploration and development of mineral properties. Segmented financial information by geographic region is shown in Note 14 to the consolidated financial statements.

Investors are urged to read our filings with U.S. and Canadian securities regulatory agencies, which can be viewed on-line at www.sec.gov, www.sedar.com or at the Company’s website, www.goldreserveinc.com which also includes the Company’s corporate governance policies. Additionally, you can request a copy of any of these documents directly from us.

We prepare our consolidated financial statements in U.S. dollars in accordance with accounting principles generally accepted in Canada (see Note 20, Differences Between Canadian and U.S. GAAP).

The Company’s current financial position and historical results of operations are a product of the Company’s efforts, since 1992, to develop the Brisas Project into an operating mine and more specifically, is a function of our decision, subsequent to the issuance of the Permit to Affect, to place orders to acquire approximately $125 million of equipment, raise $183 million through the issuance of convertible notes and common shares and to continue to incur substantial operating deficits. Likewise our October 2009 Request for Arbitration under the Additional Facility Rules of ICSID and the write-off of the costs associated with our Venezuelan operations will shape the future financial position and results of operations of the Company. We expect the arbitration process to last three to five years, consume substantial management time and cost an estimated $5 to $8 million, excluding the time and funds necessary to collect on any award.

Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in “Part I- Item 1A. Risk Factors” of this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Part II- Item 6. Selected Financial Data” of this report and our consolidated financial statements and related notes. Additional information on the Company can be found at www.sec.gov, www.sedar.com or the Company’s web-site at www.goldreserveinc.com.

As noted elsewhere in this Annual Report on Form 10-K, in 1992 we initiated the exploration and development of the Brisas Project, located in the historic Km 88 mining district of the State of Bolivar in southeastern Venezuela. The Brisas deposit, which is one of the largest undeveloped gold/copper deposits in the world, contains estimated ore reserves of 10.2 million ounces of gold and 1.4 billion pounds of copper. From 1992 to 2009, we focused substantially all our corporate and operations management and financial resources on Brisas. Since acquiring the Brisas Alluvial Concession in 1992, we have spent close to $300 million on the project (including equipment recorded in the Consolidated Balance Sheet and financial, legal and engineering costs incurred in support of our Venezuelan operations and the write-down of previously capitalized co sts associated with our Venezuelan operations recorded in the Consolidated Statement of Operations) developing the Brisas Project into a world class mining project.

Current Plan

As a result of the expropriation of the Brisas Project by the Venezuelan government, our primary objective is to manage the arbitration effort in cooperation with arbitration counsel and various experts, to minimize costs and accelerate its completion, to the extent possible. Substantially all of the key management personnel have been employed by the Company for over 15 years with a single focus of developing the Brisas Project. These individuals possess valuable historical knowledge related to the Brisas Project which is important to the successful execution of our arbitration efforts.

Our other major objectives are to: (1) explore opportunities to settle our dispute with Venezuela; (2) sell Brisas Project assets; (3) redeem, restructure or otherwise modify the terms of the 5.50% subordinated notes; and (4) continue evaluating alternative industry opportunities for an investment transaction. The successful execution of these objectives will be facilitated by the Company’s senior management team which has substantial technical, financial and administrative experience related to the mining industry. The timing of any such new investment or transaction if any, and the amounts that may be required cannot be determined at this time and are subject to available cash, sale of equipment originally slated for the Brisas Project and/or future financings, if any.

Critical Accounting Estimates

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Based on certain probability-weighted alternative outcomes, management considers 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) and compares that to its carrying value and if such expected future net cash flows are less than the carrying value 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  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. Management makes no assurances that the estimated net realizable value of the remaining processing and related equipment can be disposed of for its recorded estimated value. See Note 3 and Note 15 to the consolidated financial statements.

The fair value of the debt component of the Company’s convertible notes 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 holders. At December 31, 2008, we revised our estimate of the expected life of the notes to June 15, 2012 and adjusted the carrying value accordingly. See “Consolidated Balance Sheets - Convertible Notes” and Note 18 to the consolidated financial statements.  The adjusted carrying value was calculated by computing the present value of estimated future interest and principal payments at t he original effective interest rate. As a result of this change, the carrying value of the notes increased by approximately $20.5 million with a corresponding increase in capitalized interest and accretion.

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. We operate and file 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. See “Consolidated Statements of Operations - Income tax expense.”

The Company uses the fair value method of accounting for stock options. The fair value is computed using the Black-Scholes method which utilizes estimates that affect the amounts ultimately recorded as stock based compensation. See Note 11 to the consolidated financial statements.

Through 2006, the Company re-measured its Bolivar denominated transactions at the official exchange rate of Bs. 2,150/$. In 2007, based on new guidance from the American Institute of Certified Public Accountants (“AICPA”) International Practices Task Force (“IPTF”), the Company concluded that the parallel market rate was the most appropriate rate to use to re-measure Bolivar transactions. Accordingly, in 2007 the Company began to use the average rate received in the parallel market to re-measure Bolivar transactions and at December 31, 2007, used the parallel rate to translate Bolivar denominated monetary items. On January 1, 2008 the Venezuelan government modified the currency, fixing the official exchange rate at Bs. 2.15 to US $1.00.  In January 2010, the official rate was adjusted to Bs. 4.3 to US$1.00 for most goods and services and Bs. 2.6 to US1.00 for certain priority items such as basic foods and medicines.  In late 2009, the Venezuelan economy was determined to be highly inflationary. After consideration of the recent events with respect to the Venezuelan currency and economy, the Company continues to believe that it is most appropriate to use the parallel rate to re-measure transactions and to translate Bs. denominated monetary items. 

