Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On October 28, 2011, LKA issued to JR & Associates 100,000 “unregistered” and “restricted” shares of its common stock for consulting services rendered and recognized $67,000 in expense, or $0.67 per share.

On December 23, 2011, LKA issued to Adrian McKenzie 34,000 “unregistered” and “restricted” shares of its common stock for services rendered and recognized $15,300 in expense, or $0.45 per share.

We believe that the offer and sale of these securities was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Sections 4(2) and 4(6) thereof, and Rule 506 of Regulation D of the SEC and from various similar state exemptions.  In connection with the sale of these securities, the Company relied on the fact that there were fewer than 35 “non-accredited” recipients.  In addition, neither the Company nor anyone acting on its behalf offered or sold these securities by any form of general solicitation or general advertising.

Use of Proceeds of Registered Securities

During the year ended December 31, 2011, we did not receive any proceeds from the sale of registered securities.

Purchases of Equity Securities by Us and Affiliated Purchasers

15

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Report of Independent Registered Public Accounting Firm

To the Board of Directors

LKA International Inc.

Gig Harbor, WA

We have audited the consolidated balance sheets of LKA International Inc and its subsidiary, (collectively, the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LKA International Inc. and its subsidiary as of December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that LKA International Inc. will continue as a going concern. As discussed in Note 11 to the consolidated financial statements, LKA International Inc. suffered losses from operations and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note 11. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/MaloneBailey, LLP

www.malonebailey.com

Houston, Texas

March 30, 2012

16

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LKA INTERNATIONAL, INC.

Consolidated Balance Sheets

ASSETS

	December 31,
	2011			2010
CURRENT ASSETS
Cash	$	143,331		$	20,084
Accounts receivable		-			89,384
Prepaid expenses		-			14,341
Total Current Assets		143,331			123,809
FIXED ASSETS
Land, equipment, mining claims and asset retirement obligations		800,351			800,351
Accumulated depreciation		(218,541)			(183,083)
Total Fixed Assets, Net of Accumulated Depreciation		581,810			617,268
OTHER NON-CURRENT ASSETS
Reclamation Bonds		123,597			113,120
TOTAL ASSETS	$	848,738		$	854,197

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

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LKA INTERNATIONAL, INC.

Consolidated Balance Sheet (Continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

	December 31,
	2011				2010
CURRENT LIABILITIES
Accounts payable	$	200,877				$		179,923
Accounts payable – related party		67,205						14,247
Note payable		234,000						185,837
Notes payable - related party		829,124						744,841
Accrued interest payable		19,607						3,288
Accrued interest payable - related party		344,508						170,648
Accrued wages and advances payable to officer		179,067						61,335
Derivative liability		-						67,826
Total Current Liabilities		1,874,388						1,427,945
NON-CURRENT LIABILITIES
Asset retirement obligation		119,159						115,507
Total Liabilities		1,993,547						1,543,452
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; $0.001 par value, 50,000,000 shares authorized, no shares issued or outstanding		-						-
Common stock; $0.001 par value, 50,000,000 shares authorized, 16,344,603 and 15,390,603 shares issued, and  16,257,356 and 15,303,356  shares outstanding, respectively		16,345						15,391
Additional paid-in capital		9,354,991						8,239,494
Treasury stock; 87,247 and 87,247 shares at costs, respectively		(86,692)						(86,692)
Accumulated deficit		(10,429,453)						(8,857,448)
Total Stockholders' Equity (Deficit)		(1,144,809)						(689,255)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	848,738				$		854,197

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

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LKA INTERNATIONAL, INC.

Consolidated Statements of Operations

	Year Ended
	December 31,
	2011			2010
REVENUES
Sales - precious metals	$	851,561		$	528,845
Total Revenues		851,561			528,845
OPERATING EXPENSES
Exploration and related costs		587,138			497,983
Professional fees		537,725			67,231
Royalty expense		44,798			26,384
General and administrative		158,676			185,735
Officer salaries and bonus		835,947			150,000
Total Operating Expenses		2,164,284			927,333
OPERATING INCOME (LOSS)		(1,312,723)			(398,488)
OTHER INCOME (EXPENSE)
Loss on derivative		-			(99,369)
Debt default expense		-			(358,897)
Interest expense		(259,282)			(144,303)
Interest income		-			27
Realized gain (loss) on securities		-			(6)
Total Other Income (Expense)		(259,282)			(602,548)
LOSS PRIOR TO INCOME TAX EXPENSE		(1,572,005)			(1,001,036)
INCOME TAX EXPENSE		-			-
NET LOSS	$	(1,572,005)		$	(1,001,036)
BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.10)		$	(0.07)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED		15,641,129			15,141,332

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

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LKA INTERNATIONAL, INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

Years Ended December 31, 2010 and 2011

	Common Stock					Treasury Stock					Additional Paid-in			Accumulated					Total Stockholders'
	Shares		Amount			Shares		Amount			Capital			Deficit					Equity (Deficit)
Balance, December 31, 2009	14,990,498		$	14,991		(87,247)		$	(86,692)		$	7,847,860		$	(7,856,412)				$	(80,253)
Common stock issued for debt extension	390,105			390		-			-			358,507			-					358,897
Common stock issued for cash	10,000			10		-			-			4,990			-					5,000
Common stock warrants issued for debt offering costs	-			-		-			-			28,137			-					28,137
Net loss for the year ended December 31, 2010	-			-		-			-			-			(1,001,036)					(1,001,036)
Balance, December 31, 2010	15,390,603			15,391		(87,247)			(86,692)			8,239,494			(8,857,448)					(689,255)
Common stock issued for services	454,000			454		-			-			274,646			-					275,100
Common stock issued for officer bonus	500,000			500		-			-			324,500			-					325,000
Common stock options issued for officer bonus	-			-		-			-			360,947			-					360,947
Common stock warrants issued for services	-			-		-			-			155,404			-					155,404
Net loss for the year ended December 31, 2011	-			-		-			-			-			(1,572,005)					(1,572,005)
Balance, December 31, 2011	16,344,603		$	16,345		(87,247)		$	(86,692)		$	9,354,991		$	(10,429,453)				$	(1,144,809)

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

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LKA INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

