```
**UNITED STATES**
```

```
**SECURITIES AND EXCHANGE COMMISSION**
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```
**WASHINGTON, DC 20549**
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```
  
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**FORM 10-Q**
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** **
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Mark One)
```

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** **x**    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
```

```
For the quarterly period ended March 31, 2009
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```
or
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```
   o     **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
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```
For the transition period from .............................................................to............................................................................
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```
 
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Commission file number **0-52151**
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```
 
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**Eastern Goldfields, Inc.**
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(Exact name of registrant as specified in its charter)
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```
 
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                                              **Nevada**                                                                                       **88-0441307**
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                             (State or other jurisdiction of                                                                (I.R.S. Employer
```

```
                             incorporation or organization)                                                              Identification No.)
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```
 
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**1660 Hotel Circle North, Suite 207, San Diego, California 92108-2808**
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(Address of principal executive offices                                 (Zip Code)
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** **
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Registrant’s telephone number, including area code  **(619) 497-2555**
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______________________________________________________________________
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes  x           No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. 

 
```
Large accelerated filer  o                                                                           Accelerated filer  o
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```
 
```

```
Non-accelerated filer    o      (Do not check if a smaller reporting company)            Smaller reporting company  x
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```
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  
```

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                                                                                                                                       Yes  o           No x
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```
 
```

----

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
```

```
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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```
 
```

```
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or
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15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
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```
 
```

```
Yes  x           No o
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```
 
```

```
 
```

----

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APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date. 
```
 
```

```
On May 11, 2009, 9,932,214 shares of the issuer’s common stock were outstanding.
```

 

** **

**PART I—FINANCIAL INFORMATION**

**Item1. Financial Statements.**

** **

** **

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**MARCH 31, 2009 AND DECEMBER 31,2008**

 

** **

**ASSETS**

** **

|                                              |   | March 31, 2009 |        | December 31, 2008 |
|---------------------------------------------------|--------|----------------|-------------|-------------------|
|                                              |   |           | (Unaudited) |              |   |   |
| Cash                                              |   | $              | 1,025       |              | $ | 38,275 |
| Inventories (Notes 2 and 4)                       |   |           | 473,502     |              |   | 357,777 |
| Prepaid expenses and other  current assets        |   |           | 431,853     |              |   | 289,222 |
|                                              |   |           |        |              |   |   |
|                                              |   |           | 906,380     |              |   | 685,274 |
|                                              |   |           |        |              |   |   |
| Property, plant, and mine  development, net  |   |           |        |              |   |   |
|    (Notes 2 and 5)                      |   |           | 24,223,890  |              |   | 24,583,241 |
| Other assets                                      |   |           | 539,987     |              |   | 485,522 |
|                                              |   |           |        |              |   |   |
|                                              |   |           |        |              |   |   |
| Total  assets                                     |   | $              | 25,670,257  |              | $ | 25,754,037 |

** **

** **

** **
```
 
```

** **

** **

The accompanying notes are an integral part ofthese consolidated financial statements. 

** **

** **

** **

****3

----

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**MARCH 31, 2009 AND DECEMBER 31,2008**

 

** **

**LIABILITIES ANDSTOCKHOLDERS’ EQUITY**

|                                                                                                                                                            |   | March 31, 2009 |              | December 31, 2008 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|-------------------|-------------------|
|                                                                                                                                                            |   |           | (Unaudited)  |              |   |   |
| Current liabilities:                                                                                                                                            |   |           |              |              |   |   |
| Bank  overdraft                                                                                                                                                 |   | $              | 58,012            |              | $ | - |
| Accounts  payable and other current liabilities                                                                                                                 |   |           | 2,149,311         |              |   | 1,650,370 |
| Advances  from stockholders                                                                                                                                     |   |           | 114,150           |              |   | 110,832 |
| Short  term loans (Note 6)                                                                                                                                      |   |           | 15,608,703        |              |   | 15,350,549 |
| Current  portion of long-term liabilities (Note 7)                                                                                                              |   |           | 357,725           |              |   | 480,636 |
|                                                                                                                                                            |   |           |              |              |   |   |
| Total  current liabilities                                                                                                                                      |   |           | 18,287,901        |              |   | 17,592,387 |
|                                                                                                                                                            |   |           |              |              |   |   |
| Long-term liabilities:                                                                                                                                          |   |           |              |              |   |   |
| Long  term liabilities, net of current portion (Note 7)                                                                                                         |   |           | 1,345,455         |              |   | 1,370,472 |
| Reclamation  and remediation obligations (Note 8)                                                                                                               |   |           | 346,262           |              |   | 352,974 |
|                                                                                                                                                            |   |           |              |              |   |   |
| Total  long-term liabilities                                                                                                                                    |   |           | 1,691,717         |              |   | 1,723,446 |
|                                                                                                                                                            |   |           |              |              |   |   |
| Commitments and  contingencies (Note 9)                                                                                                                         |   |           | -                 |              |   | - |
| Minority interest (Note 10)                                                                                                                                     |   |           | 3,625,298         |              |   | 1,178,746 |
|                                                                                                                                                            |   |           |              |              |   |   |
| Stockholders’ equity:                                                                                                                                      |   |           |              |              |   |   |
| A  Class Preference Shares:                                                                                                                                     |   |           |              |              |   |   |
| $0.00001  par value, 10,000,000 shares authorized; 3,081,393 and 2,881,393 shares  issued and outstanding at March 31, 2009 and December 31, 2008, respectively |   |           | 32                |              |   | 45 |
| Preferred  Stock:                                                                                                                                               |   |           |              |              |   |   |
| $0.001  par value, 20,000,000 shares authorized; 0 shares issued and outstanding at  March 31, 2009 and December 31, 2008                                       |   |           | -                 |              |   | - |
| Common  Stock:                                                                                                                                                  |   |           |              |              |   |   |
| $0.001  par value, 160,000,000 shares authorized; 9,377,986 shares issued and  outstanding at March 31, 2009 and December 31, 2008                              |   |           | 9,378             |              |   | 9,378 |
| Common  stock to be issued                                                                                                                                      |   |           | 554               |              |   | 440 |
| Additional  paid in capital                                                                                                                                     |   |           | 23,228,201        |              |   | 22,914,882 |
| Accumulated  other comprehensive loss                                                                                                                           |   |           | (5,331,453)       |              |   | (2,668,197) |
| Accumulated  deficit                                                                                                                                            |   |           | (11,978,698)      |              |   | (11,196,876) |
|                                                                                                                                                            |   |           |              |              |   |   |
|                                                                                                                                                            |   |           |              |              |   |   |
|                                                                                                                                                            |   |           | 5,928,014         |              |   | 9,059,672 |
| Less:  Loan to Lomshiyo (Note 10)                                                                                                                               |   |           | (3,862,673)       |              |   | (3,800,214) |
|                                                                                                                                                            |   |           |              |              |   |   |
| Total  stockholders’ equity                                                                                                                                |   |           | 2,065,341         |              |   | 5,259,458 |
|                                                                                                                                                            |   |           |              |              |   |   |
|    Total liabilities and  stockholders’ equity                                                                                                   |   | $              | 25,670,257        |              | $ | 25,754,037 |

 

The accompanying notes are an integral part of these consolidatedfinancial statements. 

 

4

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

|                                                                                                  | **Three Months**

**Ended**

**March 31, 2009** | **Three Months**

**Ended**

**March 31,2008** |
|-------------------------------------------------------------------------------------------------------|-------------------------------------------------|------------------------------------------------|
|  

Income:

Sales

Other  income                                                                 |  

 

$                               |  

 

1,912,790

138,378             |  

 

	$ |  

 

2,185,015

73,262 |
|  

Total  income                                                                                 |                                            |  

2,051,168                              |   |  

2,258,277 |
|  

Costs and expenses:

Cost  of production

Exploration  costs

Operating  expenses             |  

 

                           |  

 

1,485,709

-

666,517          |   |  

 

1,589,011

-

542,906 |
|  

Total  costs and expenses                                            |                                            |  

2,152,226                              |   |  

2,131,917 |
|  

Income (Loss) from  operations                                                                |                                            |  

(101,058)                              |   |  

126,360 |
|  

Other expenses:

Interest

 

Income (Loss) before  minority interest

Minority interest |                                            |  

 

654,629                        |   |  

 

23,714 |
|                                                                                                  |  

(755,687)

(26,135)                     |                                           |  

102,646

(15,397) |
|  

Income (Loss) before  provision for income taxes

Provision for income taxes                  |                                            |  

(781,822)

-                           |   |  

87,249

- |
|  

Net income (loss)                                                                             |  

$                                       |  

(781,822)                              |  

$ |  

87,249 |
|  

Earnings (loss) per share,  basic                                                             |  

$                                       |  

(0.08)                                 |  

$ |  

0.01 |
|  

Earnings (loss) per share,  diluted                                                           |  

$                                       |  

(0.08)                                 |  

$ |  

0.01 |
|  

Weighted average shares outstanding, basic                                                    |                                            |  

9,377,986                              |   |  

9,377,986 |
|  

Weighted average shares  outstanding, diluted                                                 |                                            |  

9,377,986                              |   |  

9,961,086 |

 

 

 

 

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

****5

----

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

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

|                                                                                                                   |   | **Common Stock**                 |   | **A Class Preference Shares**                                            |      |  

                    |            |  

                        |                                          |  

                                                                                                             |   |  

                                                                             |   |  

                            |
|------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------------------------------------------------|-----------|----------------------------------|-----------------|--------------------------------------|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|------------------------------------------|
|                                                                                                                   |   | ** **

**Number of Shares** |   | ** **

**Par       **

**Value** |      | ** **

**Number of Shares** |            | ** **

**Par **

**Value** | **Common**

**Stock  to be**

**Issued** | ** **

**Additional               Paid-in Capital** |   | ** Accumulated Other       Comprehensive   Loss** |   | ** **

**Accumulated**

**Deficit** |   | ** **

**Loan to  **

**Lomshiyo** |   | ** **

**Total**

**Stockholders'**

**Equity** |
|                                                                                                                   |   |                             |   |                                                                     |      |                             |            |                                 |                                          |                                                                                                                      |   |                                                                                 |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance  at December 31, 2008 (Audited)                                                                                |   | 9,377,986                        |   | $                                                                        | 9,378     |                             | 2,881,393       |                                 | $                                             | 45                                                                                                                        | $      | 440                                                                                       | $      | 22,914,882                               |   | $ | (2,668,197) |   | $ | (11,196,876) |   | $ | (3,800,214) |   | $ | 5,259,458 |
| Common  stock to be issued for cash (114,003 shares)            |   |  

-                        |   |                                                                     |  

- |                             |  

-       |                                 |                                          |  

-                                                                                                                 |   |  

114                                                                               |   |  

313,319                          |   |   |  

- |   |   |  

- |   |   |  

- |   |   |  

313,433 |
| Common  stock issued in exchange for A Class Shares                                                                    |   |  

-                        |   |                                                                     |  

- |                             |  

200,000 |                                 |                                          |  

3                                                                                                                 |   |  

-                                                                                 |   |  

-                                |   |   |  

- |   |   |  

- |   |   |  

- |   |   |  

3 |
| Accrual  of interest income on loan to Lomshiyo                                                                        |   |  

-                   |   |                                                                     |  

- |                             |  

-       |                                 |                                          |  

-                                                                                                                 |   |  

-                                                                                 |   |  

-                                |   |   |  

- |   |   |  

- |   |   |  

(134,719) |   |   |  

(134,719) |
| Net loss                                                                                                               |   | -                                |   |                                                                     | -         |                             | -               |                                 |                                          | -                                                                                                                         |   | -                                                                                         |   | -                                        |   |   | - |   |   | (781,822) |   |   | - |   |   | (781,822) |
| Foreign currency  translation                                                                                          |   | -                                |   |                                                                     | -         |                             | -               |                                 |                                          | (16)                                                                                                                      |   | -                                                                                         |   | -                                        |   |   | (2,663,256) |   |   | - |   |   | 72,260 |   |   | (2,591,012) |
| Comprehensive loss                                                                                                     |   |                             |   |                                                                     |      |                             |            |                                 |                                          |                                                                                                                      |   |                                                                                      |   |                                     |   |   |   |   |   |   |   |   |   |   |   | (3,372,834) |
| Balance at March 31,  2009 (Unaudited)                                                                                 |   | 9,377,986                        |   | $                                                                        | 9,378     |                             | 3,081,393       |                                 | $                                             | 32                                                                                                                        | $      | 554                                                                                       | $      | 23,228,201                               |   | $ | (5,331,453) |   | $ | (11,978,698) |   | $ | (3,862,673) |   | $ | 2,065,341 |

 

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

****6

----

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

** CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | **Three Months**          | ** **                | **Three Months** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|---------------------------|------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | **Ended March 31,  2009** | **Ended March 31,  2008** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Cash flows from operating  activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                      |                      |             |   |   |
| Net  income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                         | (781,822)                 |             | $ | 87,249 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Adjustments to reconcile  net loss to net cash used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                      |                      |             |   |   |
|   in operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                      |                      |             |   |   |
| Depreciation,  depletion and amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                      | 124,680                   |             |   | 135,841 |
| Accrued  interest income on Loan Lomshiyo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                      | (134,719)                 |             |   | (72,460) |
|      Minority  interest                                                                                       |       |                      | 26,135                    |             |   | 15,397 |
| Changes in assets and  liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                      |                      |             |   |   |
|  Increase  in inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                      | (115,725)                 |             |   | (43,299) |
|  Decrease  (Increase) in other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |                      | -                         |             |   | (154,680) |
|  (Increase)  Decrease  in prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |                      | (142,631)                 |             |   | 148,849 |
|  Increase  in bank overdraft                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      | 58,012                    |             |   | - |
|  Increase  in accounts payable and other current  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                      | 498,941                   |             |   | 143,446 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                      |                      |             |   |   |
|             Net cash  provided from (used in) operations                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                      | (467,129)                 |             |   | 260,343 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Cash  flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                      |                      |             |   |   |
| Purchase  of  property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                      | (391,827)                 |             |   | (989,369) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                      |                      |             |   |   |
|             Net cash used  in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                      | (391,827)                 |             |   | (989,369) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Cash  flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                      |                      |             |   |   |
| Advances  from (to) stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                      | 3,318                     |             |   | 461,738 |
| Repayment  of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                      | (147,928)                 |             |   | (179,668) |
| Proceeds  from common stock issued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                      | 313,433                   |             |   | - |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
|             Net cash used  in (by)  financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      | 168,823                   |             |   | 282,070 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Effect of exchange rates on  cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                      | 652,883                   |             | 251,665 |
| Net decrease in cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      | (37,250)                  |             | (195,291) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Cash, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                      | 38,275                    |             | 355,148 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| Cash, end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | $                         | 1,025                     | $                | 159,857 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| **Supplemental disclosure  of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** |                      |                      |             |   |
| ** **Cash paid for interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | $                         | 654,629                   | $                | 23,714 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |   |
| **Supplemental disclosure  of non-cash operating,**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |                      |                      |             |   |
| **   investing and  financing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** |                      |                      |             |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                      |                      |             |   |
| Accrual  of interest income on loan to Lomshiyo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | $                         | 134,719                   | $                | 72,460 |

 

The accompanying notes are an integral part of theseconsolidated financial statements

7

----

****

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

**(Unaudited)**

** **

**1.        ORGANIZATION AND HISTORY**

 

EasternGoldfields, Inc., (the “Company" or "EGI") is the parentcompany of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a corporationorganized under the laws of the Republic of South Africa. EGSA conducts all of theCompany’s business operations in South Africa through its South Africancorporation subsidiaries.