Significant Accounting Policies

Our accounting policies are described in Note 1 of the consolidated financial statements contained in this Annual Report on Form 10-K for the year ended December 31, 2009. The more significant accounting policies are as follows:

Financial Instruments.  Effective January 1, 2008, the Company adopted CICA Section 3862. This Section requires entities to provide disclosures in their financial statements that enable users to evaluate: (a) the significance of financial instruments for the entity's financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.

Stock Based Compensation. We use the fair value method of accounting for stock options granted to employees and directors.  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.

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 property, plant and equipment.  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 will be amortized based on the estimated proven and probable reserves benefited.  Properties which are abandoned are written-off and properties determined to be impaired are written-down to the estimated fair value.  Interest expense allocable to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.

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 operate. 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 equipme nt may be different than management’s current estimate. See Note 3 and Note 15 to the consolidated financial statements. 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.

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting.  We believe that internal controls over financial reporting no matter how well conceived and operated, can only provide reasonable assurance that their objectives are met. There have been no changes in the Company’s internal control over financial reporting during the twelve months ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Liquidity and Capital Resources

At December 31, 2009 our total financial resources, which include cash and cash equivalents, restricted cash and marketable securities, were approximately $81.2 million compared to $110.4 million at December 31, 2008. The Company’s cash and investments are held primarily is US dollar denominated accounts.

Cash and cash equivalents                                                             $ 60,962,813      $   91,550,167

Restricted cash                                                                                      9,489,777           17,509,672

Total                                                                                                  $ 81,226,435       $ 110,402,599

Overall financial resources decreased approximately $29.2 million from December 31, 2008.  This decrease was primarily due to expenditures for property, plant and equipment of approximately $16.5 million relating to our purchase commitments for the Brisas Project, capitalized interest related to the convertible notes of approximately $4.5 and approximately $16.4 million used by operations more fully described below in results of operations, offset by approximately $7.3 million from sales of equipment.

As of March 30, 2010 we held approximately $77 million in cash, restricted cash and investments, including restricted cash of approximately $9.0 million held pursuant to a letter of credit for certain equipment purchase commitments.

With the write-off of the capitalized costs associated with our Venezuelan operations, the Company’s net book value at December 31, 2009 has decreased to approximately $20 million. The primary future obligation of the Company is the 5.50% senior subordinated notes which may be settled in cash or common shares in the event the holder chooses the one-time option to put the notes back to the Company for repurchase on June 15, 2012 (see Note 18 to the consolidated financial statements). As a result, in the near-term we believe that cash and investment balances and funds available from potential future equipment sales will be sufficient to enable us to fund our activities through 2011.

The timing and extent of additional funding, if any, depends on a number of important factors, including, but not limited to the timing and outcome of our investment dispute with the Venezuelan government, the timing and the amount of proceeds, if any, from the sale of Brisas Project assets, the extent of future acquisitions or investments, if any, status of the financial markets and our share price.

Operating Activities

Cash flow used by operating activities for 2009 was approximately $15.1 million, which was an increase over 2008 of approximately $1.3 million. Although management was successful at reducing certain operating expenses as noted below in Results of Operations, we utilized approximately $3.5 million in 2009 to reduce accounts payable and accrued expenses, the bulk of which related to the cost of defending the Company against the 2008 hostile take-over offer by Rusoro Mining Ltd.

Investing Activities

Purchase of property, plant and equipment                         $ (17,771,441)      $ (38,699,588)     $ (44,689,332)

Net (purchase of) proceeds from marketable securities           (8,042,632)             1,204,582             2,353,286

Proceeds from sale of equipment                                                  7,297,598            19,184,740                            -

Decrease (increase) in restricted cash                                          8,019,895            34,570,931          (52,080,603)

Capitalized interest paid on convertible debt                            (4,507,319)           (5,688,430)           (3,273,187)

Other                                                                                                     (44,944)              (117,760)              (108,134)

Investing activities during the 12 months ended December 31, 2009 included net investment in property, plant and equipment of approximately $17.8 million compared to $38.7 million and $44.7 million in 2008 and 2007, respectively. These payments primarily relate to obligations related to the 2007 equipment orders for Brisas originally totaling approximately $125 million.  In 2009, net purchases of marketable securities totaled approximately $8 million compared to net proceeds of $1.2 million and $2.4 million in 2008 and 2007, respectively.  The increase in marketable securities primarily relates to investments in debt securities in an effort to improve the overall rate of return on invested cash.

As a result of the April 2008 revocation of the Authorization to Affect, the Venezuelan government’s inability to clearly articulate, at that time, its intentions related to Brisas and the uncertainty of the future time schedule, the Board of Directors, in early 2008, authorized management to evaluate the sale or a redeployment to an alternative project of all or a portion of the equipment previously ordered for Brisas.  In 2008 and 2009, we sold certain equipment (one SAG mill, two ball mills (35,000 tonne per day through-put) and related motors as well as mobile equipment) originally costing approximately $53.1 million. The Company recovered approximately $26.5 million of progress payments and the purchaser assumed the remaining payment obligations of approximately $21.9 million resulting in a combined loss on sale of equipment of approximately $4.7 million. As of December 31, 2009, the Company had remaining equipment purchase commitments of approximately $­­­­­11.0 million (due in 2010) relating to previous equipment orders.