	Year Ended
	December 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,572,005)		$	(1,001,036)
Items to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		35,458			50,750
Accretion of asset retirement obligation		3,652			3,396
Realized (gain) loss on investments		-			6
Investment proceeds		-			33
Loss on derivate liability		-			99,369
Amortization of deferred debt issue costs		-			36,537
Common stock options, warrants and shares issued for      services and officer bonus		1,116,451			-
Common stock issued for debt default expense		-			358,897
Amortization of debt discount		-			3,974
Changes in operating assets and liabilities
Decrease in money market accounts		-			678
(Increase) decrease in prepaid and other assets		3,864			(10,238)
(Increase) in accounts receivable		89,384			(89,384)
Increase (decrease) in accounts payable and accounts payable - related party		73,912			78,361
Increase in accrued expenses		372,531			134,622
Net Cash Provided (Used) by Operating Activities		123,247			(334,035)
CASH FLOWS FROM INVESTING ACTIVITIES		-			-
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable – related party		-			(47,642)
Proceeds from convertible notes payable		-			200,000
Payments on derivative liability		-			(16,644)
Common stock issued for cash		-			5,000
Net Cash Provided by Financing Activities		-			140,714
NET INCREASE IN CASH		123,247			(193,321)
CASH AT BEGINNING OF PERIOD		20,084			213,405
CASH AT END OF PERIOD	$	143,331		$	20,084
CASH PAID FOR:
Interest	$	300		$	30,505
Income Taxes	$	-		$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES
Reclassification of derivative liability to note payable	$	84,283		$	184,591
Warrants issued with convertible note	$	-		$	28,137

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

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 1 -

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements presented are those of LKA International, Inc. (LKA), a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation.  LKA was incorporated on March 15, 1988, under the laws of the State of Delaware. LKA owns certain real and personal property interests including patented and unpatented mining claims, water rights, buildings, fixtures, improvements, equipment, and permits situated in Lake City, Colorado. LKA's activities associated with these properties have been sporadic since they were acquired by its predecessor in December, 1982.  LKA exited the development stage in September 2003 as a result of the reacquisition of its interest in an operating mine near Lake City, Colorado and is currently engaged in efforts to re-establish reserves and resume commercial production in addition to seeking additional investment opportunities (See Note 11).

a.  

Accounting Methods

LKA’s financial statements are prepared using the accrual method of accounting.  LKA has elected a calendar year-end.  

b.

Basic and Diluted Loss Per Share

LKA presents both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including convertible debt, stock options, and warrants, using the treasury stock method, and convertible securities, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. LKA had net losses as of December 31, 2011 and 2010, so the diluted EPS excluded all dilutive potential shares in the diluted EPS because there effect is anti-dilutive.

c.

Mine Exploration Costs

Mine exploration costs are capitalized and amortized by the units of production method over estimated total recoverable proven and probable reserves. Amortization of mineral rights is provided by the units of production method over estimated total recoverable proven and probable reserves.  Costs related to locating and evaluating mineral and ore deposits, as well as determining the economic mineability of such deposits, are expensed as incurred.  All costs related to mine exploration and expense were expensed due to there being no proven and probable reserves.

d.

Asset Retirement Obligations

LKA recognizes legal obligations associated with the retirement of long-lived assets at fair value at the time the obligations are incurred.  Upon initial recognition of a liability, the costs are capitalized as part of the carrying amount of the related long-lived asset (see Note 3).

e.

Income Taxes

LKA files income tax returns in the U.S. federal jurisdiction, and the state of Colorado.  LKA’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 1 -

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

e.

Income Taxes

Net deferred tax assets consist of the following components as of December 31, 2011 and 2010:

				2011			2010
Deferred tax assets:
Net operating loss carry forward		$	974,318		$	847,104
Accrued expenses			83,732			58,020
Valuation allowance			(1,058,050)			(905,124)
Net deferred tax asset		$	-		$	-

 

The federal income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 34% to pretax income from continuing operations for the years ended December 31, 2011 and 2010 due to the following:

	2011		2010
Pre-tax book income (loss)	$	(537,482)	$	(340,352)
Meals and entertainment		721		730
Common stock, options and warrants issued for services and debt discount		379,593		123,376
Related party accruals		25,712		23,800
Penalties and other		-		262
Accretion		1,242		1,155
Net operating loss carry forward		974,317		847,104
Valuation allowance		(844,103)		(656,075)
Federal Income Tax	$	-	$	-

LKA had net operating losses of approximately $2,866,000 that expire 20 years from when incurred.  Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations.  Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

f.

Cash Equivalents

LKA considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

g.

Principles of Consolidation

The consolidated financial statements include those of LKA International, Inc., a Delaware corporation and its wholly-owned subsidiary (LKA International, Inc.), a Nevada corporation.  All significant intercompany accounts and transactions have been eliminated.

h.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 1 -

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

i.

Revenue Recognition Policy

The Company recognizes revenue when persuasive evidence of an arrangement exists, goods have been delivered and title has transferred, the sales price is fixed or determinable, and collectibility is reasonably assured.  Revenue is generated through the sale of gold and silver ore and is recognized upon acceptance of ore delivery from the smelter. During the years ended December 31, 2011 and 2010, LKA recognized $851,561 and $528,845 from the delivery of gold and silver ore from the Golden Wonder mine, respectively.

j.

Securities and Investments

LKA applies the provisions of Accounting Standards Codification (“ASC”) 320, “Investments – Debt and Equity Securities”, regarding marketable securities. LKA invests in securities that are intended to be bought and held principally for the purpose of selling them in the near term, and as a result, classifies such investments as trading securities.  Trading securities are recorded at fair value on the balance sheet with changes in fair value being reflected as unrealized gains or losses in the current period.  In addition, LKA classifies the cash flows from purchases, sales, and maturities of trading securities as cash flows from operating activities.

k.

Stock-Based Compensation

LKA records stock-based compensation using the fair value method. Equity instruments issued to employees and the cost of the services received as consideration are accounted for in accordance with ASC 718 “Stock Compensation” and are measured and recognized based on the fair value of the equity instruments issued.  All transactions with non-employees in which goods or services are the consideration received for the issuance of equity instruments are accounted for in accordance with ASC 515 “Equity-Based Payments to Non-Employees”, based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

l.

Fair Value of Financial Instruments  

In April 2009, the FASB extended disclosure requirements on the fair value of financial instruments to interim financial statements of publicly traded companies. The requirements are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The guidance does not require disclosures for the earlier periods presented for comparative purposes at initial adoption. The guidance requires comparative disclosures only for periods ending after the initial adoption.

LKA adopted the new provisions related to fair value measurements and disclosures effective January 1, 2008. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date.

Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities recorded at fair value in the consolidated statement of financial condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by the FASB and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 1 -

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

l.

Fair Value of Financial Instruments (Continued) 

Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Fair valued assets that are generally included in this category are stock warrants for which there are market-based implied volatilities, unregistered common stock and thinly traded common stock.