 

EasternGoldfields, Inc. was originally incorporated under the laws of the State of Nevada on July 15, 1998, under the name of Fairbanks Financial, Inc. The Company wasestablished as a business management, marketing and consulting firm to serveboth the emerging and established business entrepreneur. Since itsincorporation, the Company has had minimal operations. It redirected itsbusiness efforts in late 2005 and on September 23, 2005, following a change incontrol, it purchased 100% of the issued and outstanding common or ordinarystock of EGSA. On October 1, 2005, the Company’s wholly owned subsidiary, EGSA,acquired, via a share exchange, 100% of the issued and outstanding common orordinary stock of Eastern Goldfields Limited (“EGL”), a South African goldproducer and developer corporation. EGL conducts mining operations in theBarberton Greenstone Belt area of the Mpumalanga Province, South Africa.  OnOctober 25, 2005, the Company changed its corporate name to Eastern Goldfields,Inc. to more accurately reflect its business operations.  On May 30, 2008, EGSAacquired 100% of the issued and outstanding common or ordinary stock ofBarbrook Mines Limited (“Barbrook”), also a South African gold producer anddeveloper corporation.  On December 15, 2008, ownership of Barbrook was placedunder EGL.    

 

Thisshare exchange for the acquisition of EGL by EGI’s wholly owned South Africansubsidiary, EGSA, was accounted for as a reverse acquisition, and, accordingly,for financial statement purposes, EGL was considered the accounting acquirorand the subject transaction was considered a recapitalization of EGL ratherthan an acquisition by the Company. Accordingly, the historical financialstatements prior to this share exchange are those of EGL, however, the name ofthe consolidated corporation going forward is Eastern Goldfields, Inc.

 

EGLitself is a South African holding company which has three South African subsidiarycorporations; Makonjwaan Imperial Mining Company (Pty) Ltd. (“MIMCO”), EasternGoldfields Exploration (Pty) Ltd. (“EGE”) and Centurion Mining Company (Pty)Ltd. (“Centurion”).

** **

**2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basisof Presentation**

 

Theunaudited consolidated financial statements included herein have been preparedin accordance with the accounting principles generally accepted in the UnitedStates for interim financial information and with the instructions to Form 10-Qand Article 8 and Rule 10-01 of Regulation S-X. They do not include allinformation and notes required by generally accepted accounting principles forcomplete financial statements. However, except as disclosed herein, there hasbeen no material changes in the information disclosed in the notes to theconsolidated financial statements included in the Company’s annual report onForm 10-K of Eastern Goldfields, Inc. and Subsidiaries for the year endedDecember 31,  2008. In the opinion of management, all adjustments (includingnormal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three months ended March 31, 2009, arenot necessarily indicative of the results that may be expected for any otherinterim period or the entire year. For further information, these unauditedconsolidated financial statements and the related notes should be read inconjuction with the Company’s audited financial statements for the year endedDecember 31, 2008, included in the Company’s annual report on Form  10-K.

 

8

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**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the financial statements of theCompany and its wholly owned subsidiaries. All amounts are in U.S. dollarsunless otherwise indicated. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**Property Plant andMine Development**

 

Miningassets, including mine development and infrastructure costs and mine plantfacilities, are recorded at cost of acquisition. Expenditure incurred toevaluate and develop new ore bodies, to define mineralization in existing orebodies, to establish or expand productive capacity, is capitalized untilcommercial levels of production are achieved, at which times the costs areamortized as set out below.

 

Mineralrights are recorded at cost of acquisition. When there is little likelihood ofa mineral right being exploited, or the value of mineral rights have diminishedbelow cost, a write-down is affected against income in the period that suchdetermination is made.

 

Non-miningassets are recorded at cost of acquisition. These assets include the assets ofthe mining operation not included in the previous categories and all the assetsof the non-mining operations.

 

Depreciation,depletion and amortization is determined to give a fair and systematic chargein the income statement taking into account the nature of a particular ore bodyand the method of mining of that ore body. Mining assets, including minedevelopment and infrastructure costs, mine plant facilities and evaluationcosts, are amortized over the life of the mine using units-of-productionmethod, based on estimated proved and probable ore reserves above theinfrastructure. The proven and probable reserve quantities used to calculatedepreciation, depletion and amortization do not include the proven and probablereserve quantities attributable to stockpiled inventory.

 

Provedand probable ore reserves reflect the estimated quantities of economicallyrecoverable reserves, which can be recovered in future from known mineraldeposits.

 

Certainmining plant and equipment included in mine development and infrastructure isdepreciated on a straight-line basis over their estimated useful lives.

 

Othernon-mining assets are recorded at cost and depreciated on a straight-line basisover their estimated useful lives as follows:

 

Vehicles– 10 years

 

Furnitureand equipment – 3 years

 

Thecarrying amounts of the group's assets are reviewed at each balance sheet dateto determine whether there is any indication of impairment. If such indicationexists, the asset's recoverable amount is estimated.

 

 9

----

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Use of Estimates**

 

Thepreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities and the reportedamounts of revenues and expenses during the reporting period.  Actual resultscould differ from those estimates.

 

**Earnings Per Share**

 

InFebruary 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.128 Earnings Per Share which requires the Company to present basic and dilutedearnings per share for all periods presented. The computation of loss percommon share (basic and diluted) is based on the weighted average number of sharesactually outstanding during the period. Diluted earnings per share have beencalculated to give effect to the number of additional shares of common stockthat would have been outstanding if the potential dilutive instruments had beenissued for the three months ended March 31, 2009 and 2008.  The weightedaverage number of outstanding shares includes the common stock as well as the AClass Preference Shares, as the holders of the A Class Preference Shares havethe same rights and entitlements as those attached to the common stock. Thecomputation of dilutive loss per common share does not assume conversion,exercise or contingent exercise of securities that would have an anti-dilutiveeffect on earnings.

 

Thefollowing table reconciles basic earnings per share and diluted earnings pershare and the related weighted average number of shares outstanding for thethree months ended March 31, 2009:

 

                                                                                        DISCLOSURE FOR RECONCILIATION

                                                                                                   OF BASIC AND DILUTED

                                                                                                     EARNINGS PER SHARE

 

                                                                                     Forthe Three Months Ended March 31, 2009

 

                                                                                       Income                  Shares                  Per-share

                                                                                       (Numerator)        (Denominator)           Amount

 

        Net loss                                                                          $(781,822)              9,377,986                    $  (0.08)

 

        BASIC AND DILUTEDEPS

        Income availableto common

                stockholders                                                         $(781,822)              9,377,986                    $  (0.08)

** **

** **

** **

** **10

----

 

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Income Taxes**

 

Deferredincome taxes are reported using the liability method.  Deferred tax assets arerecognized for deductible temporary differences and deferred tax liabilitiesare recognized for taxable temporary differences.  Temporary differences arethe differences between the reported amounts of assets and liabilities andtheir tax bases.  Deferred tax assets are reduced by a valuation allowancewhen, in the opinion of management, it is more likely than not that someportion or all of the deferred tax assets will not be realized.  Deferred taxassets and liabilities are adjusted for the effects of changes in tax laws andrates on the date of enactment.

 

 

**ForeignCurrency Translation**

 

TheCompany’s functional currency is the South African Rand.  The Companytranslates the foreign currency financial statements of its foreign operationsby translating balance sheet accounts at the exchange rate on the balance sheetdate and the income statement accounts using the prevailing exchange rates atthe transaction date.  Translation gains and losses are recorded instockholders’ equity and realized gains and losses are reflected in operations.

 

**ExplorationExpenses**

 

Exploration costs arecharged to operations as incurred.

 

11

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**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**Impairment ofLong-Lived Assets**

 

TheCompany reviews long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto the future net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less costs to sell.  During the threemonths ended March 31, 2009, there was no impairment of long-lived assets.

 

**Inventories**  

 

Asdescribed below, costs that are incurred in or that benefit the productiveprocess are accumulated as stockpiles and inventories. Stockpiles andinventories are carried at the lower of average cost or net realizable value.Net realizable value represents the estimated future sales price of the productbased on current and long-term metals prices, less the estimated costs tocomplete production and bring the product to sale. Write-downs of stockpiles andinventories, resulting from net realizable value impairments, are reported as acomponent of*Cost of production*. The major classifications are as follows:

 

***Stockpiles***

 

Stockpilesrepresent materials that are currently in the process of being converted to asaleable product. Conversion processes vary depending on the nature of the oreand the specific processing facility, but include mill in-circuit, leachin-circuit and carbon in-pulp inventories. In-process material is measuredbased on assays of the material fed into the process and the projectedrecoveries of the respective plants. In-process inventories are valued at theaverage cost of the material fed into the process attributable to the sourcematerial coming from the mines, stockpiles and/or leach pads plus thein-process conversion costs, including applicable depreciation relating to theprocess facilities incurred to that point in the process.

 

***PreciousMetals In process***

 

Preciousmetals in process is gold bullion.  Precious metals that result from theCompany’s mining and processing activities are valued at the average cost ofthe respective in-process inventories incurred prior to the refining process,plus applicable refining costs.

 

**RevenueRecognition** 

 

Revenueis recognized, net of treatment charges, from a sale when the price isdeterminable, the product has been delivered, the title has been transferred tothe customer and collection of the sales price is reasonably assured.

 

12

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**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**DeferredStripping Costs** 

 

Ingeneral, mining costs are allocated to production costs and inventories, andare charged to c*osts of production*whengold is sold.  However, at open pit mines with diverse grades and waste-to-oreratios over the mine life, the Company defers and amortizes certain miningcosts on a UOP basis over the life of the mine.  These mining costs, which arecommonly referred to as “deferred stripping” costs, are incurred in miningactivities that are normally associated with the removal of waste rock.  Thedeferred stripping accounting method is generally accepted in the miningindustry where mining operations have diverse grades and waste-to-ore ratios;however, industry practice does vary.  Deferred stripping matches the costs ofproduction with the sale of such production at the Company’s operations whereit is employed, by assigning each ounce of gold with an equivalent amount ofwaste removal cost.

 

If theCompany were to expense stripping costs as incurred, there could be greatervolatility in the Company’s period-to-period results of operations.

 

Deferred*stripping* costs are charged to*Costsof Production*as gold is produced andsold using the UOP method based on estimated recoverable ounces of proven andprobable gold, using a stripping ratio calculated as the ratio of total tons tobe moved to total proven and probable ore reserves, which results in therecognition of the costs of waste removal activities over the life of the mineas gold is produced.

 

TheCompany reviews and evaluates its deferred stripping costs for impairment whenevents or circumstances indicate that the related carrying amounts may not berecoverable.

 

As theCompany’s open pit operations ceased by end-2008, the Company did not measureand recognize production stage deferred stripping costs and credits for the threemonths period ended March 31, 2009. 

 

**Reclamationand Remediation Costs (Asset Retirement Obligations)**

 

InAugust 2001, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, whichestablished a uniform methodology for accounting for estimated reclamation andabandonment costs. Reclamation costs are allocated to expense over the life ofthe related assets and are adjusted for changes resulting from the passage oftime and revisions to either the timing or amount of the original present valueestimate. Prior to adoption of SFAS No. 143, estimated future reclamation costswere based principally on legal and regulatory requirements. Such costs relatedto active mines are accrued and charged over the expected operating lives ofthe mines using the UOP method based on proven and probable reserves. Futureremediation costs for inactive mines are accrued based on management’s bestestimate at the end of each period of the undiscounted costs expected to beincurred at a site. Such cost estimates included, where applicable, ongoingcare, maintenance and monitoring costs.  Changes in estimates at inactive minesare reflected in earnings in the period an estimate is revised.

 

 

13

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**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**StockOption Expense** 

 

Compensationcost recognized includes: (a) compensation cost for all share-based paymentsgranted prior to, which have since vested as of January 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofFAS 123, and (b) compensation cost for all share-based payments grantedsubsequent to January 1, 2006, which have vested based on the grant-date fairvalue estimated in accordance with the provisions of FAS 123(R).

 

        **Fair ValueAccounting**

** **

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2008.  In February 2008, theFASB staff issued Staff Position No. 157-2 “Effective Date of FASB StatementNo. 157” (“FSP FAS 157-2”).  FSP FAS 157-2 delayed the effective date of FAS157 for nonfinancial assets and nonfinancial liabilities, except for items thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  The provisions of FSP FAS 157-2 areeffective for the Company’s fiscal year beginning January 1, 2009.            

 

FAS157 establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value.  The hierarchy gives the highestpriority to unadjusted quoted prices in active markets for identical assets orliabilities (Level 1 measurements) and the lowest priority to unobservable inputs(Level 3 measurements).  The three levels of the fair value hierarchy under FAS157 are described below:

 

Level1           Unadjusted quoted prices in active markets that are accessible atthe measurement date for identical, unrestricted assets or liabilities;

 

Level2           Quoted prices in markets that are not active, or inputs that areobservable, either directly or indirectly for substantially the full term ofthe asset or liability;

 

Level3           Prices or valuation techniques that require inputs that are bothsignificant to the fair value measurement and unobservable (supported by littleor no market activity).

 

Thefollowing table sets forth the Company’s financial assets and liabilitiesmeasured at fair value by level within the fair value hierarchy.  As required byFAS 157, assets and liabilities are classified in their entirety based on thelowest level of output that is significant to the fair value measurement.