In connection with a portion of these commitments, we opened an irrevocable standby letter of credit with a Canadian chartered bank providing security on the performance of obligations and secured by cash.  As of December 31, 2009 and 2008, the Company had restricted cash of $9.5 million and $17.5 million, respectively as required by this letter of credit.  The $8.0 million reduction of restricted cash during 2009 was the result of $5.2 million of payments and a $2.8 million release of collateral related to the cancellation of a portion of the equipment. Similarly, changes in 2008 and 2007 were a result of progress payments for equipment commitments and the origination of the commitment, respectively.

The Company capitalized interest related to the convertible notes until October 2009 when we lost control and physical access to the Brisas Project. The reduction in 2009 over that recorded in 2008 relates to the amounts that were incurred subsequent to October 2009 which were expensed in the period incurred. 

Financing Activities

Net proceeds from issuance of convertible notes                                        -                               -     $   98,430,066

Net proceeds from issuance of common shares                          $      7,088              $ 309,205              74,349,097

Extinguishment of convertible notes                                               (415,254)                 (35,867)                             -

In May 2007 we completed the sale of $103.5 million aggregate principal amount of 5.50% convertible notes due June 15, 2022 and 13,762,300 Class A common shares at $5.80 per share (Cdn$6.42 per share) for approximately $79.8 million for a combined total of approximately $183.3 million before expenses and fees. Although the convertible notes have a face value of $103.5 million, they are recorded on the balance sheet at approximately $93.7 million as Canadian accounting standards require the Company to allocate the proceeds from the notes between their equity and debt components based on their respective fair values at the time of issuance.

The convertible notes are due in June 2022. The holders, as more fully described in Note 18 to the consolidated financial statements, have a one time 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 repurchase of the notes for cash would require substantial funds and this option may not occur if we lack sufficient liquidity at that time. As a result, we may elect to satisfy our obligation to pay the repurchase price, in whole or in part, by delivering common shares. If in the future we elect to repurchase the notes with common shares, we would be required to issue shares based on the share price on June 15, 2012, which will likely result in significant dilution to existing shareholders and a potential change of control of the Company.

The convertible notes are trading in the gray market often at a significant discount to face value. As the terms of the indenture provide that the Company may repurchase the convertible notes in open market purchases or negotiated transactions, the Board of Directors authorized management to repurchase a portion of the outstanding convertible debt. As of December 31, 2009, we had re-purchased approximately $1.1 million (face value) of convertible notes. Management continues to explore broader efforts to redeem a portion of the outstanding convertible notes. These efforts could include a public offer to reacquire all or a portion of the notes or a more limited “Dutch auction” or individual private transactions. The time and extent of such plans will be influenced by, among other things, terms of the indenture, regulatory issues, market conditions and available cash.

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. 

Contractual Obligations

The following table sets forth information on the Company’s material contractual obligation payments for the periods indicated as of December 31, 2009:

                                                                                                                                           Less than                                                                                                                        More Than

Convertible Notes¹                           $116,421,988              $5,629,195          $110,792,793                              –                              – &nbs p;    

Equipment Contracts²                 11,032,319              11,032,319                             –                               –                        ;       –

1         In May 2007, the Company issued $103,500,000 aggregate principal amount of its 5.50% convertible notes. The notes pay interest semi-annually and are due on June 15, 2022.  Subject to certain conditions, the notes may be converted into Class A common shares of the Company, redeemed or repurchased.

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 will 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 20 trading days in the period of 30 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.

As of December 31, 2009, $1,151,000 face value of convertible notes have been settled in cash or repurchased by the Company at a total cost of $451,000. The amounts shown above include the interest and principal payments due based on the estimate that the term of the notes will end on June 15, 2012. 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.

2         The Company originally placed orders totaling $125.3 million for the fabrication of processing equipment, mobile equipment and other mining equipment and related engineering. In July 2009 and November 2008, the Company sold a portion of this equipment recovering $26.5 million in deposits and reducing our future commitment by $21.9 million. As of December 31, 2009, the Company has equipment orders totaling $62.9 million and has made payments on these orders of $51.9 million.

Off-Balance Sheet Arrangements

     The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

RESULTS OF OPERATIONS

     Prior to 2007, we re-measured our Bolivar denominated transactions at the official exchange rate. In 2007, based on guidance from the AICPA’s IPTF, we concluded that the parallel market rate was the most appropriate rate to use to re-measure Bolivar denominated transactions. The IPTF continues to review the advisability of using the parallel rate and in the absence of more or new definitive guidance, we continue to use the parallel rate. If we were to change the method of re-measuring Bolivar denominated transactions it may have an effect on the Company’s future results of operations.

     As a result of the expropriation of the Brisas Project by the Venezuelan government and our loss of control and physical access to the project, we recorded a $150.7 million non-cash write-off of the carrying value of the expropriated assets, including affected equipment on order of approximately $14.5 million.

     In the third quarter of 2008, we implemented a cost reduction program in response to the delays being experienced in Venezuela and the subsequent actions by the Venezuelan government. Our results of operation for the twelve months ended December 31, 2009, 2008 and 2007 are a product of an extraordinary loss on expropriation of assets, operating expenses related to the management of Brisas (including legal and arbitration costs associated with the Brisas investment dispute with Venezuelan government), takeover defense costs and loss on disposal of equipment, net of interest income and gains on the disposition of marketable securities, extinguishment of debt and foreign currency.