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets carried at fair value and included in this category include stock warrants for which market-based implied volatilities are not available.

m.

New Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

n.

Reclassification of Prior Period Balances

Certain amounts in prior periods have been reclassified to conform with the report classifications of the year ended December 31, 2011, with no effect on previously reported net income or stockholder’s equity (deficit).

o.

Accounting for Derivative Instruments

LKA accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the consolidated balance sheet.

LKA uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, LKA’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for LKA’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, LKA seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

  

LKA categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.

p.

Long Lived Assets

Periodically the Company assesses potential impairment of its long-lived assets, which include property, equipment and acquired intangible assets, in accordance with the provisions of ASC Topic 360, “Property, Plant and Equipment.”  The Company recognizes impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying values. An impairment loss would be recognized in the amount by which the recorded value of the asset exceeds the fair value of the asset, measured by the quoted market price of an asset or an estimate based on the best information available in the circumstances. There were no such losses recognized during 2011 or 2010.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 2 -

FIXED ASSETS

Property and equipment are carried at cost, less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing assets. Maintenance and repairs are charged to current operations as incurred. Upon sale, retirement, or other disposition of these assets, the costs and related accumulated depreciation are removed from the respective accounts, and any gain or loss on the disposition is included in other income.

Depreciation expense is computed using the straight-line method over the following estimated useful lives:

Description	Useful Life
Land improvements	Estimated life of mine
Mining equipment	3 – 5 years
Vehicles	5 years

Fixed assets and accumulated depreciation  are as follows:

	December 31,
	2011				2010
Fixed assets:
Land	$	376,442		$	376,442
Mining claims		12,137			12,137
Land improvements		121,846			121,846
Automobile		66,923			66,923
Mining equipment		124,976			123,976
Unamortized asset retirement obligation (Note 3)		98,027			98,027
Less: Accumulated depreciation		(218,541)			(183,083)
Total fixed assets	$	581,810		$	617,268

Depreciation expense for the years ended December 31, 2011 and 2010 was $35,458 and $50,750, respectively.

NOTE 3 -

ASSET RETIREMENT OBLIGATIONS

ASC 410, “Asset Retirement and Environmental Obligations”, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs.  LKA’s asset retirement obligations (AROs) consist of estimated costs related to the reclamation of the Golden Wonder and Ute Ule mines in correspondence with federal and state reclamation laws as defined by each applicable mine permit. The obligation and corresponding asset have been recognized in the period in which the liability was incurred. Changes in estimates could occur due to mine plan revisions, changes in estimated costs, and changes in the timing of the performance of reclamation activities.

LKA calculated its initial estimated AROs for final reclamation and mine closure based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work.  Spending estimates have been escalated for inflation at 1.93% per annum, then discounted at the credit-adjusted risk-free rate of 4.09% per annum at September 18, 2003.  LKA recorded an ARO asset associated with the liability and amortizes the asset over its expected life using the straight-line depreciation method.  The ARO liability is being accreted to the projected spending date.  

During the fourth quarter of 2004, LKA revised its assessment of the anticipated productivity of the Ute Ule mine, and determined that the mine would not be subject to further exploration or mining activity. As a result, the entire ARO asset associated with the Ute Ule mine was written off.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 3 -

ASSET RETIREMENT OBLIGATIONS (CONTINUED)

On October 9, 2008, LKA received approval of its plan to add 6.4 acres to its mining permit with the State of Colorado on the Golden Wonder mine.  As a result, LKA has recorded an additional asset retirement obligation totaling $41,106, which consist of estimated additional costs related to the reclamation of the Golden Wonder mine in correspondence with federal and state reclamation laws as defined by each applicable mine permit.

The Company calculated its estimated ARO for additional final reclamation and mine closure costs based upon anticipated amounts and timing of future cash expenditures for a third party to perform the required work.  Spending estimates were escalated for inflation at 2.29% per annum and discounted at a credit-adjusted risk-free rate of 7.54% per annum. The Company recorded an ARO asset associated with the liability and will amortize the asset over its expected life of seven years using the straight-line depreciation method.  The ARO liability addition will be accreted based on the initial projected reclamation completion date of September 30, 2016.  Changes in estimates could occur due to mine plan revisions, changes in estimated costs and changes in the timing of the performance of anticipated reclamation activities.

As of December 31, 2011 and 2010, LKA holds reclamation bonds totaling $123,597 and $113,120, respectively, in the name of the State of Colorado (the State) for both the Ute Ule and Golden Wonder mines.  These amounts are being held by the State until the mines are closed and reclamation activities begin.

Accretion expense on asset retirement obligations for the years ended December 31, 2011 and 2010 was $3,652 and $3,396, respectively.

NOTE 4 -

RELATED PARTY TRANSACTIONS

Notes Payable

Cognitive Associates Limited Partnership

LKA owes Cognitive Associates Limited Partnership $56,828 in unpaid principal from a note dated December 31, 1986.  The note is unsecured, due upon demand, and accrues interest at 10% per annum.  No payments have been made during the year ended December 31, 2011.  Accrued interest related to this note totaled $76,337 and $70,654 as of December 31, 2011 and 2010, respectively.

LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum.  No payments have been made during the year ended December 31, 2011.  Accrued interest related to this note totaled $9,693 and $9,096 as of December 31, 2011 and 2010, respectively.

PanAmerican Capital Group, Inc.

On July 2, 2009, LKA issued a promissory note (the Note) to PanAmerican Capital Group, Inc. (PanAmerican), a related party company, in exchange for cash of $545,090.  The Note accrues interest at 10% per annum, is secured by a first charge over LKA mining property and claims in Hinsdale County, Colorado and is due in five installments, the first due the first business day of January 2010, with the remaining four due in three months intervals through January 2011.  The amount of the payments are to be determined as the higher of either (i) the value of 140 ounces of gold as determined by the closing spot price on the Commodity  Exchange, Inc. (COMEX) on the business day immediately preceding the installment due date, or (ii) one-fifth (1/5) of the total principal amount, together with accrued interest thereon.

During January 2010, LKA made a partial payment of $92,064 on the Note, of which $16,644 was applied against the derivative liability (see Note 7), $27,778 was applied against accrued interest and $47,642 was applied to principal.  