** **

** **

** **14

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** **

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**2.         SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES** (Continued)

 

**FairValue Accounting**(Continued)

 

|                                                                                                                                                |   |              Fair Value at March 31, 2009 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|
|                                                                                                                                                |   |                                                                                                  | (in thousands) |
|                                                                                                                                                |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                |   |                                                                                                  | Total |   |   | Level 1 |   |   | Level 2 |   |   |   Level 3 |
| Assets:                                                                                                                                             |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                    Cash                                        |   | $                                                                                                     | 1 |   | $ | 1 |   | $ | - |   | $ | - |
|                    Other assets                                |   |                                                                                                  | 25,669 |   |   | 25,669 |   |   |   |   |   |   |
|                                                                                                                                                |   | $                                                                                                     | 25,670 |   | $ | $25,670 |   | $ | - |   | $ | - |
| Liabilities:                                                                                                                                        |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                    Accounts payable and other                  |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                        current liabilities |   | $                                                                                                     | 2,207 |   | $ | 2,207 |   | $ | - |   | $ | - |
|                   Advances from stockholders              |   |                                                                                                  | 114 |   |   | 114 |   |   | - |   |   | - |
|                  Short term  loans                                  |   |                                                                                                  | 15,966 |   |   | - |   |   | 15,966 |   |   | - |
|                   Long term liabilities                   |   |                                                                                                  | 1,345 |   |   | - |   |   | 1,345 |   |   | - |
|                                                                                                                                                |   | $                                                                                                     | 19,632 |   | $ | 2,321 |   | $ | 17,311 |   | $ | - |

 

 

TheCompany’s cash and certain other assets are classified within Level 1 of thefair value hierarchy since they are valued using quoted market prices.  Thecash and certain other assets that are valued based on quoted market prices inactive markets are primarily money market securities.

 

TheCompany’s accounts payable and other current liabilities and advances fromstockholders are classified within Level 1 of the fair value hierarchy sincethey occur with sufficient frequency and volume toprovide pricing information on an ongoing basis.

 

**The Company’s short term loans and long term liabilities areclassified within Level 2 of the fair value hierarchy since they have aspecified (contractual) term.**

 

Thetotal amount of the changes in fair value for the period was included in netloss as a result of changes from December 31, 2008.

 

InFebruary 2007, the FASB issued FASB Statement No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (“FAS 159”) permits entities tochoose to measure many financial instruments and certain other items at fairvalue, with the objective of improving financial reporting by mitigatingvolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The provisions of FAS 159 were adopted January 1, 2008.  TheCompany did not elect the Fair Value Option for any of its financial assets orliabilities, and therefore, the adoption of FAS 159 had no impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

** **

**            Recent Accounting Pronouncements**

 

In April 23, 2009,the Financial Accounting Standards Board (FASB) issued FASB Staff Position(FSP)  Financial Accounting Standard (FAS) 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly.*Basedon guidance, if an entity determines that the level of activity for an asset orliability has significantly decreased and that a transaction is not orderly,further analysis of transactions or quoted prices is needed, and a significantadjustment to the transaction or quoted prices may be necessary to estimatefair value in accordance with the Statement of Financial Accounting Standards(SFAS) No. 157 *Fair Value Measurements*. This FSP is to be appliedprospectively and is effective for interim and annual periods ending after June15, 2009 with early adoption permitted for periods ending after March 15, 2009.The company will adopt this FSP for its quarter ending June 30, 2009. There isno expected impact on the Company’s financial statements.

 

In April 2009, theFASB issued FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation ofOther-Than-Temporary Impairments.* The guidance applies to investments indebt securities for which other-than-temporary impairments may be recorded. Ifan entity’s management asserts that it does not have the intent to sell a debtsecurity and it is more likely than not that it will not have to sell thesecurity before recovery of its cost basis, then an entity may separateother-than-temporary impairments into two components:  1) the amount related tocredit losses (recorded in earnings), and 2) all other amounts (recorded inother comprehensive income). This FSP is to be applied prospectively and iseffective for interim and annual periods ending after June 15, 2009 with earlyadoption permitted for periods ending after March 15, 2009. The company willadopt this FSP for its quarter ended June 30, 2009. There is no expected impacton the Company’s financial statements.

 

In April 2009, theFASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, *InterimDisclosures about Fair Value of Financial Instruments.*The FSP amends FSASNo. 107 “Disclosures about Fair Value of Financial Instruments” to require anentity to provide disclosures about fair value of financial instruments ininterim financial instruments in interim financial information. This FSP is tobe applied prospectively and is effective for interim and annual periods endingafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009. The company will include the required disclosures in itsquarter ending June 30, 2009.

 

In December 2007, theFASB issued SFAS No. 141 (R), *Business Combinations,* which becameeffective January 1, 2009 via prospective application to business combinations.This Statement requires that the acquisition method of accounting be applied toa broader set of business combinations, amends the definition of a businesscombination, provides a definition of a business, requires an acquirer torecognize an acquired business at its fair value at the acquisition date andrequires the assets and liabilities assumed in a business combination to bemeasured and recognized at their fair values as of the acquisition date (withlimited exceptions). The company adopted this Statement on January 1, 2009.There was no impact upon adoption , and its effects on future periods willdepend on the nature and significance of business combinations subject to thisstatement.

 

In April 2009, theFASB issued FSP FAS 141 (R)-1, *Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies.*This FSP requires that assets acquired and liabilities assumed in a businesscombination that arise from contingencies be recognized at fair value if fairvalue can be reasonably estimated. If fair value cannot be reasonablyestimated, the asset or liability would generally be recognized in accordancewith SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14,“Reasonable Estimation of the Amount of a Loss”. Further, the FASB removed thesubsequent accounting guidance for assets and liabilities arising fromcontingencies from SFAS no. 141(R). The requirements of this FSP carry forwardwithout significant revision the guidance on contingencies of SFAS No.  141,“Business Combinations”, which was superseded by SFAS No. 141(R) (see previousparagraph). The FSP also eliminates the requirement to disclose an estimate ofthe range of possible outcomes of recognized contingencies at the acquisitiondate. For unrecognized contingencies, the FASB requires that entities includeonly the disclosures required by SFAS No. 5. This FSP was adopted effectiveJanuary 1, 2009. There was no impact upon adoption, and its effects on futureperiods will depend on the nature and significance of business combinationssubject to this statement.

 

In April 2008, theFASB issued FSP FAS 142-3, *Determination of the Useful Life of IntangibleAssets.* The FSP states that in developing assumptions about renewal orextension options used to determine the useful life of an intangible asset, anentity needs to consider its own historical experience adjusted forentity-specific factors. In the absence of that experience, an entity shallconsider the assumptions that market participants would used about renewal orextension options. This FSP is to be applied to intangible assets acquiredafter January 1, 2009. The adoption of this FSP did not have an impact on theCompany’s financial statements.

** **

** **

** **15

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** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**3.         GOINGCONCERN**

** **

The accompanying consolidated financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States of America, which contemplate continuation of the Companyas a going concern. The Company has sustained net losses of $781,822 for the threemonths ended March 31, 2009.  Net cash used in operations for the three months endedMarch 31, 2009 was $467,129. The Company also has an accumulated deficit of $11,978,698and a working capital deficit of $17,381,521 at March 31, 2009. 

 

The items discussed above raise substantial doubt about the Company's ability to continue as a going concern. If the Company's financial resources are insufficient, the Company may require additional financing in order to execute its business plan and support its operations. The Company cannot predict whether this additional financing will be in the form of equity, debt or another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. Should financing sources fail to materialize, management would seek alternate funding sources such as the sale of common and/or preferred stock, the issuance of debt or other means. The Company plans to attempt to address its working capital deficiency by increasing its sales, maintaining strict expense controls and seeking strategic alliances.

 

In the event that these financing sources do not materialize, or the Company is unsuccessful in increasing its revenues and profits, the Company will be forced to further reduce its costs, may be unable to repay its debt obligations as they become due, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. Additionally, if these funding sources or increased revenues and profits do not materialize, and the Company is unable to secure additional financing, the Company could be forced to reduce or curtail its business operations.

 

**4.         INVENTORIES**

 

Inventories at March31, 2009 and December 31, 2008 consist of the following:

** **

|                       |   | March 31, 2009 |    | December 31, 2008 |
|----------------------------|--------|----------------|---------|-------------------|
|                       |   |           |    |              |   |   |
| Gold in hand               |   | $              | -       |              | $ | 146,364 |
| Precious metals in process |   |           | 281,017 |              |   | 187,259 |
| Stockpiles                 |   |           | 192,485 |              |   | 24,154 |
|                       |   |           |    |              |   |   |
|                       |   | $              | 473,502 |              | $ | 357,777 |

** **

** **

** **

** **

** **16

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** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**5.         PROPERTY,PLANT AND MINE DEVELOPMENT**

 

Major classes of property, plant, and mine developmentas of March 31, 2009 and December 31, 2008 are as follows:

|                               |   | March 31, 2009 |       | December 31, 2008 |
|------------------------------------|--------|----------------|------------|-------------------|
|                               |   |           |       |              |   |   |
| Land and buildings                 |   | $              | 372,213    |              | $ | 379,428 |
| Mining assets                      |   |           | 4,520,508  |              |   | 4,608,130 |
| Mine development costs             |   |           | 21,823,189 |              |   | 24,108,457 |
| Mining rights                      |   |           | 2,964,280  |              |   | 966,842 |
| Motor vehicles                     |   |           | 79,856     |              |   | 81,404 |
| Furniture and equipment            |   |           | 157,886    |              |   | 160,946 |
| Metallurgical plant                |   |           | 4,119,993  |              |   | 4,199,851 |
| Plant and equipment                |   |           | 252,127    |              |   | 50,224 |
| Environmental  rehabilitation fund |   |           | 156,004    |              |   | 159,026 |
|                               |   |           |       |              |   |   |
|                               |   | 34,446,056     |       | 34,714,308        |
| Less: accumulated  depreciation    |   | (10,222,166)   |       | (10,131,067)      |
|                               |   |           |       |              |   |   |
| Net  property and equipment        |   | $              | 24,223,890 |              | $ | 24,583,241 |

** **

Depreciation,depletion and amortization expense is $124,680 and $135,841 for the threemonths ended March 31, 2009 and 2008, respectively.   

** **

** **

** **

** **

** **

** **

17

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** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**6.         SHORTTERM LOANS**

** **

Short term loans at March31, 2009 and December 31, 2008 consist of the following:

 

|                                                            |   | March 31, 2009 |       | December 31, 2008 |
|-----------------------------------------------------------------|--------|----------------|------------|-------------------|
|                                                            |   |           |       |              |   |   |
| Phoenix Gold Fund and Asian  Investment Management Services Ltd |   | $              | 3,891,304  |              | $ | 3,822,724 |
| Investec Bank Limited                                           |   |           | 9,549,764  |              |   | 9,364,097 |
| Kestrel S.A.                                                    |   |           | 2,167,635  |              |   | 2,163,728 |
|                                                            |   |           |       |              |   |   |
|                                                            |   | $              | 15,608,703 |              | $ | 15,350,549 |

 

On March 28, 2008,the Company’s wholly owned subsidiary EGSA entered into a Convertible Loan Agreement(the “Agreement”) with Phoenix Gold Fund and Asian Investment ManagementServices Ltd, collectively referred to as “the Lenders”.

 

The Loan amounting toR32 million ($3,361,768 as of March 31, 2009) received on April 18, 2008 istermed as pre-listing funds prior to EGSA’s intended listing on theJohannesburg Stock Exchange within twelve months from the date of thisAgreement.   

 

Forthe purposes of this Agreement, EGSA has been ascribed a value of R432 millionand the percentage shareholding that will be issued to the Lenders in order todischarge the Loan has been calculated accordingly.

 

Theloan principal can convert into 6.9% of the total issued and outstanding sharesof the ordinary capital of EGSA after the conversion of the loan by EGSA. Conditions relating to interest payments are as follows:    

** **

•        If EGSA is able to list its shareswith the JSE Limited (JSE) within six months of the agreement date then nointerest is due and payable.  

•        If EGSA is not able to list itsordinary shares with the JSE within six months of the agreement date theninterest will accrue at the South African Prime Lending Rate. 

•        If EGSA lists its ordinary shareswith the JSE after six months but before twelve months of the agreement date,then interest will accrue and be paid on a monthly basis until conversion orrepayment of the loan.  

 

IfEGSA has been unable to list its ordinary shares with the JSE within twelvemonths of the agreement date, then the lender can demand repayment of principaland accrued interest or conversion of the debt into the corresponding ordinaryshares of EGSA.  Accordingly, the loan balance outstanding at March 31, 2009includes $529,536 of accrued interest. The Company is currently renegotiatingthe terms of the agreement with the lender.

 

 

 

 

 

 

 

 18

----

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**6.         SHORTTERM LOANS** (Continued)

 

On May 27, 2008, the Company’s wholly owned subsidiaryEGSA obtained R80 million ($8,404,421 as of March 31, 2009) six month bridgingloan facility (“facility”) from Investec Bank Ltd. (“Investec”) for the acquisitionof Barbrook Mines Ltd.  On October 30, 2008, this facility was renegotiated andthe Company received a commitment letter agreement from Investec.  Under theterms of this agreement, Investec has agreed to extend the maturity date of theCompany’s existing bridging loan (the “Existing Loan”) from the originalmaturity date of November 28, 2008 to May 29, 2009 (the “Loan Extension”).

 

As consideration for the Loan Extension, the Companyagreed to the following:

 

i.        To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

ii.       To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

iii.     To confirm that the Company hassufficient working capital for the period through the last date of the LoanExtension;

iv.     To subordinate all shareholderloans to the Existing Loan;

v.      To prohibit the payment of anyinterest and principal on all shareholder loans;

vi.     To prohibit further indebtednesswithout the prior written approval of Investec; and

vii.   To provide Investec on or beforethe 5th calendar day of each month, monthly management accounts and an updateon the Company’s financing strategy and provide Investec with an opportunity toreview the strategy with Investec, upon Investec’s request.

  

Theloan balance outstanding at March 31, 2009 includes $1,145,343 of accruedinterest.  