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2009 Compared to 2008.

Consolidated net loss for the year ended December 31, 2009 was approximately $165.5 million or $2.89 per share, an increase of approximately $145.7 million from 2008. As a result of the expropriation of the Brisas Project by the Venezuelan government and our loss of control and physical access to the 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.

In addition, the change in net loss was also due to an increase in other income of approximately $0.6 million, reductions in operating expenses of approximately $4.1 million and costs associated with the takeover defense and litigation of approximately $3.4 million, and increases in loss on sale of equipment of approximately $2.1 million and interest expense of approximately $1.7 million.

Interest income for the 12-month period ended December 31, 2009 decreased from the comparable period primarily due to substantially reduced rates of return on invested cash and to a lesser extent, lower levels of invested cash. The gain on the extinguishment of debt was due to the re-purchase of approximately $1.1 million (face value) of the Company’s convertible notes at a substantial discount. The increase in gain on sale of securities is a result of non-recurring investment transactions during the period reported.

Excluding the extraordinary loss on the expropriation of assets, expenses in 2009 amounted to $17.9 million compared with $22.2 million in 2008, a $4.3 million reduction. As a result of an effort to reduce controllable costs, we cut general and administrative, technical services and corporate communications expense by approximately $4.5 million which was comprised primarily of reductions related to both the number of personnel and compensation related items, fees associated with consultants, costs associated with efforts related to the Brisas Project debt financing and, to a lesser extent, the cumulative sum of reductions of other operating expenses. These decreases have been supplemented by a decline in takeover defense costs of approximately $3.4 million, but offset by an increase in loss on the sale of equipment of approximately $2.1 million, an increase in legal and accounting expense of approximately $0.4 million, primarily related to arbitration costs, and an increase in interest expense of approximately $1.7 million as a result of no longer capitalizing interest expense subsequent to the date we filed for arbitration with ICSID.

We expect the trend of further reducing general and administrative, technical services and corporate communications expense to continue along with future increases in expenses associated with the execution of our arbitration efforts.

 2008 Compared to 2007.

Consolidated net loss for the year ended December 31, 2008 was approximately $19.7 million or $0.35 per share, an increase of approximately $7.7 million from 2007. The change in net loss was primarily a result of a decrease in other income of approximately $4.0 million and operating expenses of approximately $4.2 million and an increase in costs associated with the takeover defense and litigation of approximately $5.4 million and loss on sale of equipment of approximately $1.3 million.

Interest income for the 12 month period ended December 31, 2008 decreased by $2.5 million from the comparable period primarily due to substantially reduced rates of return on invested cash and to a lesser extent, lower levels of invested cash. The loss on sale of marketable securities of $0.2 million in 2008 compared to a $1.3 million gain on sale of marketable securities reported in 2007 accounted for the remaining reduction in other income for the comparable periods.

Overall, expenses in 2008 amounted to $22.2 million compared with $18.5 million in 2007, a $3.7 million increase. We cut general and administrative expense by approximately $4.7 million which was comprised primarily of reductions related to compensation expense, fees associated with bank financing efforts and other general and administrative expenses.

The decrease in general and administrative expense was offset by increases in other operating expenses including legal costs associated with the initial stages of filing for arbitration, changes in foreign currency gain/losses, approximately $5.4 million of expenses attributable to defending against the unsolicited takeover offer from Rusoro Mining Ltd. and loss on the sale of equipment of approximately $1.3 million as well as the impact of changes in minority interest and income taxes.

Item 7A.       Quantitative and Qualitative Disclosures about Market Risk

The carrying amounts for cash and cash equivalents, marketable securities, deposits, advances and other, accrued interest and accounts payable and accrued expenses on the balance sheet approximate fair value because of the immediate or short-term maturity of these instruments. Fair value estimates are made at the balance sheet date based on relevant market information but involve uncertainties and therefore cannot be determined with precision The Company currently does not enter into any hedging transactions. The Company is exposed to various risks including credit risk, liquidity risk, currency risk and interest rate risk as described below:

a)              Credit risk is the risk that a counterparty will fail to meet its obligations to the Company. The Company’s primary exposure to credit risk is through its cash and cash equivalents and restricted cash balances. The Company diversifies its cash holdings into major Canadian and U.S. financial institutions and corporations.

b)              Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with its financial liabilities. The Company manages this risk by maintaining adequate cash balances through equity and debt offerings to meet its current and foreseeable obligations. The following table presents the Company’s payments due on accounts payable and accrued expenses and its undiscounted interest and principal payments due on its convertible notes, based on the estimate that the term of the notes will end on June 15, 2012. 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.

                                                                                         Less than                                           ^{&n bsp;}                       More Than

A/P and accruals  $     3,790,003        $   3,790,003                              –                            –                        –

Interest                       14,072,988              5,629,195             $ 8,443,793                            –                        –

Principal                   102,349,000                            –            102,349,000                            –                        –

c)              The Company is subject to currency risk mainly due to its operations in Venezuela. Transactions denominated in foreign currency are exposed to exchange rate fluctuations which have an impact on the statement of operations.  The Company’s 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 Company’s net loss from the translation of foreign currency denominated financial instruments, as at December 31, 2009 and 2008, by the amounts shown below.< /P>

Venezuelan Bolívar                                                         $ 60,766                $ 69,684         

Canadian Dollar                                                              (10,894)                 (67,540)       

The Company limits the amount of currency held in non-U.S dollar accounts, but does not actively use derivative instruments to limit its exposure to fluctuations in foreign currency rates.

d)              The Company is subject to the risk that changes in market interest rates will cause fluctuations in the fair values of its financial instruments. Cash and cash equivalents earn floating market rates of interest. Other current financial assets and liabilities are generally not exposed to this risk because of their immediate or short-term maturity. The interest rate on the Company’s convertible notes is fixed and therefore the interest payments are not subject to changes in market rates of interest.