27

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 4 -

RELATED PARTY TRANSACTIONS (CONTINUED)

Notes Payable (Continued)

PanAmerican Capital Group, Inc. (Continued)

LKA paid commissions and due diligence fees totaling $54,509 related to obtaining the funding.  Debt issue costs have been deferred and were being amortized over the life of the Note as interest expense.  Amortization of debt issuance costs was $0 and $36,537 for the years ended December 31, 2011 and 2010, respectively.

Due to delays in mine production, PanAmerica agreed to allow LKA to defer a portion of the first installment payment due January 4, 2010. The second installment payment due April 5, 2010 and third installment due on July 5, 2010, were also deferred until August 15, 2010. In consideration for these payment deferrals LKA agreed to make certain additional interest payments and to provide additional collateral/security on any unpaid balances due as of August 15, 2010. LKA and PanAmerican entered into a Waiver Agreement on June 10, 2010 whereby PanAmerican waived its Enforcement Rights with respect to the delinquent payments on the Note in consideration for the following:

(a)

LKA must pay all amounts payable in respect of the installment payments otherwise due under the Note on January 4, 2010, April 5, 2010 and July 5, 2010 to PanAmerican on or before August 15, 2010;  

(b)

on or before August 15, 2010, LKA must pay to PanAmerican, in addition to the amounts otherwise payable under subsection (a) above, an amount equal to 2% per month of any unpaid installment payments, calculated with respect to any such unpaid installment payment, from the date such installment payment was otherwise due; and

(c)

(i) LKA must issue to PanAmerican one unregistered and restricted share of LKA common stock for each dollar of unpaid installment payments otherwise due as of the date of the Waiver Agreement; and (ii) on July 5, 2010, issue to the PanAmerican one unregistered and restricted share of LKA common stock for each dollar of the installment payment otherwise due as of July 5, 2010.  The shares are to be held by PanAmerican as security and are to be surrendered to LKA for cancellation upon satisfaction of the Borrower of the obligations set forth in (a) and (b) above. In circumstances where such obligations are not satisfied the Holder shall be entitled to retain such Shares as beneficial owner thereof provided that such retention shall not otherwise relieve the Borrower from its obligations under the Note or the Waiver Agreement.

As a result of LKA’s failure to pay the required installment payment on August 15, 2010, 220,453 and 169,652 shares of LKA common stock were surrendered to PanAmerican with a fair value of $358,897.  The fair value of these shares was recorded as debt default expense for the year ended December 31, 2010.   

LKA failed to make the required final note installment payment due January 4, 2011.  To-date, PanAmerican has not made any demands on the past due installments and LKA continues to pursue a resolution with the debt holder. As a result of the Waiver Agreement and payment defaults, LKA has reclassified a total of $268,873 in accrued derivative liability related to the past due Note payments to the remaining original $497,448 note principal and has accrued interest at a rate of 2% per month, for the period from the dates of note defaults through December 31, 2011. Total accrued interest on the Waiver Agreement and past due note balance was $258,478 and $74,560 at December 31, 2011 and 2010, respectively.  Interest expense on the Note totaled $183,917 and $91,496 for the years ended December 31, 2011 and 2010, respectively.

.

Office Space

LKA pays a company owned by an officer and shareholder $1,500 per month for office rent and expenses.  The affiliated Company, (Abraham & Co., Inc. a Financial Industry Regulatory Authority member and registered investment advisor) also executes LKA’s securities transactions and manages its investment portfolio. At December 31, 2011 and 2010, LKA owes Abraham & Co $31,000 and $13,500 on this obligation, respectively.  

28

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 4 -

RELATED PARTY TRANSACTIONS (CONTINUED)

Accounts and Wages Payable

At December 31, 2011 and 2010, LKA owes $36,205 and $747, respectively, for purchases made on the personal credit card of LKA’s president, Kye Abraham.  Additionally, LKA owed Kye Abraham $12,500 and $0 for non-interest bearing, short-term operating loans to LKA at December 31, 2011 and 2010, respectively, and $166,567 and $61,335 in unpaid salary at December 31, 2011 and 2010, respectively,

Stock Options

On December 28, 2007, LKA’s board of directors authorized the issuance of options to purchase 1,000,000 shares of LKA’s common stock to an officer and shareholder for services previously rendered. The options have an exercise price of $0.40 per share, and have a five-year term from the date of grant (See Note 9).

On October 26, 2011, LKA’s board of directors authorized the issuance of 500,000 shares and options to purchase 1,000,000 shares of LKA’s common stock to an officer and shareholder for services previously rendered. The options have an exercise price of $0.50 per share, and have a three-year term from the date of grant (See Note 9).

NOTE 5 -

SIGNIFICANT EVENTS

During August 2010, LKA entered into a Mine Operating Agreement (Operating Agreement) with Coal Creek Construction (Coal Creek).  The Operating Agreement calls for Coal Creek to provide mine operating services, including mining and underground construction, blasting, crushing, bagging, hauling, loading and transporting of ore and associated waste material to locations specified by LKA in the vicinity of the property, maintenance of roads to the Property and working areas for the mining of the Property.  

Per the Operating Agreement, Coal Creek is to pay all Mine Operator Services Expenses and is entitled to reimbursement for such expenses from LKA provided LKA has received sufficient monies from ore/metals sales. LKA is responsible for payment of costs associated with vehicles it provides for the Project (including insurance and maintenance) property and production taxes, mining claim assessments or fees, personnel and consultants hired by LKA, claim and permit filings, and reclamation bonds. LKA shall also pay all liabilities associated with the Property which were incurred prior to the date of the Operating Agreement.

In exchange for providing Mine Operator Services, Coal Creek is entitled to a payment equal to twenty percent of the project's net profits, or Net Smelter Receipts less deductions for Mine Operator Services, Royalties and Project-related Expenses, provided that Coal Creek has performed its service obligations and is current with its financial obligations and all other terms of its agreement with LKA.  During the years ended December 31, 2011 and 2010, LKA paid Coal Creek $529,000 and $226,708 for Mine Operator Services and accrued an additional $83,289 in remaining reimbursable expense related to ore shipments.

NOTE 6 -

NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION

During the fall of 2002, the Federal Bureau of Land Management (the "BLM") advised LKA of its desire to extend to the Ute-Ule Property certain environmental clean-up activities that it is conducting on neighboring properties that LKA does not own.