** **

On August25, 2008, the Company obtained a Swiss Francs 2,200,000 ($2,061,650 as of March31, 2009) six month loan from a shareholder, Kestrel SA (“Kestrel”), forpurposes of working capital requirements.  Interest on the loan is 15% p.a.calculated on the outstanding balance and compounded monthly in arrears.  Inaddition, on August 22, 2008, the Company entered into a Common Stock PurchaseWarrant Agreement with Kestrel whereby Kestrel is entitled to purchase up toFifty Thousand (50,000) shares of Common Stock (par value $0.001 per share)from the Company upon payment to the Company of Five Dollars ($5.00) per share. Warrants may be purchased at any time on or after August 20, 2008 but allrights to purchase the Shares and to exercise this Warrant shall expire onAugust 21, 2011 after which it shall become void and all rights hereunder shallthereupon cease.  The repayment of the loan was extended to June 30, 2009. 

 

Theloan balance outstanding at March 31, 2009 includes $105,985 of accruedinterest.

** **

** **

** **

** **

** **

** **19

----

 

** **

** **

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**7.         LONGTERM LIABILITIES**

 
|  

Standard  Bank Vehicle and Asset Finance 

Less:  Current portion |  

$ |  

1,703,180

(357,725) |
|---------------------------------------------------------------------------|-----------|------------------------------|
|                                                                      |  

$ |  

1,345,455            |

 

Secured by installment sale agreements over certainmining equipment, bearing interest at the prime bank overdraft rate less 1% andrepayable in monthly installments of R547,956 ($57,566), including interest.

 

Maturitiesof the liabilities are as follows:

 
| **For the year ending December 31:**

2009

2010

2011

2002 |   |   |   |  

$ |  

357,725

533,671

574,895

236,889 |
|--------------------------------------------------------------|--------|--------|--------|-----------|--------------------------------------------|
|  

                                                |   |   |   |  

$ |  

1,703,180                          |

** **

**8.         RECLAMATIONAND REMEDIATION**

 

TheCompany’s mining and exploration activities are subject to various laws andregulations governing the protection of the environment. These laws andregulations are continually changing and are generally becoming morerestrictive. The Company conducts its operations so as to protect the publichealth and environment and believes its operations are in compliance withapplicable laws and regulations in all material respects. The Company has made,and expects to make in the future, expenditures to comply with such laws andregulations, but cannot predict the full amount of such future expenditures.Estimated future reclamation costs are based principally on legal andregulatory requirements.

 

AtMarch 31, 2009 $346,262 were accrued for reclamation obligations relatingto currently or recently producing mineral properties.

 

Thefollowing is a reconciliation of the total liability for reclamation andremediation: 

 
|  

Balance, December 31, 2008

Reduction,  change in estimate and other

Liabilities  settled

Accretion  expense |   |   |   |  

$ |  

352,974

(6,712)

-

- |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|-----------|--------------------------------|
|  

Balance, March 31, 2009                                                                                        |   |   |   |  

$ |  

346,262                |

 

 

20

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****

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

 

**9.         COMMITMENTSAND CONTINGENCIES**

 

Afirst continuing covering bond in the amount of South African Rands 200,000($21,011) was registered over the property held by a subsidiary, MakonjwaanProperties Henry Nettman Two Eight (Pty) Ltd., in lieu of financial guaranteesamounting to South African Rands 164,000 ($17,229) issued in favor of theDepartment of Minerals and Energy.

 

Duringthe year ended December 31, 2006, the Company entered into a Service andSupport Agreement with Cheston Minerals PTY Limited (“CML”), a company owned byEGI’s President.  This agreement covers the rental of the Company’s SouthAfrican office and use of the office equipment and supplies, which are owned byCML.  The term of the agreement is one year and is renewable on an annualbasis.  The Company charged $49,500 to operating expense for the three monthsended March 31, 2009.

 

Our recently acquiredsubsidiary, Barbrook Mines, was subject to several claims brought against it bycreditors during 2006 and 2007 fiscal years.  These claims, which had beenaccrued for at 2007 year end, were in the main settled and the matters finalized. In the matter with Sentinel Corporate Solutions (Pty) Limited, Sentinel hasissued summons against Barbrook for R1,108,061 (approximately $116,000) inrespect of amounts payable, which are accrued for, in respect of a laborcontract.  Barbrook has instituted an action against Sentinel for R7,456,465(approximately $783,000) in respect of damages incurred when the labor forceset fire to the Barbrook administration building.  Both matters with Sentinelare presently still being defended and are not yet finalized.

** **

**10.       MINORITYINTEREST**

 

Thecurrent South African mining legislation promulgated under “Mineral andPetroleum Resources Development Act of 2004 (“MPRDA”) seeks, among otherthings, (i) to expand opportunities for historically disadvantaged SouthAfricans to enter the mineral industry and obtain benefits from theexploitation of mineral resources; and (ii) to promote employment, social andeconomic welfare as well as ecologically sustainable development. In order toconvert an old order mining right to a new order mining right the holder isrequired to submit a social and labor plan. The plan should describe how itwill expand opportunities for historically disadvantaged South Africans toenter the mineral industry.

 

Further,for purposes of mining right conversions effective May 1, 2004 (the effectivedate), the MPRDA (incorporating the Mining Charter) requires mining companyownership for historically disadvantaged South Africans to 15% ownership withinfive years and 26% ownership within 10 years of the effective date. Thetransfer of ownership is to be consummated at fair market value.

 

Accordingly,and pursuant to the requirements of MPRDA, EGL on December 9, 2005 entered intoa “Heads of Agreement” to sell 26% of its ordinary stock to LomshiyoInvestments (Proprietary) Limited (“Lomshiyo”) for a consideration ofR9,900,000 (At March 31, 2009 – $1,040,047).  The transaction closed onFebruary 2, 2006.  Further, and upon the acquisition of Barbrook on May 30,2008, a similar agreement was concluded with Lomshiyo on December 15, 2008amounting to R20,800,000 (At March 31, 2009 – $2,185,149).    

 

** **

** **21

** **

----

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2009**

** (Unaudited)**

** **

**10.       MINORITYINTEREST** (Continued)

 

Thesetwo amounts are classified as loans to Lomshiyo and are reflected as areduction of equity in the Company’s March 31, 2009 consolidated balancesheet.  Lomshiyo is a South African corporation whose majority shareholders arehistorically disadvantaged South Africans.  

 

Thepurchase of ordinary stock was financed with a note receivable bearing anannual interest rate of the South African Prime Rate (15% at March 31, 2009). The note accrues interest and is payable to the Company on January 2, of eachyear.  A total of $637,477 of accrued interest has been added to the notereceivable.  The note is due and payable on December 31, 2010.  The Company’scommon stock collateralizes the note receivable.

** **

**11.**       **CONVERTIBLELOAN**

 

In December2008, the Company approved a private placement of up to $2,000,000 at a priceof $3 per Common Stock and Common Stock Purchase Warrants with an exercise priceof $3.  This private placement was closed on March 15, 2009, and funds receivedfrom subscribers amounted to $1,633,554 (net of $29,134 in commissions)representing 554,228 of Common Stock.  The issuing of the share certificates isin progress.     

** **

**12.       STOCKOPTIONS**

** **

**            Employee Stock Options**

 

TheCompany currently maintains the Eastern Goldfields, Inc. 2005 Stock Plan(“Stock Plan”), approved by stockholders on November 26, 2005, forexecutives and eligible employees.  Under this Stock Plan, options to purchaseshares of stock can be granted with exercise prices not less than 100% of fairmarket value of the underlying stock at the date of grant.  Options grantedunder the Company’s stock plan vest over periods ranging from one to threeyears of the date of the grant and are exercisable over a period of time not toexceed 10 years from grant date.  At December 31, 2006, no shares wereavailable for future grants under the Company’s 2005 Stock Incentive Plan. 

 

The following table summarizes annual activity for allstock options for each of the two years ended December 31:

 

 

 

 

 

 

 

 

 

 

 

22

----

 

 

 

 

 

**EASTERNGOLDFIELDS, INC. AND SUBSIDIARIES**

** NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2008**

** (Unaudited)**

 

**12.       STOCKOPTIONS**(Continued)

** **

**            Employee Stock Options** (Continued)

 
|                                                                                                         | **2008**                                  | ** **                                 | **2007**                            |
|--------------------------------------------------------------------------------------------------------------|-------------------------------------------|--------------------------------------------|-------------------------------------|
|                                                                                                         | ** **

**Number of Shares**          | ** **                                 | **Weighted Average Exercise Price** | ** ** | ** **

**Number of Shares** | ** ** | **Weighted Average Exercise Price** |
| Outstanding,  beginning 

    of the period

Granted

Exercised  

Forfeited  and expired          |  

 

                     |  

850,000

-

-

-                   |                                |  

$ |  

1.50

-

-

- |   |   |  

850,000

-

-

- |   |  

$ |  

1.50

-

-

- |
| Outstanding,  end of the period                                                                              |                                      | 850,000                                    |                                | $ | 1.50 |   |   | 850,000 |   | $ | 1.50 |
| Options  exercisable, end of year

 

Weighted  average fair value of options granted during the period |  

 

 

 

 

$ |  

833,000

 

 

 

- |                                |  

$ |  

1.50

  |   |  

$

 

 

 

$ |  

550,000

 

 

 

$- |   |  

$ |  

1.50

 

 

 

  |

 

Thefair value of the stock options granted (and vested) during the years endedDecember 31, 2008 and 2007, was approximately $0 and $0 or $0 and $0 per stockoption, respectively, and was determined using the Black Scholes option pricingmodel.  The factors used for the years ended December 31, 2008, were the optionexercise price of $1.50 per share, a 3 year life of the options, volatilitymeasure of 43.77% (2007 – 50%), a dividend rate of 0% and a risk free interestrate of 2.10% (2007 - 4.55%).

 

The following tablesummarizes information about stock options outstanding at December 31,2008, with exercise prices less than the fair market value on the date of grantwith no restrictions on exercisability after vesting:

|                         |    | **Options Outstanding** |    |                                                                  |    | **Options Exercisable**                 |
|------------------------------|--------------|-------------------------|--------------|-----------------------------------------------------------------------|--------------|-----------------------------------------|
| **Range of Exercise Prices** |         | **Number  Outstanding** |         | **Weighted-  average  Remaining  Contractual  Life  (in years)** |         | **Weighted-  average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |
|  

$1.50                |    | 850,000                 |    |       9                                      |    |  $                                 | 1.50 |    | 833,000 |   |  $ | 1.50 |
|                              |              |                         |              |                                                                       |              |                                         |  |  |  |  |  |  |

 

As ofMarch 31, 2009, there were approximately $NIL of unrecognized compensation costrelated to unvested stock options.  This cost is expected to be recognized overa weighted average period of 0.6 years.

 

 

 

 

**13.      COMMON STOCK**

 

On November 21, 2008, the Board ofDirectors approved the issuance of 300,000 Special Shares to certain employeesin payment of the services that the Company had received. Of the total 300,000Special Shares, 200,000 related to South African employees, and, in accordancewith the South African Exchange Regulations, 200,000 Class A Preference Sharesin the South African subsidiary EGSA had been issued. The corresponding 200,000shares in EGI and the balance of 100,000 shares of EGI to non-South Africanemployees are in the process of being issued. 

On February 16, 2009, 554,228 sharesof restricted common stock at $3.00 per share and 554,228 Common Stock PurchaseWarrants in the form of a unit security at $3.00 per unit were issued for cashfor a total offering of $1,662,684 less offering costs of $29,134 totaling$1,633,550. These share certificates were issued on May 7, 2009. 

 

**14.       SUBSEQUENT EVENT**

 

On April 30, 2009 the Company enteredinto the Restated Convertible Loan and Option Agreement (the "RestatedAgreement") with Asian Investment Management Services, Limited ("AIMS"). TheRestated Agreement provides that AIMS will; (A) provide technical and corporateassistance to the Company's subsidiary, EGSA, in connection with EGSA'sstrategies and objectives; (B) make available additional funds as an "AdditionalLoan" no later than May 29, 2009 in an amount not to exceed 93,000,000 (SouthAfrican Rand) to EGSA so as to allow EGSA to pay all amounts due Investec BankLimited under the Investec Loan and for EGSA to cancel the security given by oron behalf of EGSA to Investec Bank including, but not limited to, the Borrower'sCession and the Guarantee; (C) convert the Additional Loan and the existingconvertible loan of March 31, 2008 in the amount of 32,000,000 (South AfricanRand) that EGSA received from AIMS and the Phoenix Gold Fund (as amended onMarch 27, 2009) (the "Original Loan"), both consolidated and totaling125,000,000 (South African Rand) into 40% of the outstanding common shares ofeither EGSA or such other entity as the parties agree for purposes of theplanned listing of the common stock of the Company and its subsidiaries (or suchother entity as the Company and AIMS may determine by subsequent agreement)pursuant to the Listing Commitment. The Restated Agreement also grants AIMS aright of first refusal which provides that the Company shall not obtain anyadditional funding from any other source unless the Company has first offeredAIMS the opportunity to provide such additional funding on no less favorableterms and conditions and AIMS has, after thirty days from the date of receipt ofnotice, declined to exercise its right of first refusal. 

 

23

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**MATTER OF FORWARD-LOOKINGSTATEMENTS**

 

THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THEUSE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,""SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDSOR OTHER VARIATIONS OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OFPLANS OR STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.  MANAGEMENT WISHES TOCAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING,  BUT NOTLIMITED TO, STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS,COMPETITIVE CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NOEXISTING BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLYPREDICTIONS.  NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVECORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED.  ACTUAL EVENTSOR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVETO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY.FORWARD-LOOKING STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTSAND IMPORTANT FACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC.,INCLUDING, BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKSINCLUDE, BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTHIN ITEM 1A, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITEDHISTORY OF OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THECOMPANY, THE INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHEDCOMPETITORS, ANY ONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTSTO DIFFER MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIEDIN SUCH FORWARD-LOOKING STATEMENTS.  WE UNDERTAKE NO OBLIGATION TO UPDATE ORREVISE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEWINFORMATION AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OFUNANTICIPATED OR OTHER SUBSEQUENT EVENTS.

 

*Asused herein, the term “the Company,” “we,”  “us,” and “our” refer to EasternGoldfields, Inc., a Nevada corporation and its subsidiaries unless otherwisenoted.*

 

 

**Item2. Plan of Operation.**

** **

**CriticalAccounting Policies and Estimates. **OurPlan of Operations section discusses our unaudited consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities as the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. On an on-going basis, management evaluates its estimatesand judgments, including those related to revenue recognition, accruedexpenses, financing operations, and contingencies and litigation. Managementbases its estimates and judgments on historical experience and on various otherfactors that are believe to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying value of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. The most significant accounting estimates inherent in thepreparation of our financial statements include estimates as to the appropriatecarrying value of certain assets and liabilities which are not readily apparentfrom other sources.