Item 8.          Financial Statements and Supplementary Data

Management’s Report

To the Shareholders of Gold Reserve Inc.

The accompanying consolidated financial statements of the Company were prepared by management in accordance with accounting principles generally accepted in Canada, consistently applied and within the framework of the summary of significant accounting policies in these consolidated financial statements. Management is responsible for all information in the Annual Report on Form 10-K. All financial and operating data in the Annual Report on Form 10-K is consistent, where appropriate, with that contained in the consolidated financial statements.

Management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.  Management has established and maintains a system of internal accounting control designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, financial information is reliable and accurate and transactions are properly recorded and executed in accordance with management’s authorization. This system includes established policies and procedures, the selection and training of qualified personnel and an organization providing for appropriate delegation of authority and segregation of responsibilities.

The Board of Directors fulfills its responsibilities for the consolidated financial statements primarily through the activities of its Audit Committee, which is composed of three directors, none of whom are members of management.  This Committee monitors the independence and performance of our independent auditors and meets with the auditors to discuss the results of their audit and their audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. This Committee reviews and discusses with management the consolidated financial statements, related accounting principles and practices and (when required of management under securities commissions or the applicable listing standards) management’s assessment of internal control over financial reporting.  This Committee also monitors the integrity of our financial reporting process and systems of internal controls regarding finance, accounting and legal compliance. 

The consolidated financial statements have been audited on behalf of the shareholders by the Company’s independent auditors, PricewaterhouseCoopers LLP. The auditors’ report outlines the scope of their examination and their opinion on the consolidated financial statements. The auditors have full and free access to the Audit Committee.

/s/ Rockne J. Timm                                                                                                     /s/ Robert A. McGuinness

   Chief Executive Officer                                                                                              Vice President–Finance and CFO

    March 30, 2010                                                                                                           March 30, 2010      

Independent Auditors’ Report

To the Shareholders of Gold Reserve Inc.

We have audited the consolidated balance sheets of Gold Reserve Inc. (the “Company”) as at December 31, 2009 and December 31, 2008, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for each of the years in the three year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2009 and December 31, 2008 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009, in accordance with Canadian generally accepted accounting principles.

Signed “PricewaterhouseCoopers LLP”

Chartered Accountants

Vancouver, British Columbia

March 30, 2010

Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when there is a change in accounting principles that has a material effect on the comparability of the Company’s financial statements, such as the change in accounting for income tax loss carryforwards described in note 2 to the financial statements. Our report to the shareholders dated March 30, 2010 is expressed in accordance with Canadian reporting standards which do not require a reference to such a change in accounting principles in the auditors’ report when the change is properly accounted for and adequately dis closed in the financial statements.

Signed “PricewaterhouseCoopers LLP”

Chartered Accountants

Vancouver, British Columbia

March 30, 2010

GOLD RESERVE INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(Expressed in U.S. dollars)

ASSETS

Cash and cash equivalents (Note 4)                                                                                       $     60,962,813    $     91,550,167

Marketable debt securities (Note 5)                                                                                              10,175,020                           –

Marketable equity securities (Note 6)                                                                                               598,825              1,342,760

Deposits, advances and other                                                                                                            566,483              1,123,002

Property, plant and equipment, net (Note 9)                                                                               38,122,102         175,132,478

Restricted cash (Note 15)                                                                                                                9,489,777            17,509,672

Prepaid and other                                                                                                                                           –            &nbs p;    956,435

LIABILITIES

Accounts payable and accrued expenses                                                                           $       3,790,003     $       8,134,708

Accrued interest                                                                                                                                  234,550                 236,848

Convertible notes (Note 18)                                                                                                          93,693,168           91,829,699

Minority interest in consolidated subsidiaries                                                                            2,279,699              2,306,823

Measurement Uncertainty (Note 1)

Commitments and Contingencies (Notes 11, 15)

SHAREHOLDERS' EQUITY

Serial preferred stock, without par value

  Authorized:         Unlimited

  Issued:                 None

Common shares and equity units: (Note 17)                                                                     $   247,905,231    $   247,501,272    

  Class A common shares, without par value

    Authorized:       Unlimited

    Issued:               2009…  57,694,997        2008…  57,119,055

    Outstanding:     2009…  57,444,997        2008…  56,869,055                                                               

  Equity Units                                                   

    Issued:               2009…       500,236        2008…       500,236

    Outstanding:     2009…              961         2008…              961                                                                

Equity component of convertible notes (Note 18)                                                                   28,652,785           28,774,221

Less, common shares and equity units held by affiliates                                                           (636,267)              (636,267)

Stock options (Note 11)                                                                                                                10,014,136              9,428,802

Accumulated deficit                                                                                                                   (265,630,369)      (100,180,541)

Accumulated other comprehensive income (loss)                                                                       (277,225)                329,640

KSOP debt (Note 10)                                                                                                                         (110,691)              (110,691)