The BLM has commissioned and obtained an engineering evaluation and cost analysis (“EE/CA”) report on the Ute-Ule and the neighboring public lands. The EE/CA, which was released for a 30 day public comment period in December of 2002, has identified a large volume of mine tailings and metals loading of shallow ground water, with elevated levels of arsenic, cadmium and lead being present.  The total clean-up costs on all of these properties are estimated at approximately $7 million, with the projected clean-up cost of the Ute-Ule alone estimated at approximately $4,317,000. The BLM has prepared a written response to the public comments received concerning the EE/CA and is in the process of selecting an overall site clean-up plan and is determining the final engineering plans. Once these tasks are completed, the BLM will then enter into the process of implementing those plans. As of

29

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 6 -

NOTIFICATION OF POSSIBLE ENVIRONMENTAL REMEDIATION (CONTINUED)

December 31, 2011, LKA and the BLM remain in the process of discussing and deliberating the reported environmental impacts as previously reported within the EE/CA. No determination of an overall site clean-up plan has yet been made by the BLM.  

Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the BLM and EPA may either require a property owner to perform the necessary cleanup or the agencies may perform the work and seek recovery of costs against the owner.  The BLM has taken the position that LKA will be liable for the cleanup on the Ute-Ule property, with the timing of the cleanup, the ultimate cost, and LKA’s share of the total cost, still to be determined.  The BLM has indicated its willingness to negotiate a settlement of the matter and LKA intends to vigorously defend itself.  However, LKA is in the early stages of this process and cannot accurately predict a range of what the ultimate liability, if any, will be.

NOTE 7 -

DERIVATIVE LIABILITY

As a result of the repayment terms of the Note with PanAmerican Capital Group, Inc. being indexed to the closing spot price of gold on COMEX at each repayment date (see Note 4), the Note is considered to be a hybrid debt instrument with an embedded derivative liability.  Accordingly, the embedded derivative liability is required to be bifurcated from the debt host agreement and recorded as a liability at its fair value as of the consolidated balance sheet date.  The changes in fair value of the liability are being recorded as current period gains or losses in the consolidated statement of operations.

The fair market value of the embedded derivative liability was determined using level 1 inputs by applying observable quoted market prices of gold futures on the COMEX market for instruments that settle on or near the related debt payments, multiplying the quoted prices by the underlying number of troy ounces of gold at each repayment date and subtracting the otherwise required cash payment of the underlying note.  During the year ended December 31, 2010, LKA recorded a loss from derivative liability of $99,369.  During the year ended December 31, 2011, LKA failed to make the final required payment on the derivative liability at January 4, 2011 and reclassified the remaining $67,826 balance of the liability and $16,457 in related accrued interest to a related party note payable.

The fair market value of LKA’s derivative liability at December 31, 2010 and 2011 is as follows:

Derivative liability at December 31, 2010	$	67,826
Reclassification to notes payable – related party		(67,826)
Derivative liability at December 31, 2011	$	-

NOTE 8 -

COMMITMENTS AND CONTINGENCIES

Except as discussed above in Note 6, LKA is not the subject of any pending legal proceedings and, to the knowledge of management; no proceedings are presently contemplated against LKA by any federal, state or local governmental agency.

NOTE 9 -

STOCK-BASED COMPENSATION

Common Stock

On August 15, 2010, as a result of LKA’s failure to pay the required installment payment on August 15, 2010, LKA issued 220,453 and 169,652 shares of LKA common stock to PanAmerican with a fair value of $358,897, or $0.92 per share.  The fair value of these shares was recorded as debt default expense.

On August 31, 2010, LKA sold 10,000 shares of its common stock for $5,000, or $0.50 per share.

During February 2011, LKA entered into a consulting agreement for investor and public relations services. As a result of this agreement, LKA issued 50,000 shares of its fully vested common stock.  LKA recorded $37,500 in consulting expense, or $0.75 per share.

30

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 9 -

STOCK-BASED COMPENSATION (CONTINUED)

Common Stock (Continued)

During March 2011, LKA issued 20,000 share of its common stock to a consultant for services rendered.  LKA recorded $13,600 in consulting expense, or $0.68 per share.

During April 2011, LKA issued a consultant 50,000 shares of its common stock for services rendered and recognized $28,000 in expense, or $0.56 per share.

During April 2011, LKA issued a consultant 15,000 shares of its common stock for services rendered and recognized $4,650 in expense, or $0.31 per share.

During August 2011, LKA issued a consultant 35,000 shares of its common stock for services rendered and recognized $11,550 in expense, or $0.33 per share.

During October 2011, LKA engaged Newport Coast Securities, Inc. as its investment banker to explore financing opportunities for the Company and its Golden Wonder mining project.  As a result of this agreement, LKA agreed to issue Newport 150,000 shares of LKA common stock and recognized $97,500 in expense, or $0.65 per share..

During October 2011, LKA issued a consultant 100,000 shares of its common stock for services rendered and recognized $67,000 in expense, or $0.67 per share.

During October 2011, LKA issued its Chairman and CEO 500,000 shares of common stock and options to purchase up to 1,000,000 shares of LKA common stock at $0.50 per share for 3 years.  The shares and options were issued for services rendered related to the continued management and operation of the company.  Both grants vested immediately.  LKA recognized $685,947 in expense related to these issuances.

During December 2011, LKA issued a consultant 34,000 shares of its common stock for services rendered and recognized $15,300 in expense, or $0.45 per share.

Common Stock Options

On December 28, 2007, LKA granted an option to its President to purchase 1,000,000 shares of LKA’s common stock at an exercise price of $0.40 per share, exercisable for five years from the date of grant (the “2007 Options”).  The resulting fair value estimate, net of tax, totaled $415,092. This amount was recorded as a current period expense during the fourth quarter of 2007.

During October 2011, LKA issued its Chairman and CEO 500,000 shares of common stock and options to purchase up to 1,000,000 shares of LKA common stock at $0.50 per share for 3 years.  The shares and options were issued for services rendered related to the continued management and operation of the company.

The warrants were valued at $360,947 using the Black-Scholes option fair value pricing model using the following assumptions:

Stock price on grant date	$	0.65
Exercise price	$	0.50
Expected time to exercise		1.5 years
Risk free interest rate		0.69%
Volatility		106.56%
Expected forfeiture rate		0.00%

The following table summarizes the options outstanding and associated activity for the years ended December 31, 2011 and 2010:

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 9 -

STOCK-BASED COMPENSATION (CONTINUED)

Common Stock Options (Continued)

	Number of Options		Weighted Average Price			Weighted Average Remaining Contractual Life
Options outstanding at December 31, 2009		1,000,000	$	0.40		1
Granted		-		-		-
Exercised		-		-		-
Forfeited		-		-		-
Options outstanding at December 31, 2010		1,000,000	$	0.40		1
Granted		1,000,000		0.50		3
Exercised		-		-		-
Expired		-		-		-
Options exercisable at December 31, 2011		2,000,000	$	0.45		2

The aggregate intrinsic value of stock options was $0 and $510,000 at December 31, 2011 and 2010, respectively.