 

Theseaccounting policies are described at relevant sections in this discussion andanalysis and in the notes to the financial statements included in our QuarterlyReport on Form 10-Q for the period ended March 31, 2009

** **

24

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Our strategy, to the extent that we are able, is togrow our mineral reserves through optimization of current operations, explorationand prudent acquisitions.  The following is a summary of the actions andstrategies that we implemented in 2008:

 

•        Development of the Lily Mine operation 

•        Acquisitions 

•        Exploration

 

**Growth and Expansion**

 

**Lily Mine**

 

Our primary focus, to the extent that we are able, isto develop the underground mine at Lily.  Primary development of the initialunderground section began in June 2007 and full conversion from open pit miningto underground mining commenced in January 2009.  All of Lily Mine’s goldproduction since January 2009 is being derived from underground operations.  Todate, some 2,400 meters of underground development has been completed.  Thisunderground tonnage will be treated at the current Makonjwaan mill for the nexttwo years.  The acquisition of the nearby Barbrook Mine, discussed below, witha dormant processing plant has altered the original strategy of building a newplant at the Lily Mine site.  The Barbrook processing plant, which is in theprocess of being refurbished, will be used to process the ore from Lily Mine’sunderground mining operation.  

 

If our estimates and operating conditions can bemaintained and assuming no interruptions in our plans. we anticipate that Lilyunderground operations may ramp up to full production of around 30,000 tons permonth by mid 2010.  If current operating levels can be maintained and if we aresuccessful in meeting the challenges and uncertainties that we face, we expectto produce approximately 14,000 ounces of gold in 2009 for gross revenue ofapproximately $12,450,000 increasing to approximately 35,000 ounces of gold peryear in years 2011 through 2023 for gross annual revenue of approximately$31,400,000 (using a projected gold price of $900/oz.).  These are onlyestimates and are subject to change and fluctuating market conditions.  Theresults of the Bankable Feasibility Study (“BFS”) completed in March 2008,include an estimate that the Lily Mine has a life of at least 15 years based onexisting mineral reserves.     

 

The Lily Main Pit opencast operation: 

 
    - Commenced     in June 2000 and was closed in October 2006.  During this period,     1,012,000 tonnes were successfully extracted at an average grade of 2.89     grams of gold per ton. 

 
    - The     closure of the Lily Main open pit was timed to coincide with extraction of     oxidized ore from the Lily East pit.  Mining continued until August 2007     before the pit was closed due to unstable high wall conditions.  During     this period a total of 96,347 tons were extracted having an average grade     of 2.27 grams of gold per ton.

  
    - Open     pit production commenced at Rosie’s Fortune in July 2007.  This open pit     was initially planned to be mined until May 2008 but was found to be     sufficiently productive to be continued until December 2008.  A total of     180,572 tonnes were extracted at an average grade of 2.22 grams of gold     per ton.

 

The strategy behind extending open pit miningoperations after closure of the Main pit in October 2006 was to maintain cashflow while establishing and preparing the underground workings for production. This was done with the expectation that the Lily East and Rosie’s Fortune openpit operations would be marginal but profitable.

 

25

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The following table summarizes the tons milled, goldproduced and operating profit (loss) for the life of the open pit operations toDecember 2008.

 
| ** **

**Period** | **Ore  Milled** | ** **

**Au Produced** | **Average Grade Produced** | **Operating Profit/(loss)** |
|------------------------|-----------------|-----------------------------|----------------------------|-----------------------------|
| **Year**               | **mths**        | **T**                       | **Kg**                     | **oz**                      | **g/t** | **oz/t** | **US$** |
| 2000/01                | 9               | 120,000                     | 240                        | 7,700                       | 1.99 | 0.062 | 338,087 |
| 2001/02                | 12              | 154,000                     | 309                        | 9,900                       | 2.00 | 0.063 | 647,117 |
| 2002/03                | 12              | 153,000                     | 343                        | 11,000                      | 2.36 | 0.074 | 1,049,173 |
| 2003/04                | 12              | 131,000                     | 241                        | 7,700                       | 1.84 | 0.057 | (541,559) |
| 2004                   | 9               | 116,000                     | 230                        | 7,400                       | 1.98 | 0.062 | (743,916) |
| 2005                   | 12              | 168,000                     | 398                        | 12,800                      | 2.37 | 0.074 | 420,522 |
| 2006                   | 12              | 166,200                     | 377                        | 12,100                      | 2.27 | 0.071 | 2,278,341 |
| 2007                   | 12              | 160,000                     | 322                        | 10,400                      | 2.32 | 0.072 | 1,660,754 |
| 2008                   | 12              | 154,000                     | 242                        | 7,800                       | 1.58 | 0.051 | 846,214 |
| **TOTAL**              | ** **      | **1,322,200**               | **2,702**                  | **86,800**                  | **2.09** | **0.064** | **5,954,733** |

(1)    Prior to March 31, 2004, 12 month accounting periods were from April 1 to March 31

(2)    2005 represents the first year ofchange to the accounting period or fiscal year based on a calendar year

 

The extensive exploration diamond drilling programscompleted since 2005 up to the end of 2008 have successfully increased themineral reserves of the Lily Mine to the extent that a full BankableFeasibility Study has been completed giving the entire project a very positiveNPV and IRR at a conservative medium term gold price of US$800/ounce.  82diamond drill holes (with wedges), totaling in excess of 28,800 meters ofdrilling, have increased reserves from 210,000 ounces at the end of 2004 to anestimated 565,000 ounces by the end of 2008.  The discovery cost is remarkablylow at an estimated +/-US$2.00 per ounce during this exploration period.  

 

The aim of this extensivedrilling exercise was twofold: 

 

•        To extend MineralReserves along strike and in depth.  The drilling has successfully identifiedthe mineralized zone over 2,000 meters of horizontal strike to 600 meters ofvertical depth below surface.

 

•        To infill betweenexisting drill intersections in certain areas, thereby upgrading the estimationconfidence of the Mineral Reserves within the planned underground section ofthe extended Lily ore body. 

 

The resultant revised Reservesallow for a Life of Mine of 15 years with a production capacity of 32,000 tonsper month. 

 

To the extent that we are able and provided that wecan implement our current plans, we anticipate that exploration will continueon the mine property both from surface and later from underground as the minedevelops in depth to continue increasing the reserve potential.

 

There can be no assurance that we will be successfulin implementing these plans or the plan of operations described in this Form10-Q.  We face many risks and uncertainties and we have only a limited historyof operations.  See Item 1A. “Risk Factors”

** **

26

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**Acquisitions**

 

If circumstances and our financial resources allow, weintend to make strategic acquisitions in the next few years with the objectiveof increasing its production to 100,000 oz/annum.  We continue to investigatepotential opportunities.  We cannot assure you that we will achieve these orother goals or if we achieve them, that we can sustain any such achievement forany period in the future.

  

**BarbrookMine: **As disclosed in our Form 8-K,on February 21, 2008 we entered into an agreement to purchase Barbrook Mine.This offer was accepted by the seller corporation, Maid 'O The Mist (Proprietary) Limited, a companyincorporated in the Republic of South Africa and a subsidiary of CaledoniaMining Corporation Limited (“Caledonia”), a company incorporated in Canada.  The acquisition was completed on May 30, 2008.  

 

The acquisition of Barbrook has had the followingtwofold positive impact on EGI:

 

•        The planned underground miningoperations at Lily Mine, as reported in the BFS (March 2008), required theconstruction of a new processing plant on site.  The existing processing plantat Barbrook, once refurbished, will substitute for a new plant.  The purchaseprice of Barbrook was less than half the budgeted cost for the proposed newplant.  The plant, complete with a large slimes dam, is located less than halfthe distance from Lily Mine (6 km) than its current operating Makonjwaan plantfacility (17 km).

 

•        Barbrook contains substantialmineralized assets and a well developed underground infrastructure includingsome 50 km of development and readily accessible areas for mining.  Extensionsto the processing plant will be required to treat the metallurgicallycomplicated ore bodies once mining commences at Barbrook. This is currentlybeing investigated.  It is planned to geologically model and re-evaluateBarbrook by commencing exploration and primary development with the objectiveof bringing Barbrook Mine successfully into initial production in 2010.

 

Currently and based on the due diligence that wecompleted to date, we believe that the Barbrook Mines Limited holds title to aMining Authorization covering an estimated 2,286 hectares which hosts aconsolidation of numerous small mines and claims in the historically renownedBarberton gold mining district of South Africa.  Mining at Barbrook commencedin the 1880’s.  In 1996 exploration significantly improved the definition ofestimated main ore zones.  Treatment of refractory ores commenced in July 1996and continued until July 1997.  A total of 166,400 tons of sulphide ore wastreated at an average rate of +/-14,000 tons per month.  311 kg of gold wasproduced at a recovered grade of 1.87g/t.  Both the head grade andmetallurgical recovery achieved over this period (~40%) were below target andthe mine was put on care and maintenance pending a re-evaluation of the miningmethod and metallurgical process.

 

 

 27

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                HistoricProduction – Barbrook Mine
| **Period**                        | **Tonnage Treated**

**T** | **Gold Produced**

**Kg** | **Gold Produced**

**Oz** | **Recovered Grade**

**g/t** |
|-----------------------------------|----------------------------|---------------------------|---------------------------|------------------------------|
| Oct  ’89 – Jan ‘91 | 220,630                    | 500                       | 16,075                    | 2.31                         |
| Nov  ’93 – Jan ‘95 | 490,533                    | 645                       | 20,740                    | 1.31                         |
| Feb  ’95 – May ‘95 | 81,130                     | 131                       | 4,210                     | 1.62                         |
| Jul  ’96 – Jul ‘97 | 166,397                    | 311                       | 10,000                    | 1.87                         |
| 2006                              | 74,904                     | 224                       | 7,200                     | 4.64                         |
| **Total  Production**             | 1,033,594                  | 1,711                     | 58,225                    | 1.66                         |

Note:Information taken from Venmyn (Pty) Ltd Technical Statement January 2007

 

Based on the information we have available andprovided that current trends continue, we believe that the Barbrook Mine lookspromising.  Various metallurgical test work took place between 1997-2007 whichshowed that improvements to gold recoveries are achievable.  A completere-evaluation was done in 2002.  At that date, this lead to an estimate ofProven and Probable Ore Reserves amounting to 176,000 tons at an insitu gradeof an estimated 6.0 g/t gold.  All quoted Resource and Reserve estimates willbe re-evaluated by EGI’s competent staff in time as additional informationbecomes available

 

Barbrook has a well established surface infrastructure(plant, workshops, laboratory, tailings dam, etc) and extensive undergrounddevelopment (>50 km).  Access to the mine is via two adits, respectively on7 and 10 Levels, separated by 150 meters.  No development exists and verylittle exploration has been completed below 10 Level, which is at surface riverelevation.  All ancillary utilities are operational.

 

If we are successful in obtaining sufficient financingon reasonable terms and assuming that our current assessments and estimates arenot later reduced, we intend to further implement our plans for the operationof the Barbrook Mine. However, there can be no assurance that we will besuccessful in these efforts.

                

**Prospects for the Future:**

 

**Exploration**

 

**OtherProperties**

 

Geological exploration has continued with positiveresults on the Worcester project area where continued diamond drilling hassuccessfully identified the continuation of the mineralized zone well below theold workings.  A further 4,180 meters of explorationdiamond drilling was completed during 2008, bringing the total amount of corerecovered since 2006 to 9,385 meters. The additional drilling was successful inconfirming the down-dip extension of the Worcester mineralized zone below theold mine workings.  It is envisaged that this project will proceed topre-feasibility status during early 2009.

 

The Bonanza project area and other target locationsare still under investigation and proposals for further exploration are beingconsidered.  The outcome of these exploration programs is expected to result inthe further delineation of new ore bodies which can be developed for mining inthe medium term future.  To the extent that it is possible and if we aresuccessful, our goal is to produce an additional 20,000 oz/annum from a secondoperation.  While we currently believe that this goal is feasible, we cannotassure that we will achieve this goal or the related objectives.

 

We anticipate that the acquisition of Barbrook mayalso add to the exploration focus in 2009 but we have not made any specificdeterminations with respect to the extent of the amount of exploration that maybe completed in 2009 or the precise time frame for this exploration.

 

28

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** **

** **

**Requirement for Additional Capital**

 

Based on our current estimates and subject to laterevaluations that are to be completed by management, we anticipate that ourcapital requirements can be grouped into three areas: 

 
    - Development     of the Lily underground mine and new processing plant;
    - Exploration     of the company’s minerals rights including extensions to Lily and the     Worcester project area; and
    - Partial     financing of acquisitions.

 

The development of the underground mine at Lily is ofprimary importance and the capital expenditure is currently estimated at $25Million.  Breakdown of this estimate is as follows:  

 

                                                                                                                                            

|                                                                       |   | **US$ million** |
|----------------------------------------------------------------------------|--------|-----------------|
| Repayment  of bridging loan (incl. interest) arranged to acquire           |   |            |
|         100% of the shares in Barbrook Mines |   | $10             |
| Development  of underground mine at the Lily Mine                          |   | 12              |
| Refurbish  and expand Barbrook plant                                       |   | 3               |
|                                                                       |   | $25             |

 

Our current estimates and projections suggest thatthis may be sufficient to allow us to develop the underground workings and themine infrastructure at the Lily Mine site as well as the refurbishment of theBarbrook plant to be used for processing the Lily ore.  We may change or reviseour estimates as we obtain additional information and as studies of the mineare completed.  In the event that the amount needed is increased, we mayre-evaluate our plans and delay or re-schedule capital expenditures for thisproperty and other properties consistent with circumstances and priorities atthat time.

Currently, we anticipate that ongoing exploration willcontinue at the Worcester Mine and the other target locations within ourmineral rights.  In most cases we have had encouraging results so far.  But weanticipate that we will likely need to make an estimated $4 Million inadditional capital expenditures to achieve the exploration objectives that wehave set for the next 12 months.  That estimate may change or increase iffurther evaluations show that additional expenditures may be needed to fullycomplete these explorations.