Approved by the Board of Directors:

            s/ Chris D. Mikkelsen                                               s/ Patrick D. McChesney

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2009, 2008 and 2007

(Expressed in U.S. dollars)

                                                                                                                                                 2007

Other Income:

Interest income                                                                                        $           288,952        $    2,687,825         $   5,164,480

Gain on extinguishment of debt                                                                         601,936                   76,530                            –

Gain (loss) on disposition of marketable securities                                     2,274,848                (243,053)            1,334,604

Expenses:

General and administrative                                                                              4,380,165              7,453,842           12,143,569

Technical services                                                                                            4,264,103              5,410,181              5,093,963

Takeover defense and litigation (Note 19)                                                   2,021,729              5,407,230                            –

Loss on sale of equipment                                                                              3,423,544              1,346,423                            –

Corporate communications                                                                                698,295                 941,002                 904,157

Legal and accounting                                                                                       1,303,087                 899,195                 774,140

Foreign currency (gain) loss                                                                                (5,429)                  61,212                (926,299)

Income tax expense (Note 13)                                                                         (142,319)              (737,050)                 (26,848)

Minority interest                                                                                                   27,124                    8,712                (462,474)

Interest expense                                                                                              (1,688,403)                        –         & nbsp;                   –

Extraordinary loss on expropriation of assets (Note 3)                       (150,726,472)                            –                      –

Basic and diluted net loss per share:

  Loss before extraordinary item                                                                            (0.26)                     (0.35)                      (0.24)

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Years Ended December 31, 2009 and 2008

(Expressed in U.S. dollars)

Net loss for the year                                                                                                             $(165,449,828)           $(19,726,121)

Other comprehensive income (loss), net of tax:

   Unrealized gain (loss) on marketable securities                                                                   1,667,983                (1,693,150)

   Adjustment for realized losses (gains) included in net loss                                            (2,274,848)                    243,053

Comprehensive loss for the year                                                                                      $(166,056,693)           $(21,176,218)

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2009, 2008 and 2007(restated, Note 2)

(Expressed in U.S. dollars)

                                                                                                                                           & #160;                                                                                                                                                                          
60;                                

                                                                                                                                                     &# 160;        Equity Com-       Common Shares                                                             Accumulated

                                                                     Common Shares and Equity Units Issued         ponent of Con-    and Equity Units          Stock         Accumulated   Other Compre-          KSOP

Other comprehensive income                                                                                                                                               ;                                                                                          239,139

Stock option compensation                                                                                                                                                                               4,724,120

Equity component of convertible notes                                                                                         28,784,710

Fair value of options exercised                                                                           167,052                                                                  
60;            (167,052)

Common shares issued for:

  Cash                                                               13,985,742                                74,349,097

  Services                                                              394,000                                   1,818,012

  KSOP                                                                  100,000                                      497,600                                        0;                                                                                                                           (497,600)

Allocation to KSOP participants                                                                                                                                                                                                                                                            387,780

Other comprehensive loss                                                                                                                                              & #160;                                                                                          (1,450,097)

Stock option compensation                                                                                                                                                                               1,958,470

Conversions and repurchase of

  convertible notes                                                                                                                                        (10,489)

Fair value of options exercised                                                                           191,905                                                                  
60;            (191,905)

Common shares issued for:

  Cash                                                                     162,133                                      309,205

  Services                                                           1,311,125                                   2,704,659

Other comprehensive loss                                                                                                                                              & #160;                                                                                              (606,865)               

Stock option compensation                                                                                                                                                                                  590,180

Conversions and repurchase of

  convertible notes                                                                                                                                     (121,436)

Fair value of options exercised                                                                                4,846                                                               ;                      (4,846)

Common shares issued for:

  Cash                                                                       24,442                                           7,088

  Services                                                              551,500                                      392,025

GOLD RESERVE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2009, 2008 and 2007

(Expressed in U.S. dollars)

                                                                                                                                                  2007

Cash Flow from Operating Activities:

Net loss for the year                                                                                $ (165,449,828)       $ (19,726,121)     $ (11,979,768)

Adjustments to reconcile net loss to net

  cash used by operating activities:

    Stock option compensation                                                                           590,180              1,958,470              4,724,120

    Depreciation                                                                                                     213,902                 224,071                 179,111

    Gain on extinguishment of debt                                                                   (601,936)                (76,530)                           –

    Loss on sale of equipment                                                                          3,423,544              1,346,423                            –

    Loss on expropriation of assets                                                             150,726,472                            –                            –

    Amortization of premium on

     marketable debt securities                                                                             109,715                            –                            –

    Accretion of convertible notes                                                                      554,581                            –                            –

    Foreign currency loss                                                                                       50,522                      6,796              1,131,269

    Minority interest in net income (loss) of

       consolidated subsidiaries                                                                            (27,124)                   (8,712)                462,474

    Net (gain) loss on disposition of marketable securities                        (2,274,848)                 243,053            (1,334,604)

    Future income tax expense (benefit) (Note 13)                                            169,815                  747,019                (431,725)

    Shares issued for compensation and KSOP                                                392,025               2,704,659              2,205,792

Changes in non-cash working capital:

    Decrease (increase) in deposits, advances and accrued interest              507,737               (442,931)              (137,176)

    Decrease in accounts payable and accrued expenses                           (3,515,102)              (834,419)              (494,798)

Cash Flow from Investing Activities:

Purchase of marketable securities                                                               (12,095,811)           (3,262,239)           (4,163,941)

Purchase of property, plant and equipment                                             (1 7,771,441)         (38,699,588)         (44,689,332)

Proceeds from the sale of marketable securities                                           4,053,179              4,466,821              6,517,227

Proceeds from the sale of equipment                                                             7,297,598            19,184,740                             –

Decrease (increase) in restricted cash                                                            8,019,895            34,570,931          (52,080,603)

Capitalized interest paid on convertible notes                                            (4,507,319)           (5,688,430)           (3,273,187)

Other                                                                                                                       (44,944)              (117,760)              (108,134)

Cash Flow from Financing Activities:

Net proceeds from issuance of convertible notes                                                      –                          –           98,430,066

Net proceeds from issuance of common shares                                                  7,088                 309,205           74,349,097

Extinguishment of convertible notes                                                               (415,254)                (35,867)                          –

Change in Cash and Cash Equivalents:

Net increase (decrease) in cash and cash equivalents                            (30,587,354)           (3,130,409)          69,305,888

Cash and cash equivalents - beginning of year                                          91,550,167           94,680,576           25,374,688

Non-cash investing activities:

Issuance of common shares as compensation                                  $           392,025        $   2,704,659        $   1,818,012

Issuance of common shares to KSOP Plan                                        $                     –        $                  –       $       497,600

1.      The Company and Significant Accounting Policies:

The Company. 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”).  We discontinued development of the Brisas Project after it was expropriated by the Venezuela n government and we are now seeking to invest in or acquire an alternative mining project. The Company has no revenue producing mining operations at this time. All amounts shown herein are expressed in U.S. dollars unless otherwise noted.

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”). 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. After the Reorganization, a shareholder of Gold Reserve Inc. continued to own an interest in the business, through subsidiary companies, that in aggregate was essentially the same as before the Reorganization.

Certain U.S. 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. 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.

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 20, 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 five Aruban subsidiaries 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. See Note 12.

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

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 prope rties. 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.

Property, Plant and Equipment. Property, plant and equipment are recorded at the lower of 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 rat e 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.

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.

Foreign Currency. The U.S. 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 include d in operating expenses.

In 2003, the Venezuelan government implemented foreign exchange controls which fixed the rate of exchange between Venezuelan Bolivars (Bs.) and the US dollar. In March 2005, the rate was fixed at 2,150 Bs. to US $1.00. In October 2005, the government enacted the Criminal Exchange Law which imposes sanctions on the exchange of Bs. with foreign currency unless the exchange is made by officially designated methods. The exchange regulations do not apply to transactions with certain securities denominated in Bs. which can be swapped for securities denominated in another currency effectively resulting in a parallel market for the Bolivar.

Through 2006, the Company re-measured its Bolivar denominated transactions at the official exchange rate of Bs. 2,150/$. In 2007, based on new guidance from the American Institute of Certified Public Accountants (“AICPA”) International Practices Task Force (“IPTF”), the Company concluded that the parallel market rate was the most appropriate rate to use to re-measure Bolivar transactions. Accordingly, in 2007 the Company began to use the average rate received in the parallel market to re-measure Bolivar transactions and at December 31, 2007, used the parallel rate to translate Bolivar denominated monetary items. On January 1, 2008 the Venezuelan government modified the currency, fixing the official exchange rate at Bs. 2.15 to US $1.00.  In January 2010, the rate was adjusted to Bs. 4.3 to US$1.00 for most goods and services and Bs. 2.6 to US1.00 for certain priority items such as basic foods and medicines.  In late 2009, the Venezuelan economy was determined to be highly inflationary. After consideration of the recent events with respect to the Venezuelan currency and economy, the Company continues to believe that it is most appropriate to use the parallel rate to re-measure transactions and to translate Bs. denominated monetary items. 

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. 

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.

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. 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 operate. 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 cu rrent estimate. See Note 3 and Note 15. 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.

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. 

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 t heir 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.

2.      Restatement and New Accounting Policies:

The Company restated its 2007 financial statements upon the adoption of EIC 172, Income Statement Presentation of a Tax Loss Carryforward Recognized Following an Unrealized Gain in Other Comprehensive Income. This abstract provides guidance on whether the tax benefit of tax loss carryforwards consequent to the recording of unrealized gains in other comprehensive income, such as unrealized gains on available-for-sale securities, should be recognized in net income or in other comprehensive income. Upon adoption effective September 30, 2008, EIC 172 was applied retrospectively with restatement of prior periods from January 1, 2007 resulting in a reclassification of $485,109 from the January 1, 2007 opening balance of accumulated other comprehensive income to accumulated deficit. Additionally, $431,725, or $0.01 per share, of income tax be nefit was reclassified from other comprehensive loss to net loss for the year ended December 31, 2007.

New Accounting Policies:

CICA Section 3064, Goodwill and Intangible Assets. This Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s financial statements.

EIC 173, Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This abstract provides guidance on taking into account the credit risk of an entity and counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments, for presentation and disclosure purposes. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s financial statements.

EIC 174, Mining Exploration Costs. This abstract provides guidance on when exploration costs related to mining properties may be capitalized and when an impairment assessment of previously capitalized exploration costs should be made. This abstract was effective for financial statements issued after March 27, 2009 and did not have a material impact on the Company’s financial statements.

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

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.