Common Stock Warrants

During December 2010, LKA granted fully vested warrants to purchase 84,000 share of its common stock for 36 months at $0.93 per share as debt offering costs related to the issuance of convertible notes payable (see Note 10). The warrants were valued at $28,137 using the Black-Scholes option fair value pricing model using the following assumptions:

Stock price on grant date	$	0.85
Exercise price	$	0.93
Expected time to exercise		3 years
Risk free interest rate		0.80%
Volatility		192.45%
Expected forfeiture rate		0.00%

During April 2011, LKA entered into an interim consulting agreement with Francois Viens to act as a special advisor to the LKA board of directors, with the election of being appointed to a position on the LKA board in the future.  As part of the consulting agreement, Mr. Viens is to be paid consulting fees for any work done on projects pre-approved by the LKA board of directors.  An initial incentive compensation for his services, LKA agreed to issues Mr. Viens warrants to purchase up to 500,000 shares of LKA stock in three tranches on a three-year vesting schedule as follows:

Warrant I for 200,000 shares exercisable at $0.80 per share, to be issued as of May 1, 2011.

Warrant II for 150,000 shares exercisable at $1.20 per share, to be issued one year later, or May 1, 2012.

Warrant III for 150,000 shares exercisable at $1.80 per share, to be issued one year later, or May 1, 2013.

Each warrant has a term of two and one-half years. In the event the shares underlying the warrants, and the closing price of the common stock of the Company has been $3.00 per share or higher for 10 trading days within a 30 day trading period subject to minimum trading volumes, LKA shall be able to redeem the Warrants at $0.001 per warrant.

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 9 -

STOCK-BASED COMPENSATION (CONTINUED)

Common Stock Warrants (Continued)

The Warrant I - III tranches were valued at $91,905, $64,955 and $60,586 using the Black-Scholes option fair value pricing model using the following assumptions:

Stock price on grant date	$	0.59
Exercise price	$	0.80 – 1.80
Expected time to exercise		2.5 years
Risk free interest rate		0.69%
Volatility		164.93%
Expected forfeiture rate		0.00%

During the year ended December 31, 2011, LKA expensed $91,905 related to Warrant I and $43,304 and $20,195for Warrants II and III, respectively. The value of Warrants II and II are being recognized ratably over the vesting term of one and two years, respectively.  

The following table summarizes the warrants outstanding and associated activity for the years ended December 31, 2010 and 2011:

	Number of Options		Weighted Average Price			Weighted Average Remaining Contractual Life
Warrants outstanding at December 31, 2009		400,000	$	1.00		1.5
Granted		84,000		0.93		3.0
Exercised		-		-		-
Forfeited		(400,000)		(1.00)		-
Warrants outstanding at December 31, 2010		84,000	$	0.93		2.93
Granted		200,000		0.80		2.5
Exercised		-		-		-
Expired		-		-		-
Warrants exercisable at December 31, 2011		284,000	$	0.84		1.16

NOTE 10 -

NOTES AND CONVERTIBLE NOTES PAYABLE

During December 2010, LKA issued a convertible note payable for cash of $150,000.  The convertible note accrued interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011 and  is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing.  During June 2011, the convertible note payable became past due and pursuant to the terms of the note, the to-date interest and commission expense of $18,000 as of June  1, 2011 was reclassified to note principle and the total then began to accrue interest at 15% per annum.   Accrued interest on the convertible note totaled $14,705 and $2,466 at December 31, 2011 and 2010, respectively.

During December 2010, LKA issued a convertible note payable for cash of $50,000.  The convertible note accrued interest at 5% and commission expense at 7% of the cash balance provided through the due date of June 1, 2011 and is convertible upon the consummation of a sale of equity securities of the Company for cash in an equity financing at a conversion price equal to the price per share paid by the investors in such financing.  During June 2011, the convertible note payable became past due and pursuant to the terms of the note, the to-date interest and commission expense of $6,000 as of June  1, 2011 was reclassified to note principle and the total then began to accrue interest at 15% per annum.   Accrued interest

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 10 -

NOTES AND CONVERTIBLE NOTES PAYABLE (CONTINUED)

on the convertible note totaled $4,902 and $822 at December 31, 2011 and 2010, respectively.  Debt offering costs of $24,163 were amortized to interest expense during the year ended December 31, 2011.

Notes and convertible notes payable consisted of the following at December 31:

2011       

2010  

Note payable to an individual, 12% interest

per annum, unsecured, due upon demand

$

10,000

  $

10,000

Note payable to related parties, 10% interest per

annum, unsecured, due upon demand (Note 4)

62,803

62,803

Note payable to a related company, 24% interest per

annum, secured by asset of LKA, due upon demand (Note 4)

766,321

573,020

Note payable to a related company, 10% interest per

annum, secured by asset of LKA, due January 4, 2011

(Note 4)

-

109,018

Convertible note payable to a company, 15% interest

per annum, unsecured, due upon demand

56,000

25,837

Convertible note payable to a company, 15% interest

per annum, unsecured, due upon demand

168,000

150,000

Total Notes and Convertible Notes Payable

$

1,063,124

  $

930,678

Maturities on notes and convertible notes payable are as follows:

Year ended December 31:

2011

                          $

1,063,124

2012

-

2013

-

2014

-

2015

-

Total

$

1,063,124

NOTE 11 -

GOING CONCERN

LKA's consolidated financial statements are prepared using Generally Accepted Accounting Principles applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business.  However, LKA has recently accumulated significant losses and has negative working capital.  All of these items raise substantial doubt about its ability to continue as a going concern.  Management's plans with respect to alleviating the adverse financial conditions that caused management to express substantial doubt about the LKA's ability to continue as a going concern are as follows:

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LKA INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

NOTE 11 -

GOING CONCERN (CONTINUED)

LKA is currently engaged in an intensive exploration program at the Golden Wonder mine with the objective of returning the mine to a producing status. The exploration program, which began in November, 2008, has involved extensive sampling/assaying for the purpose of identifying possible new production zones within the mine. During this evaluation period, sampling and analysis of exposed veins yielded encouraging results and some precious metals revenues. While encouraging, no conclusion can be drawn at this time about the commercial viability of the mine and LKA continues to pursue potential third party operator or lease agreements for the property.