 

If circumstances allow and if we are successful inobtaining additional necessary capital, we anticipate that we may developBarbrook underground by expanding Barbrook plant for production of a planned28,000 oz pa starting in 2010.  Currently, and subject to further confirmation,we estimate that capital expenditures for Barbrook are as follows:  

                                                                                                                                           

|                                                                 |   | **US$ million** |
|----------------------------------------------------------------------|--------|-----------------|
|                                                                 |   |            |
| Pre-production  capital program to develop underground workings      |   |            |
|         commencing 2009                |   | $6              |
| Barbrook  plant expansion to accommodate Barbrook ore – 2009/10 |   | 9               |
| Construction  of BIOX plant to treat refractory ore - 2010           |   | 10              |
|                                                                 |   | $25             |

 

The BIOX Process is a pretreatment process forrefractory gold ores or concentrates, using naturally occurring bacteria tobreak down the sulphide matrix and liberate the gold for subsequentcyanidation.  This is an alternative to the conventional processes of roasting andpressure oxidation and offers advantages that typically include reduced capitalcost, simplicity of operation, robustness and environmental friendliness.

 

29

 

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If circumstances and opportunities allow, we may makeat least one other acquisition in 2009 and will require funds in order tosecure such acquisition or to provide initial support for the acquiredoperation.  An amount of $10 Million has been estimated for this purpose andthis estimate may be changed as we complete further reviews in light of new additionalinformation.

Accordingly and to the extent that we are able, weseek to raise additional capital of $25 million for our Lily Mine undergrounddevelopment in the second quarter of 2009 and $4 million for our ongoingexploration program and objectives.  Our current capital raising strategy alsocalls for us to seek an additional $25 million in new capital for developingunderground mining operations at Barbrook Mine.  While we have had discussionswith several potential providers of capital, we are not in a position toestimate the form or terms of any such financing arrangement and we cannot giveyou any assurance that we will successfully complete any financing arrangementsor, if we do, that the additional new capital obtained in any financing arrangementcan be raised on terms that are reasonable in light of our currentcircumstances.

 

But, overall and if favorable conditions allow and ifwe can achieve our current objectives, our goal is to complete financingarrangements for the Lily Mine and our exploration program in the secondquarter of 2009.  For this we seek to raise $29 million.  Accordingly, as aninterim step and as part of our capital raising strategy, in 2008 we completed:

a.   Convertiblebond facility in March 2008 which raised US$4 million, and  

b.     Bridging loan facility in May 2008 ofapproximately US$10 million.

  

These interim financings were necessary to implementour plans prior to the main fund raising in the second quarter of 2009.  Giventhe uncertainties of the marketplace and the challenges that we face, there canbe no assurance that our efforts to raise additional new capital will besuccessful or if we are successful, that we can raise additional capital onterms that are reasonable in light of our current circumstances.

 

We are obligated to repay Investec the US $10 millionbridging loan facility on or before May 29, 2009.  In the event that we are notsuccessful in repaying this loan or re-negotiating the terms of the loan, wemay face the loss of our subsidiary and thus our principal business and assets.While we are hopeful that we will be successful in these efforts, we cannotassure you that we will achieve our objectives.  In that event, any investorwho acquires our Common Stock can stand to lose all or substantially all oftheir investment.

** **

**Results of Operations for the Three Months Ended March31, 2009 and 2008**

A summary of our comparative operations, which ariseonly from mining operations at the Lily Mine for the three months period ended March31, 2009 and March 31, 2008 were as follows:

 

|                          |       | **Three months period**

**ended March 31,** |
|-------------------------------|------------|----------------------------------------------|
|                          | **2009**   |                                         | **2008** |
| Ore Tons Milled               | 35,921     |                                         | 38,365 |
| Yield  – grams per ton   | 1.83       |                                         | 2.02 |
| Gold  Sold – oz          | 2,033      |                                         | 2,378 |
| Gold  price - $/oz            | $903       |                                         | $916 |
|                          |       |                                         |   |
| Total  Income*                | $1,913     |                                         | $2,185 |
| Cost  of Production*          | ($1,486)   |                                         | ($1,589) |
| Exploration  Costs*           | Nil        |                                         | Nil |
| **Operating  Income (Loss)*** | **$427**   | ** **                                   | **$596** |
| Operating  Expenses, net*     | ($1,183)   |                                         | ($493) |
| Minority  Interest*           | ($26)      |                                         | ($16) |
| **Net  Income (Loss) ***      | **($782)** | ** **                                   | **$87** |
|                               |            |                                              |  |  |

* Expressed in Thousands

** **

30

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**Comparative Results of the Three Months Ended March 31,2009 and 2008**

 

**Revenues:  **Forthe 2009 period covering three months of commercial production from January 1,2009 to March 31, 2009 (“First-Quarter 2009”), we recorded revenues ofapproximately $1,913,000 from sales of gold versus revenues of approximately $2,185,000for the three month period from January 1, 2008 to March 31, 2008 (the “First-Quarter2008”), which amounted to a decrease of approximately 12%.  The principalfactors affecting this decrease in revenue were as follows:

 

•        Ore tons milled in theFirst-Quarter 2009 was lower than that of First-Quarter 2008 at 35,921 tons,yield had dropped by approximately 9% resulting in lower gold production. Accordingly, 2,033 oz. of gold was sold in First-Quarter 2009 as compared with 2,378oz. of gold sold in First-Quarter 2008, a drop of approximately 15%.  This wasprimarily due to change in the nature of production in that First-Quarter 2008was totally from open pit operations whereas First-Quarter 2009 was the firstoutput obtained from underground mining activity.  

  

•        In 2008 sales averaged$916 per ounce of gold, our 2009 sales averaged $903 per ounce of gold; a decreasein the price of gold of approximately 1%.  However, this decrease in the priceof gold may or may not be a trend and if it is a trend, we do not know if itwill continue.  We are not able to project gold prices and to the extent thatgold prices fall in the future, our operations, revenues, profitability, andcash flow will be adversely and significantly impacted for such period of timeas lower price levels in the marketplace are maintained.  

** **

**Cost of Production:**  Ore tons milled in the First-Quarter 2009 was lower than that ofFirst-Quarter 2008 at 35,921 tons.  During the First-Quarter 2009, we produced andsold 2,033 oz. of gold at a cost of $1,486,000, whereas, during the First-Quarter2008, we produced and sold 2,378 oz. of gold at a cost of $1,589,000. Accordingly, per ounce cost of production for the First-Quarter 2009 was $731whereas per ounce cost of production for First-Quarter 2008 was $668; anincrease in the per ounce production of gold of 9%.

 

Principal factor affecting this increase in cost ofproduction were the change over from open pit production to undergroundproduction and that the First-Quarter 2009 was the first production fromunderground mining activities.

  

**Operating Expenses for the First-Quarter 2009:** Ouroperating expenses increased to $1,183,000 in the First-Quarter 2009 from $493,000in the First-Quarter 2008; an increase of approximately 240%. A major factoraffecting this was an increase in interest charges of $630,000 on the Company’sloan commitments.      

** **

**Changesin Exchange Rates: **Changesin exchange rates had a significant impact on the comparability of our resultsfor the First-Quarter 2009 versus the First-Quarter2008.  The average rates of exchange for the interim periods ended March 31,2009 and March 31, 2008 were SAR 9.4283 to $1 and SAR 7.4990 to $1,respectively – approximately 26% weakening of the South African Rand againstthe US Dollar.  Had the exchange rate remained the same during the First-Quarter2009 as that of First-Quarter 2008, the results of our operationsarising from South African Rand transactions would have been approximately $98,000higher.

 

Changes in exchange rates had a significant impact onthe comparability of our balance sheets as of March 31, 2009 versus March 31,2008.  The rates of exchange as at March 31, 2009 and March 31, 2008 were SAR 9.3378to $1 and SAR 8.1363 to $1, respectively – approximately 15% weakening of theSouth African Rand against the US Dollar.  Had the exchange rate remained thesame in 2009 as that of 2008, our total South African Rand based net assetswould have been approximately $1,500,000 higher.  This variation in the mainrelates to: 

 

•        our property, plant and mine development costs whichwould have been approximately $4,100,000 higher; 

•        amount receivable fromLomshiyo would have been $660,000 higher; and

•        our liabilities whichwould have been 3,400,000 higher.

** **

**Restructuring:**** **On March 28, 2008 andthrough our subsidiary, EGSA, we entered into a Convertible Loan Agreement. The agreement involves EGSA receiving $3,981,932 (32,000,000 SA Rands) ofproceeds.  The loan principal can convert into 6.9% of the total issued andoutstanding shares of ordinary capital after the conversion of the loan byEGSA.  If EGSA has been unable to list its ordinary shares with the JSE withintwelve months of the agreement date, then the lender can demand repayment ofprincipal and accrued interest or conversion of the debt into the correspondingordinary shares of EGSA.  Accordingly, the loan balance outstanding at March31, 2009 includes $529,536 of accrued interest.

 

31

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On May 27, 2008, the Company’s wholly owned subsidiaryEGSA obtained R80 million ($8,567,145 as of December 31, 2008) six monthbridging loan facility (“facility”) from Investec Bank Ltd. (“Investec”) forthe acquisition of Barbrook Mines Ltd.  On October 30, 2008, this facility wasrenegotiated and the Company received a commitment letter agreement fromInvestec.  Under the terms of this agreement, Investec has agreed to extend thematurity date of the Company’s existing bridging loan (the “Existing Loan”)from the original maturity date of November 28, 2008 to May 29, 2009 (the “LoanExtension”).

 

As consideration for the Loan Extension, the Companyagreed to the following:

 

•        To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

•        To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

•        To confirm that the Company hassufficient working capital for the period through the last date of the LoanExtension;

•        To subordinate all shareholderloans to the Existing Loan;

•        To prohibit the payment of anyinterest and principal on all shareholder loans;

•        To prohibit further indebtednesswithout the prior written approval of Investec; and

•        To provide Investec on or beforethe 5th calendar day of each month, monthly management accounts and an updateon the Company’s financing strategy and provide Investec with an opportunity toreview the strategy with Investec, upon Investec’s request.

  

The loan balance outstanding at March 31, 2009includes $$1,145,343 of accrued interest.

 

In the event that we breach our obligations toInvestec Bank Ltd., we could lose our wholly owned subsidiary and all of ourassets and business.

 

On August 25, 2008, the Company obtained a SwissFrancs 2,200,000 ($2,061,650 as of March 31, 2009) six month loan from ashareholder, Kestrel SA (“Kestrel”), for purposes of working capitalrequirements.  Interest on the loan is 15% p.a. calculated on the outstandingbalance and compounded monthly in arrears.  In addition, on August 22, 2008,the Company entered into a Common Stock Purchase Warrant Agreement with Kestrelwhereby Kestrel is entitled to purchase up to Fifty Thousand (50,000) shares ofCommon Stock (par value $0.001 per share) from the Company upon payment to the Companyof Five Dollars ($5.00) per share.  Warrants may be purchased at any time on orafter August 20, 2008 but all rights to purchase the Shares and to exercise thisWarrant shall expire on August 21, 2011 after which it shall become void andall rights hereunder shall thereupon cease.  The repayment of the loan wasextended to June 30, 2009. 

 

The loan balance outstanding at March 31, 2009includes $105,985 of accrued interest.

 

32

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On October 28, 2008, the Company engaged IBK CapitalCorporation of Toronto ("IBK") where IBK has agreed to undertake itsbest efforts to assist the Company in raising up to $10 million in the nextthree months.  In the event that market conditions allow and if IBK issuccessful, IBK will be paid a commission on the funds raised and will receivecommon stock purchase warrants.  In this event, the net proceeds will be usedto fund expenditures on the development of the Lily project and for general andcorporate working capital purposes.  As of the end of March 2009, IBK was notsuccessful and their appointment was terminated as of April 1, 2009.  

 

On December 23, 2008, the Company retained CollinsStewart LLC of New York (“Collins”) to act as its exclusive placement agent withrespect to a best efforts private placement transaction of up to $15,000,000 ofCompany securities.  In the event that market conditions allow and if Collinsis successful, Collins will be paid at closing for the sale of Securities aU.S. dollar cash fee equal to 6.5% of the proceeds raised and 3.0% of thecommon stock equivalents underlying the Securities issued in the form of commonstock warrants with an exercise price equal to the purchase price of theSecurities.

 

Withfunds raised and positive cash flow from its ongoing production activities, theCompany believes that it will be able to repay the existing Investec bridgingloan.  While the Company has not received any commitment from the broker-dealerwith respect to raising these additional funds and there can be no assurancethat the efforts of Collins will be successful, the Company remains optimisticthat if market conditions allow, it may be able to complete one or more ofthese planned financial transactions on reasonable terms.

 

OnApril 14, 2009, the Company received a proposal from AIMS Asset Management SdnBhd (“AIMS”) offering the Company the following facilities:

 
    - AIMS     to purchase the Investec loan in full either by funding EGSA to settle the     loan or by directly buying the loan from Investec;
    - The     period of the loan assigned to AIMS to be extended for 2 months to end     July 2009; 
    - EGSA     to be owned by a listed holding company on Australian Stock Exchange; and
    - Upon     satisfaction of imminent listing but prior to listing, AIMS undertakes to     convert this loan together with the existing convertible loan into a     direct 40% stake in EGSA.               
```
 
```

This proposal was considered by the Boardof Directors of EGI upon receipt and a resolution was passed approving it.

** **

33

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On April 30, 2009 and subject to our satisfactions ofcertain conditions, we entered into the Restated Convertible Loan and OptionAgreement (the “Restated Agreement”) with Asian Investment Management Services,Limited (“AIMS”).  The Restated Agreement provides that AIMS will; (A)  providetechnical and corporate assistance to our subsidiary, EGSA, in connection withEGSA’s strategies and objectives; (B) make available additional funds as an“Additional Loan" no later than May 29, 2009 in an amount not to exceed93,000,000 (South African Rand) to EGSA so as to allow EGSA to pay all amountsdue Investec Bank Limited under the Investec Loan and for EGSA to cancel thesecurity given by or on behalf of EGSA to Investec Bank including, but notlimited to, the Borrower’s Cession and the Guarantee (as set forth in the Form8-K that we filed on April 23, 2008);  (C) convert the Additional Loan and theexisting convertible loan of March 31, 2008 in the amount of 32,000,000 (SouthAfrican Rand) that EGSA received from AIMS and the Phoenix Gold Fund (asamended on March 27, 2009) (the “Original Loan”), both consolidated andtotaling 125,000,000 (South African Rand) into 40% of the outstanding commonshares of either EGSA or such other entity as the parties agree for purposes ofthe planned listing of the common stock of the Company and its subsidiaries (orsuch other entity as we and AIMS may determine by subsequent agreement)pursuant to the Listing Commitment (in that event, we agreed to grant AIMS anoption to purchase an additional 10% of the issued share capital of EGSA whichshall be exercisable at any time after the date at which all of the conditionsset forth above  have been satisfied by us or waived by AIMS but no later thanthe date at which the common stock of EGSA) (or such other entity as we andAIMS may determine by subsequent agreement), is listed on an acceptable stockexchange (such as the London AIM, the Australian Stock Exchange or such otherstock exchange to which AIMS gives its consent). The Restated Agreement alsogrants AIMS a right of first refusal which provides that the Company shall notobtain any additional funding from any other source (other than CollinsStewart, LLC) unless the Company has first offered AIMS the opportunity toprovide such additional funding on no less favorable terms and conditions andAIMS has, after thirty days from the date of receipt of notice, declined toexercise its right of first refusal.