3.      Expropriation of Brisas Project by Venezuelan Government and Arbitration:

The Brisas Project has been expropriated by the Venezuelan government, and we no longer have control or physical access to the project.  As a result, we no longer report mineral reserves for Brisas, and we have discontinued the development of our Venezuelan properties, including Brisas and Choco 5 (which was a grass-roots exploration property also located in the State of Bolivar). On October 21, 2009 we filed a Request for Arbitration under the Additional Facility Rules of ICSID, against the Bolivarian Republic of Venezuela (“Respondent”). In November 2009 our Request for Arbitration was registered by ICSID (Gold Reserve Inc. v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/09/1)).

In evident retaliation, Venezuelan government personnel arrived at the Brisas Project camp site on October 26, 2009, 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.

The Company is seeking compensation in the arbitration for all of the loss and damage resulting from Venezuela’s 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, preparing for the initial meeting with the Respondent and the three member arbitration tribunal and developing and filing our initial pleadings, the filing of which is expected to occur in 2010.

As a result of the expropriation of the Brisas Project by the Venezuelan government and our loss of control and physical access to the 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 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 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 P auji Concessions. 

4.      Cash and Cash Equivalents:

Bank deposits                                                                                                                      $ 53,900,646        $ 85,925,019

The above amounts exclude restricted cash of approximately $9.5 million and $17.5 million in 2009 and 2008 respectively. See Note 15, Commitments. At December 31, 2009 and 2008, the Company had approximately $59,000 and $205,000 respectively, in Venezuela and banks outside Canada and the U.S.

5.      Marketable Debt Securities:

                                                                                                                                                     &n bsp;                                         

The Company’s marketable debt securities are classified as held-to-maturity and are measured at amortized cost using the effective interest rate method.

6.      Marketable Equity Securities:

                                                                                                                                                     &n bsp;                                         

Fair value at beginning of year                                                                                         $ 1,342,760                  $ 4,987,511

Acquisitions                                                                                                                            2,135,293                    3,262,239

Dispositions, at cost                                                                                                            (2,102,548)                 (4,709,874)

Realized (gain) loss on sale                                                                                                 (2,274,848)                      243,053

The Company’s 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 December 31, 2009 and 2008 marketable equity securities had a cost basis of $876,049 and $843,305, respectively.

7.      Financial Instruments:

The fair values as at December 31, 2009 and 2008 along with the carrying amounts shown on the consolidated balance sheets for each classification of financial instrument are as follows:                                                    

                                                                                                      December 31, 2009                                         December 31, 2008

                                                        Classification                  Amount                   Value                       Amount                   Value         

Restricted cash                                    held for trading             9,489,777            9,489,777                  17,509,672          17,509,672

Marketable debt securities                  held to maturity          10,175,020          10,208,950                                  –                         –

Marketable equity securities              available for sale               598,825               598,825                   1,342,760            1,342,760

Deposits advances and other              held to maturity               566,483               566,483                   1,123,002            1,123,002

Derivative liability                               held for trading                          –                          –                    1,442,635            1,442,635

A/P and accruals                    other financial liabilities            3,790,003            3,790,003                     6,692,073            6,692,073

Accrued interest                     other financial liabilities               234,550               234,550                       236,848               236,848

Convertible notes                   other financial liabilities          93,693,168          69,085,575                  91,829,699          37,723,480

Fair value estimates for marketable securities are made at the balance sheet date by reference to published price quotations in active markets. At December 31, 2009 and 2008, the fair value of the convertible notes was estimated using an indicative valuation based on recent market information.

CICA 3862 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels: 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 entity’s own assumptions.

                                                                                                                                                      &nb sp;                                     

                                                                                           Fair value

                                                                                  December 31, 2009           Level 1                Level 2                Level 3                 

                                                                                                                                                      &nb sp;                                     

                                                                                           Fair value

                                                                                  December 31, 2008           Level 1                Level 2                Level 3                 

Restricted cash                                                                    9,489,777                9,489,777

Derivative liabilities                                                             1,442,635                              –           1,442,635                       –         

The Company is exposed to various risks including credit risk, liquidity risk, currency risk and interest rate risk as described below:

a)               Credit risk is the risk that a counter party will fail to meet its obligations to the Company. The Company’s primary exposure to credit risk is through its cash and cash equivalents, restricted cash and marketable debt securities balances. The Company diversifies its cash holdings into major Canadian and U.S. financial institutions and corporations.

b)              Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with its financial liabilities. The Company manages this risk by maintaining adequate cash balances through equity and debt offerings to meet its current and foreseeable obligations. The following table presents the Company’s payments due on accounts payable and accrued expenses and its undiscounted interest and principal payments due on its convertible notes, based on the estimate that the term of the notes will end on June 15, 2012. If the notes were to reach their contractual maturity date of June 15, 2022, additional interest payments would amount to $56.3 m illion over the additional ten year term of the notes.

                                                                                               Less than                                     ^{&nbs p;}                                  More Than

A/P and accruals         $     3,790,003         $     3,790,003                              –                              –                        –

Interest                                         14,072,988                5,629,195             $ 8,443,793                              –                         –

Principal                        102,349,000                              –            102,349,000                              –                        –

c)               The Company is subject to currency risk mainly due to its operations in Venezuela. Transactions denominated in foreign currency are exposed to exchange rate fluctuations which have an impact on the statement of operations.  The Company’s 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 Company’s net loss from the translation of foreign currency denominated financial instruments, as at December 31, 2009 and 2008, by the amounts shown below.