In order to support continued operation of the mine, LKA entered into several financing transactions during the year ended December 31, 2011 and plans on raising additional funding during 2012 to support the continued exploration of the Golden Wonder mine.  If LKA is not successful in the resumption of mine operations which produce positive cash flows from operations, LKA may be forced to continue to raise additional equity or debt financing to fund its ongoing obligations or risk ceasing doing business.  

There can be no assurance that LKA will be able to achieve its business plans, raise any more required capital or secure the financing necessary to achieve its current operating plan.  The ability of LKA to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 12 -

SUBSEQUENT EVENTS

During January 2012, LKA settled a shipment of ore for $193,893, which was shipped in December 2011, but not processed until January 2012.

During April 2011, LKA entered into an agreement with Rauno Perttu to act as Chief Geologist and special advisor to the LKA board of directors, with the election of being appointed to a position on the LKA board in the future.  As part of the agreement, Mr. Perttu is to be paid consulting fees for any work done on projects pre-approved by the LKA board of directors.  An initial incentive compensation for his services, LKA agreed to issues Mr. Perttu warrants to purchase up to 500,000 shares of LKA stock in three tranches on a three-year vesting schedule as follows:

Warrant I for 200,000 shares exercisable at $0.40 per share, to be issued as of March 1, 2012.

Warrant II for 150,000 shares exercisable at $0.60 per share, to be issued one year later, or March 1, 2013.

Warrant III for 150,000 shares exercisable at $0.80 per share, to be issued one year later, or March 1, 2014.

Each warrant has a term of two and one-half years.  

35

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ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None; not applicable.

ITEM 9A:  CONTROLS AND PROCEDURES

Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our President and our Treasurer concluded that our disclosure controls and procedures as of the end of the period covered by the Annual Report were effective and that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President and our Treasurer, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our management, with the participation of the President and the Treasurer, evaluated the effectiveness of our internal controls over financial reporting as of December 31, 2011.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework.  Based on this evaluation, our management, with the participation of the President and acting CFO, concluded that, as of December 31, 2011, our internal controls over financial reporting were effective.

This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal controls over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of our 2011 fiscal year, there were no changes in our internal control over financial reporting.

ITEM 9B:  OTHER INFORMATION

None; not applicable.

36

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PART III

ITEM 10:  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Identification of Directors and Executive Officers

The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.

Name	Positions Held	Date of Election or Designation	Date of Termination or Resignation
Kye A. Abraham	President Chairman of the Board Director	03/88 03/88 03/88	* * *
Nanette Abraham	Secretary	1990	*
	Director Treasurer	1990 12/02	* *

·

These persons presently serve in the capacities indicated.

Background and Business Experience

Kye Abraham, President, Chairman of the Board Mr. Abraham is 53 years old. He has been the President of LKA since 1988. Mr. Abraham is also the President, Chairman of the Board and sole shareholder of Abraham & Co., Inc., a registered FINRA broker/dealer. Mr. Abraham is also the Managing Partner of Caldera.

Nanette Abraham, Secretary/Treasurer and Director. Ms. Abraham, age 54, and, until recently was employed as a Research Associate by the Russell Investment Group Company, a worldwide financial consulting company, since 1991.  She has been the Secretary and Director of LKA for over 10 years, and was appointed to the office of Treasurer in December, 2002.

Significant Employees

LKA has no employees who are not executive officers, but who are expected to make a significant contribution to its business.

Family Relationships

Our President, Kye Abraham, is the husband of Nanette Abraham, who is our Secretary/Treasurer.

Involvement in Other Public Companies Registered Under the Exchange Act

None; not applicable.

Involvement in Certain Legal Proceedings

During the past ten years, no director, promoter or control person:

·

has filed a petition under federal bankruptcy laws or any state insolvency laws, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

·

was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic

37

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violations and other minor offenses);

·

was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting the following activities:

Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

Engaging in any type of business practice; or

Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

·

was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in the preceding bullet point, or to be associated with persons engaged in any such activity;

·

was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;

·

was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

·

was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

any Federal or State securities or commodities law or regulation; or

any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

any law or regulation prohibiting mail or wire fraud in connection with any business activity; or

·

was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, or any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Promoters and control person.

See the heading “Transactions with Related Persons” below.

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Section 16(a) Beneficial Ownership Reporting Compliance

Our shares of common stock are registered under the Exchange Act, and therefore our officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a) which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities.  Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.  Based solely upon review of the copies of such forms furnished to us during the fiscal year ended December 31, 2011, the following were filed timely:

Name	Type	Filed
Kye A. Abraham	Form 4	November 1, 2011

Code of Ethics

We have adopted a Code of Conduct for our President and Secretary/Treasurer. A copy of the Code of Conduct was attached as Exhibit 14 to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2003. See Part IV, Item 15 of this Report.

Corporate Governance

Nominating Committee

We have not established a Nominating Committee because we believe that our Board of Directors is able to effectively manage the issues normally considered by a Nominating Committee.  During the calendar year ended December 31, 2011, there were no changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

Audit Committee

We have not adopted an audit committee separate from our Board of Directors because the Board of Directors consists of only Mr. and Mrs. Abraham.

ITEM 11:  EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation paid by the Company for services rendered during the periods indicated:

SUMMARY COMPENSATION TABLE

(1)  Effective December 28, 2007, our Board of Directors resolved to grant to Mr. Abraham an option to purchase up to one million (1,000,000) “unregistered” and “restricted” shares of our common stock at a price of $0.40 per share, exercisable for five years.  On October 26, 2011, the Company granted to Mr. Abraham options to purchase up to one million (1,000,000) “unregistered” and “restricted” shares of our common stock at a price of $0.50 per share, exercisable for three years.

Compensation of Directors

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ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners

The following tables set forth the share holdings of those persons who were the beneficial owners of more than vie percent (5%) shareholders of the Company’s common stock as of March 27, 2012:

Ownership of Principal Shareholders

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE

Transactions with Related Persons

Except as indicated below, during the past fiscal year, the Company has not entered into any transaction, and there is no currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years.

On July 2, 2009, LKA issued a promissory note (the Note) to PanAmerican Capital Group, Inc. (PanAmerican), a related party company, in exchange for cash of $545,090.  The Note accrues interest at 10% per annum, is secured by a first charge over LKA mining property and claims in Hinsdale County, Colorado and is due in five installments, the first due the first business day of January 2010, with the remaining four due in three months intervals through January 2011.  The amount of the payments are to be determined as the higher of either (i) the value of 140 ounces of gold as determined by the closing spot price on the Commodity  Exchange, Inc. (COMEX) on the business day immediately preceding the installment due date, or (ii) one-fifth (1/5) of the total principal amount, together with accrued interest thereon.