** **

 

 

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**Item3. Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

Our operations and our securities are subject to anumber of substantial risks, including those described below.  If any of theseor other risks actually occur, our business, financial condition and operatingresults, as well as the trading price or value of its securities could bematerially adversely affected.  No attempt has been made to rank these risks inthe order of their likelihood or potential harm.  In addition to those generalrisks enumerated elsewhere in this Form 10-Q, any purchaser of our common stockshould also consider the following risk factors:

 

**Risks Related to the Company’s Operations**

** **

**We require additional funding which may not beavailable.  If we are unable to obtain necessary financing on acceptable terms,we may have to curtail our current or planned operations:** We require additional funding to implement ourbusiness plan.  We terminated our open pit operations at our Lily Mine inDecember 2008 and commenced production at Lily underground effective January2009.  Additional capital will be required in order to ramp up fullunderground.  We also will require still additional funding to explore ourother properties. We may seek to obtain such funding for these activitiesthrough equity or debt financing, joint ventures or from other sources.  Therecan be no assurances that we will be able to raise adequate funds on acceptableterms from these or other sources (in light of our current circumstances),which may hinder us from continuing or expanding our operations.

 

**Operational hazards and responsibilities couldadversely affect our operations:**  Ourcurrent operational activities are subject to a number of risks and hazardswhich include but not limited to the following:

 

•        environmental hazards;

•        industrial accidents;

•        labor disputes;

•        unusual or unexpected geologicalor operating conditions;

•        changes in regulatory environment;

•        natural phenomena such as severeweather conditions, floods, earthquakes; and

•        other hazards.

 

These occurrences could result in significant damageto, or destruction of, mineral properties or production equipment, personalinjury or death, environmental damage, delays in mining, monetary losses andpossible legal liability.  The occurrence of these operational hazards couldadversely affect our mining operations by limiting production or the closure ofthe mines themselves.

 

**We are not insured against any losses or liabilitiesthat could arise from our operations either because insurance is unavailable orbecause the premium cost is excessive.  The payment of such liabilities couldhave a material adverse effect on our financial position and, depending on theextent of such liability, could result in the total loss of our assets andoperations****:**  Exploration for goldinvolves hazards, which could result in us incurring substantial losses andliabilities to third parties for pollution, accidents and other hazards.  Wehave public liability insurance of $1,500,000, but if we incur uninsured lossesor liabilities, the funds available for the implementation of its business planwill be reduced and our assets may be jeopardized.  The payment of suchliabilities may have a material adverse effect on our financial position and,depending on the extent of such liability, could result in the total loss ofour assets and operations.

 

**The Bank Feasibility Study (“BFS”) contain estimatesand assumptions regarding the feasibility of our mining operations which maylater prove to be inaccurate as additional information becomes available:**  While webelieve that the BFS was conducted in a responsible fashion and the estimates,assumptions, and methodology of the BFS follows standards that are consistentwith industry practice, the amount of Reserves, Proven Reserves, and otherprojections may be later significantly reduced as we obtain additional information. The extent of any reduction in these estimates and their magnitude can not beknown at this time.  We are aware that estimates in the mining industry can besubject to dramatic changes.  For these reasons, we can not assure you that wewill not later discover that our estimates need to be significantly reduced aswe complete further work on our mining properties.

 

35

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**Our ability to discover a viable and economic mineralreserve on our properties is subject to numerous factors, most of which arebeyond our control and are not predictable.  If we are unable to discover suchreserves, it most likely will not be able to establish a profitable commercialmining operation on these properties:** Exploration for gold is speculative in nature, involves significant financialrisks and is frequently unsuccessful.  Few properties that are explored areultimately developed into commercially producing mines.  Our long-termprofitability will be, in part, directly related to the cost and success ofexploration programs.  Our gold exploration programs entail risks relating tothe following:

 

•        location of economic ore bodies;

•        development of appropriatemetallurgical process;

•        receipt of necessary governmentapprovals; and

•        construction of mining andprocessing facilities at sites chosen for mining.

 

**The commercial viability of a mineral deposit isdependent on a number of factors including, but not limited to, the following:**

** **

•        price of gold;

•        exchange rates;

•        particular attributes of thedeposit (i.e. size, grade and proximity to infrastructure);

•        financing costs;

•        taxation;

•        royalties;

•        land tenure;

•        land use;

•        water use;

•        availability and cost of powersource;

•        importing and exporting gold; and

•        environmental protection.

 

The effect of these factors and their magnitude cannotbe accurately predicted and any one of which could adversely affect our abilityto operate.  Further, we have little or no control over these variables.

** **

**Our ability to become and remain profitable, should webecome profitable, will be dependent on our ability to locate, explore, developand mine additional properties.  There is intense competition for theacquisition of gold properties.  If we are unable to accomplish this, we mostlikely will not be able to be profitable on a long-term basis:**  Gold properties eventually become depleted oruneconomical to continue mining.  As a result, our long-term success isdependent in large part on its ability to acquire, discover, develop and minenew properties.  The acquisition of gold properties and their exploration and developmentare subject to intense competition.  There are many larger companies withgreater financial resources, larger staff, more experience and more equipmentfor exploration and development that may be in a better position than us tocompete for such mineral properties.  If we are unable to locate, develop andeconomically mine new properties, we most likely will not be able to beprofitable on a long-term basis.  Further, given the competition that we facefrom these larger companies, we cannot assure you that we can achieve orsustain profitability or if we do, that we can sustain it.

 

36

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**Our property interests are located in South Africa.  The risk of doing business in a foreign country could adversely affect itsresults of operations and financial condition: **We face risks normally associated with any conduct ofbusiness in foreign countries, including various levels of political andeconomic risk.  The occurrence of one or more of these events could have amaterial adverse impact on our current and future operations which, in turn,could have a material adverse impact on its future cash flows, earnings,results of operations and financial condition.  These risks include thefollowing:

 

•        prevalence of various diseases atthe mining sites;

•        security concerns;

•        adverse weather such as rainyseason;

•        labor disputes;

•        uncertain or unpredictablepolitical and economic environments;

•        war and civil disturbances;

•        changes in laws or policies;

•        mining policies;

•        monetary policies;

•        unlinking of rates of exchange toworld market prices;

•        environmental regulations;

•        labor relations;

•        return of capital;

•        taxation;

•        delays in obtaining or theinability to obtain necessary governmental permits;

•        governmental seizure of land ormining claims;

•        limitations on ownership;

•        institution of laws requiringrepatriation of earnings;

•        increased financial costs;

•        import and export regulations; and

•        establishment of foreign exchangeregulations.

 

37

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Any such changes may affect our current miningoperations and ability to undertake exploration activities in respect ofpresent and future properties in the manner currently contemplated, as well asour ability to explore and eventually develop and operate those properties inwhich we have an interest or in respect of which we have obtained explorationrights to date.  Certain changes could result in the confiscation of propertyby nationalization or expropriation without fair compensation.  We do not carryany insurance for any of these risks and we have no plans to acquire any suchinsurance in the future.

 

**There are uncertainties as to title matters in themining industry.  Any defects in such title may cause us to forfeit its rightsin mineral properties and could jeopardize its business operations:**  If the title to or our rights of ownership in ourproperties, prospects and/or claims are challenged or impugned by thirdparties, or theproperties, prospectsand/or claims in which we have an interest are subject to prior transfers orclaims, such title defects could cause us to loose our rights in such properties. If we lose our rights in and to any of our mineral properties, our businessoperations could be jeopardized.  We may not have the financialresources to protect and assert our legal claims in such properties.

 

**In the event that we breach our obligations toInvestec, we may lose our wholly-owned subsidiary EGSA and thereby lose all ofour assets:**  While we believe thatthe financing arrangement with Investec was prudent and appropriate, we haveincurred a risk that we are unable to repay Investec the U.S. $10 millionbridging loan on or before May 29, 2009 or in the event that we breach ourobligations to Investec, Investec has the right to our wholly owned subsidiary,EGSA, and in that event we could lose all of our assets and business.  As aresult and in that event, any person who acquires our Common Stock would loseall or substantially all of their investment.

**Our current and planned operations require permits andlicenses from various governmental authorities.  If we are unable to obtain andmaintain such requisite permits, licenses and approvals, our businessoperations and ability to become profitable may be adversely affected:**  Such permits and licenses are subject to change inregulations and in various operating circumstances.  We cannot assure you thatwe will be able to obtain or maintain in force all necessary permits andlicenses that may be required to conduct exploration or commence constructionor operation of mining facilities at properties to be explored or to maintaincontinued operations at economically justifiable costs.  Further, certain ofour mineral rights and interests are subject to government approvals.  In allsuch cases such approvals are, as a practical matter, subject to the discretionof the South African government or governmental officials.  No assurance can begiven that we will be successful in obtaining any or all of such approvals. Our inability to obtain and maintain the requisite permits, licenses andapprovals could materially and adversely affect our operations and ability tobecome profitable.

 

**Gold prices can fluctuate on a material and frequentbasis due to numerous factors beyond the Company’s control.  Our ability togenerate profits from operations could be materially and adversely affected bysuch fluctuating prices:**  Theprofitability of our current and future gold mining operations is significantlyaffected by changes in the market price of gold.  Between January 1, 2007 andDecember 31, 2008, the “fixed price” for gold on the London Exchange hasfluctuated between $608.40 and $1,011.25 per ounce.  Gold prices fluctuate on adaily basis and are affected by numerous factors beyond our control, including:

 

•        level of interest rate;

•        rate of inflation;

•        central bank sales; and

•        world supply of gold.

 

Each of these factors can cause significantfluctuations in gold prices. Such external factors are in turn influenced bychanges in international investment patterns and monetary systems and politicaldevelopments.  The price of gold has historically fluctuated widely and,depending on the price of gold, revenues from mining operations may not besufficient to offset the costs of such operations.  We have no means ofcontrolling or influencing any of these factors and there is no likelihood thatwe will achieve any such control or influence in the future.

** **

**Gold is sold in South Africa in South African Rands.  If applicable currency exchange rates fluctuate our revenues and results ofoperations may be materially and adversely affected:** All of the gold that we produce is required to be soldto The Rand Refinery Ltd. which is a South African corporation and the world’slargest gold refinery.  Such sales are paid for with South African Rands.  Wealso incur a significant amount of our expenses which are payable in South AfricanRands.  As a result of the required utilization of the South African Rand, ourfinancial performance is affected by fluctuations in the value of the SouthAfrican Rand to the U.S. Dollar.  At the present time, we have no plan orpolicy to utilize forward contracts or currency options to minimize thisexposure, and even if these measures are implemented there can be no assurancethat such arrangements will be available, be cost effective or be able to fullyoffset such future currency risks.

 

**Dependence upon Key Executives and Employees:**  Our success depends to a great extent upon thecontinued successful performance of key executives and employees in general andspecifically Mr. Michael McChesney.  Mr. McChesney is presently employed by usas our President and Chief Executive Officer.  Mr. McChesney also serves as oneofour directors.  If Mr. McChesney andcertain other present key executives and employees are unable to perform theirduties for any reason, our ability to operate in South Africa will be materiallyadversely effected.  We do not have a key man life insurance policy on the lifeof Mr. McChesney or any other key executives and employees and we have nopresent plans to acquire any such policies. 

** **

 38

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** **

**Item4. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures:**  Weconducted an evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures.  The term “disclosure controls and procedures”, as defined in Rules13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, asamended (“Exchange Act”), means controls and other procedures of a company thatare designed to ensure that information required to be disclosed by the companyin the reports it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSecurities and Exchange Commission's rules and forms.  Disclosure controls andprocedures also include, without limitation, controls and procedures designedto ensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company's management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate, toallow timely decisions regarding required disclosure.  Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedas of March 31, 2009, that our disclosure controls and procedures are effectiveto a reasonable assurance level of achieving such objectives.  However, itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

**Management’s Report on Internal Control Over Financial Reporting:**  Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act.  Our internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  The internal controls for the Company are provided byexecutive management’s review and approval of all transactions.  Ourinternal control over financial reporting also includes those policies andprocedures that:

 

(1)    pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect thetransactions and dispositions of our assets;

 

(2)    provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with U.S. GAAP, and that our receipts and expendituresare being made only in accordance with the authorization of our management; and

 

(3)    provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on the financialstatements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. 

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of March 31, 2009.  In making this assessment, management used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in Internal Control-Integrated Framework.  Management’s assessmentincluded an evaluation of the design of our internal control over financialreporting and testing of the operational effectiveness of these controls.

 

Basedon this assessment, management has concluded that as of March 31, 2009, ourinternal control over financial reporting was effective to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of the Securitiesand Exchange Commission that permit the Company to provide only management’sreport in this annual report.

 

**Changes in Internal Control over Financial Reporting:**  There were no changes in our internal control overfinancial reporting during the first quarter ended March 31, 2009, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

****39

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**PART II—OTHER INFORMATION**

** **

**Item 1. Legal Proceedings.**

 

The Company’s recently acquired subsidiary, BarbrookMines, was subject to several claims brought against it by creditors during2006 and 2007 fiscal years.  These claims, which had been accrued for at 2007year end, were in the main settled and the matters finalized.  In the matterwith Sentinel Corporate Solutions (Pty) Limited, Sentinel has issued summonsagainst Barbrook for R1,108,061 (approximately US$116,000) in respect ofamounts payable, which are accrued for, in respect of a labor contract. Barbrook has instituted an action against Sentinel for R7,456,465 (approximatelyUS$783,000) in respect of damages incurred when the labor force set fire to theBarbrook administration building.  Both matters with Sentinel are presentlystill being defended and are not yet finalized.

 

Other than the matter discussed above, we are not a party to any pending legal proceedings, and no suchproceedings are known to be threatened or contemplated.