During January 2010, LKA made a partial payment of $92,064 on the Note, of which $16,644 was applied against the derivative liability (see Note 7), $27,778 was applied against accrued interest and $47,642 was applied to principal.  

LKA paid commissions and due diligence fees totaling $54,509 related to obtaining the funding.  Debt issue costs have been deferred and are being amortized over the life of the Note as interest expense.  Amortization of debt issuance costs was $36,537 and $17,972 for the years ended December 31, 2010 and 2009, respectively.

Due to delays in mine production, PanAmerica agreed to allow LKA to defer a portion of the first installment payment due January 4, 2010. The second installment payment due April 5, 2010 and third installment due on July 5, 2010, were also deferred until August 15, 2010. In consideration for these payment deferrals LKA agreed to make certain additional interest payments and to provide additional collateral/security on any unpaid balances due as of August 15, 2010. LKA and PanAmerican entered into a Waiver Agreement on June 10, 2010 whereby PanAmerican waived its Enforcement Rights with respect to the delinquent payments on the Note in consideration for the following:

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LKA must pay all amounts payable in respect of the installment payments otherwise due under the

Note on January 4, 2010, April 5, 2010 and July 5, 2010 to PanAmerican on or before August 15, 2010;

 

on or before August 15, 2010, LKA must pay to PanAmerican, in addition to the amounts otherwise payable under subsection (a) above, an amount equal to 2% per month of any unpaid installment payments, calculated with respect to any such unpaid installment payment, from the date such installment payment was otherwise due; and

LKA must issue to PanAmerican one unregistered and restricted share of LKA common stock for each dollar of unpaid installment payments otherwise due as of the date of the Waiver Agreement; and (ii) on July 5, 2010, issue to the PanAmerican one unregistered and restricted share of LKA common stock for each dollar of the installment payment otherwise due as of July 5, 2010.  The shares are to be held by PanAmerican as security and are to be surrendered to LKA for cancellation upon satisfaction of the Borrower of the obligations set forth in (a) and (b) above. In circumstances where such obligations are not satisfied the Holder shall be entitled to retain such Shares as beneficial owner thereof provided that such retention shall not otherwise relieve the Borrower from its obligations under the Note or the Waiver Agreement.

As a result of LKA’s failure to pay the required installment payment on August 15, 2010, 220,453 and 169,652 shares of LKA common stock were surrendered to PanAmerican with a fair value of $358,897.  The fair value of these shares was recorded as debt default expense for the year ended December 31, 2010.   

LKA failed to make the required final note installment payment due January 4, 2011.  To-date, PanAmerican has not made any demands on the past due installments and LKA continues to pursue a resolution with the debt holder. As a result of the Waiver Agreement and payment defaults, LKA has reclassified a total of $268,873 in accrued derivative liability related to the past due Note payments to the remaining original $497,448 note principal and has accrued interest at a rate of 2% per month, for the period from the dates of note defaults through December 31, 2011. Total accrued interest on the Waiver Agreement and past due note balance was $258,478 and $74,560 at December 31, 2011 and 2010, respectively.  Interest expense on the Note totaled $183,917 and $91,496 for the years ended December 31, 2011 and 2010, respectively.

LKA pays a company owned by an officer and shareholder $1,500 per month for office rent and expenses.  The affiliated Company, (Abraham & Co., Inc. a Financial Industry Regulatory Authority member and registered investment advisor) also executes LKA’s securities transactions and manages its investment portfolio. At December 31, 2011 and 2010, LKA owes Abraham & Co $31,000 and $13,500 on this obligation, respectively.  

LKA owes Cognitive Associates Limited Partnership $56,828 in unpaid principal from a note dated December 31, 1986.  The note is unsecured, due upon demand, and accrues interest at 10% per annum.  No payments have been made during the year ended December 31, 2011.  Accrued interest related to this note totaled $76,337 as of December 31, 2011.

LKA owes Cognitive Intelligence Limited Partnership $5,975 in unpaid principal from a note dated October 1, 1987. The note is unsecured, due upon demand, and accrues interest at 10% per annum.  No payments have been made during the year ended December 31, 2011.  Accrued interest related to this note totaled $9,693 as of December 31, 2011.

At December 31, 2011 and 2010, LKA owes $36,205 and $1,247, respectively, for purchases made on the personal credit card of LKA’s president, Kye Abraham.

Promoters and Certain Control Persons

See the heading “Transactions with Related Persons” above.

Parents of the Smaller Reporting Company

LKA has no parents, except to the extent that Mr. Abraham may be deemed to be its parent by virtue of his beneficial ownership of approximately 49% of its currently outstanding shares.

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Director Independence

We do not have any independent directors serving on our Board of Directors.

ITEM 14:  PRINCIPAL ACCOUNTING FEES AND SERVICES

The following is a summary of the fees billed to us by our principal accountants during the fiscal years ended December 31, 2011, and 2010:

Fee Category		2011		2010
Audit Fees	$	30,000		$	20,000
Audit-related Fees	$	0		$	0
Tax Fees	$	0		$	0
All Other Fees	$	0		$	0
Total Fees	$	30,000		$	20,000

Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.

Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”

Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.

All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.

PART IV

ITEM 15:  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)(2)    Financial Statements.  See the audited financial statements for the year ended December 31, 2011 contained in Item 8 above which are incorporated herein by this reference.

(a)(3)         Exhibits.  The following exhibits are filed as part of this Annual Report:

Exhibits

Exhibit Number	Description (1)
3.1	Certificate of Incorporation (2)
3.2	By-laws  (2)
14	Code of Conduct (3)
31.1	302 Certification of Kye Abraham
31.2	302 Certification of Nanette Abraham
32	906 Certification
101 INS	XBRL Instance Document*
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document*
101 LAB	XBRL Taxonomy Extension Label Linkbase Document*
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101 CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101 SCH	XBRL Taxonomy Extension Schema Document*

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under these sections.

DOCUMENTS INCORPORATED BY REFERENCE

(1)  Summaries of all exhibits contained within this Report are modified in their entirety by reference to these exhibits.

(2)  Incorporated by reference to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2001, filed with the SEC on February 11, 2003.

(3)  Incorporated by reference to our Annual Report on Form 10-KSB for the calendar year ended December 31, 2003, filed with the SEC on March 29, 2004.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LKA INTERNATIONAL, INC.

Date:	March 30, 2011		By:	/s/Kye Abraham
				Kye Abraham, President, Chairman of the Board and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

LKA INTERNATIONAL, INC.

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