** **

**Item1A.  Risk Factors.**

** **

Our operations and our securities are subject to anumber of substantial risks, including those described below.  If any of theseor other risks actually occur, our business, financial condition and operatingresults, as well as the trading price or value of its securities could be materiallyadversely affected.  No attempt has been made to rank these risks in the orderof their likelihood or potential harm.  In addition to those general risksenumerated elsewhere in the document, any purchaser of our common stock shouldalso consider the following risk factors:

** **

**Lack of Diversification: **Our business, assets, and operations are concentratedin South Africa and the mining of gold.  As a result, we are not diversifiedand to that extent we face continuing challenges to achieve stable revenues,profits, and cash flow while also remaining exposed to the risks associatedwith this concentration.

** **

** **40

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**Qualified Opinion Letter from Accountants: **Our accountants, Mendoza Berger & Co., issued aqualified opinion letter in connection with their audit of our financialstatements for the year ending December 31, 2008.  Their qualification, termeda “going concern” qualification, primarily reflected their assessment of theextent of our short-term debt and our obligations to Investec Bank Limited(“Investec”) for the repayment of the bridging loan due for payment on May 29,2009.  While we anticipated that the “going concern” qualification would beissued (which is common for smaller companies), we have entered into anagreement with Asian Investment Management Services Limited (“AIMS”) (as setforth in our Form 8-K which we filed on May 5, 2009) that provides funds torepay Investec and some additional working capital.  To that extent and if AIMSprovides the additional capital set forth in the agreement, we will avoid adefault on our obligations to Investec.  However, the terms of the agreementwith AIMS requires that we undertake efforts to re-domicile the Company, seek alisting for our Common Stock on an acceptable stock exchange, and fulfillcertain other conditions as set forth in our agreement with AIMS.  In all ofthese matters, we believe that we have prudently addressed the financial needsof the Company, we cannot assure you with certainty that we will obtain theanticipated funds or that we will avoid further financial difficulties in thefuture.

** **

**Impact of Agreement with AIMS:  **As of May 13, 2009, we satisfied certain conditionsset forth in the Restated Convertible Loan and Option Agreement (the “RestatedAgreement”) that we entered into with Asian Investment Management ServicesLimited (“AIMS”). (A copy of the Restated Agreement with AIMS was filed in ourForm 8-K on May 5, 2009.)  The Restated Agreement provides that AIMS couldacquire approximately 46% of our outstanding Common Stock.  In that event, ourexisting stockholders will incur significant dilution with respect to theirpercentage ownership of the Company resulting from the conversion of theconvertible loan that we issued to AIMS and from the exercise of an optionacquired by AIMS in accordance with that agreement.  While we believe that theRestated Agreement provided us with the capital needed to meet our obligationsto Investec and at a reasonable cost (given current financial marketconditions), our obligations to AIMS will significantly impact the control anddirection of the Company and will likely reduce and limit the ability of ourexisting stockholders to influence our corporate affairs.

** **

**SmallCompany, Limited Resources & Need for Additional Capital:**  We are a small company with limited financialresources relative to the many competitors in our industry.  In the event ofany unexpected problems or difficulties in our business and operations, we maynot have the ability to obtain sufficient additional capital on terms that arereasonable in light of our current circumstances and market conditions. Further, we currently estimate that we will need to raise $15,000,000 inadditional capital.  We have not received any assurances that this additionalcapital can be obtained or if it is obtained, that can be obtained onreasonable terms and in a timely fashion to allow us to execute our plans.  

 

**LimitedTrading Market for Common Stock:**** Our common stock is presently traded in theover-the-counter Bulletin Board and is quoted on the “OTCBB Market”.  Our stocktrades on a limited and sporadic basis and we cannot assure you that acontinuous liquid trading market will develop or, if it does develop, that itwill be sustained for any continuous period. 

** **

**Share Capital: **We have a significant number of shares authorized but unissued.  Theseshares may be issued without stockholder approval.  Significant issuances ofstock would further dilute the percentage ownership of our current stockholders and could likely havean adverse impact on the market price of the common stock. As of May 12, 2009, we have an aggregate of 150,020,785shares of Common Stock and 20,000,000 shares of Preferred Stock authorized. All of such shares of common stock and such shares of preferred stock may beissued without any action or approval by our stockholders.  Further and underthe provisions of our Articles of Incorporation, our Board of Directors has theability, without obtaining stockholder consent, to issue one or more series ofpreferred stock each with such dividend, liquidation, conversion, voting orother rights which could adversely affect the voting power or other rightsassociated with our common stock. Additionally, we may in the future issue debtsecurities, secured or unsecured, which may have limitations or restrictions onthe payment of dividends and which will have priority in the event ofliquidation or dissolution.  As a result, an investor who purchases our commonstock may hold legal claims to our assets that will be subordinate to theclaims asserted by superior holders.  Finally, any such shares issued wouldfurther dilute the percentage ownership of our current stockholders and wouldlikely have an adverse impact on the market price of the common stock.

**Lackof Profits and Negative Cash Flow:** During the three months ended March 31, 2009, we recorded a net loss of $781,822compared to a net income of $87,249 for the three months ended March 31, 2008and negative cash flow for the three months ended March 31, 2009.  While webelieve that if we can successfully implement our business plan and if marketand competitive conditions allow, we may achieve profitability and positivecash flow, we can not assure you that we will achieve profitability andpositive cash flow or if we do achieve these goals, that we can sustainprofitability and positive cash flow in the future.

 

**Extensionof Loan & Covenants Granted to Investec:**  On October 30, 2008, we entered into an extension of the $10,000,000bridging loan with Investec Bank Limited.  Under the terms of the loan, we areobligated to pay interest to Investec and repay all principal due to Investecon May 29, 2009.  Further, and in addition to other provisions, we grantedInvestec 820,000 common stock purchase warrants and agreed to provide Investecwith monthly management reports.  In the event that we are not able to repaythe full amount of the $10,000,000 loan from Investec on or before the May 29,2009, then, absent an extension of the loan or some other re-negotiation of theloan, we could stand to lose our principal subsidiary with current business.  Whilewe believe that the agreement extending the existing bridging loan serves ourlong-term interests, and we believe that we will be successful in repaying theloan on or before the May 29, 2009 date, we can not assure you that we will besuccessful in repaying the loan as required.  In the event that we are notsuccessful, any holder of the Company’s Common Stock could stand to lose all orsubstantially all of their investment.

 

**Lack of Dividends:**  Our board of directorsdetermines whether to pay dividends on the Company’s issued and outstandingshares. The declaration of dividends will depend upon our future earnings (ifany), our capital requirements, our financial condition and other relevant factors. Our board of directors does not intend to declare any dividends on our CommonStock for the foreseeable future.  We anticipate that we will retain anyearnings to finance the growth of our business and for general corporatepurposes.

** **

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**Competition & Lack of Diversification:**  Goldproperties eventually become depleted or uneconomical to continue mining.  As aresult, our long-term success is dependent on our ability to acquire, discover,develop and mine new properties.  The acquisition of gold properties and theirexploration and development are subject to intense competition.  Companies withgreater financial resources, larger staffs, more experience and more equipmentfor exploration and development may be in a better position than us to competefor such mineral properties.  If we are unable to locate, develop andeconomically mine new properties, it most likely will not be able to beprofitable on a long-term basis.  In addition, all of our assets and operationsare concentrated in the mining business described in this Form 10-K and we haveno current plans to diversify into any other business activity.  

 

**Reliance Upon Estimates & Matter of EstimatedReserves:**  Our business and the plansdescribed in this Form 10-Q rely, in large measure, upon estimates that wereceived from others (including those in the Bankable Feasibility Study) usedin combination with our own assessments.  While we continue to evaluate thegeological information that we use, we cannot assure you that the estimatesrecited in this Form 10-Q are accurate or that we will not later revise andlower our estimated reserves which may adversely impact our financialperformance.  Estimates used in the mining industry can change dramatically andall of our estimates may be revised or reduced on the basis of later receivedinformation and estimates. 

 

**LimitedTrading and Limited History for our Common Stock:**  Our common stock trades on a limited and sporadicbasis and, as a result, there is only limited liquidity in our common stock. Further, our common stock has had only a limited trading history on theBulletin Board Market.  As a result and given the limited trading market forour common stock, the price of our common stock may be far more volatile andunpredictable than the prices of common stocks and other securities that have along and established trading history.

** **

**PossibleRule 144 Stock Sales:**  Many of the shares of our outstanding Common Stockare "restricted securities" and may be sold only in compliance withRule 144 adopted under the Securities Act of 1933 or other applicableexemptions from registration.  As revised effective February 15, 2008, Rule 144generally now requires that a holder of our restricted Common Stock hold these“restricted securities” for at least six months from the date at which theywere acquired before undertaking any public re-sale of the restricted CommonStock pursuant to Rule 144.  And if the holder is an “affiliate” (as defined inRule 144(a)(1) or was an “affiliate” in the immediately preceding 90 day period),then the holder must also satisfy certain other requirements of Rule 144.  As aresult of the revision to Rule 144 that became effective February 15, 2008(including but not limited to the shorter holding period under Rule 144(d)),potential and actual sales of our Common Stock by our present shareholders mayhave a depressive effect on the price of our Common Stock in the marketplace. 

** **

**Government, Environmental, and Legal Risks:**  Our operations are subject to South African andlocal laws and regulations regarding environmental matters, the abstraction ofwater, and the discharge of mining wastes and materials.  Any changes in theselaws could affect our operations and economics.  Environmental laws andregulations change frequently, and the implementation of new, or themodification of existing, laws or regulations could harm us.  While we believewe do not currently have any material environmental obligations, explorationactivities may give rise in the future to significant liabilities on our partto the government and third parties and may require us to incur substantialcosts of remediation. 

 

**Operational Hazards and Responsibilities:**  Our operational activities are subject to a numberof risks and hazards which include but not limited to the following:

 

•        environmental hazards;

•        industrial accidents;

•        labor disputes;

•        unusual or unexpected geologicalor operating conditions;

•        changes in regulatory environment;

•        natural phenomena such as severeweather conditions, floods, earthquakes; and

•        other hazards.

 

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These occurrences could result in significant damageto, or destruction of, mineral properties or production equipment, personalinjury or death, environmental damage, delays in mining, monetary losses andpossible legal liability.  The occurrence of these operational hazards couldadversely affect our mining operations by limiting production or the closure ofthe mines themselves.

 

**Limited Insurance Coverage: **We are not insured against any losses or liabilitiesthat could arise from its operations either because insurance is unavailable orbecause the premium cost is excessive.  The payment of such liabilities couldhave a material adverse effect on our financial position and, depending on theextent of such liability, could result in the total loss of its assets andoperations.  Exploration for goldinvolves hazards, which could result in us incurring substantial losses andliabilities to third parties for pollution, accidents and other hazards.  Wehave public liability insurance of $1,500,000 but, ifwe incur uninsured losses or liabilities, the funds available for theimplementation of our business plan will be reduced and our assets may bejeopardized.  The payment of such liabilities may have a material adverseeffect on our financial position and, depending on the extent of suchliability, could result in the total loss of its assets and operations.

 

**The Bankable Feasibility Study (“BFS”): **The BFS contains estimates and assumptions regardingthe feasibility of our mining operations which may later prove to be inaccurateas additional information becomes available.  While we believe that theBFS was conducted in a responsible fashion and the estimates, assumptions,and methodology of the BFS follows standards that are consistent with industrypractice, the amount of Reserves, Proven Reserves, and other projections may belater significantly reduced as we obtain additional information.  The extent ofany reduction in these estimates and their magnitude can not be known at thistime.  We are aware that estimates in the mining industry can be subject todramatic changes.  For these reasons, we can not assure you that we will notlater discover that our estimates need to be significantly reduced as wecomplete further work on our mining properties.

 

**Commercial Viability and Reserves: **Our ability to discover a viable and economic mineralreserve on its properties is subject to numerous factors, most of which arebeyond our control and are not predictable.  If we are unable to discover suchreserves, we most likely will not be able to establish a profitable commercialmining operation on these properties. Exploration for gold is speculative in nature, involves significant financialrisks and is frequently unsuccessful.  Few properties that are explored are ultimatelydeveloped into commercially producing mines.  Our long-term profitability willbe, in part, directly related to the cost and success of exploration programs. Our gold exploration programs entail risks relating to the following:

 

•        location of economic ore bodies;

•        development of appropriatemetallurgical process;

•        receipt of necessary governmentapprovals; and

•        construction of mining andprocessing facilities at sites chosen for mining.

 

The commercial viability of a mineral deposit isdependent on a number of factors including the following:

 

•        the price of gold;

•        exchange rates;

•        the particular attributes of thedeposit (i.e. size, grade and the proximity to infrastructure);

•        financing costs;

•        taxation;

•        royalties;

•        land tenure;

•        land use;

•        water use;

•        availability and cost of powersource;

•        importing and exporting gold; and

•        environmental protection.

 

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The effect of these factors cannot be accuratelypredicted and any one of which could adversely affect our ability to operate. Further, we have little or no control over these variables and the magnitude ofany one risk or any group of risks and the extent to which they may adverselyimpact us can not be predicted with any accuracy.

.

**Profitability: **We anticipate that our ability to achieve and sustain profitability andpositive cash flow will likely be dependent primarily on our ability to locate,explore, develop and mine additional, commercially viable properties.  There isintense competition for the acquisition of gold properties.  If we are unableto accomplish this, it most likely will not be able to be profitable on along-term basis.  Gold propertieseventually become depleted or uneconomical to continue mining.  As a result,our long-term success is dependent on its ability to acquire, discover, developand mine new properties.  The acquisition of gold properties and theirexploration and development are subject to intense competition.  Companies withgreater financial resources, larger staffs, more experience and more equipmentfor exploration and development may be in a better position than us to competefor such mineral properties.  If we are unable to locate, develop and economicallymine new properties, we most likely will not be able to achieve profitability,positive cash flow, or both on a long-term basis.

 

**Foreign Country Location: **All of our property interests and all of ouroperations are concentrated in South Africa.  The risk of doing business in aforeign country could adversely affect our results of operations and financialcondition.  We face risks normallyassociated with any conduct of business in foreign countries, including variouslevels of political and economic risk.  The occurrence of one or more of theseevents could have a material adverse impact on our current and futureoperations which, in turn, could have a material adverse impact on our futurecash flows, earnings, results of operations and financial condition.  Theserisks include the following:

 

•        prevalence of various diseases atthe mining sites;

•        security concerns;

•        adverse weather such as rainyseason;

•        labor disputes;

•        uncertain or unpredictablepolitical and economic environments;

•        war and civil disturbances;

•        changes in laws or policies;

•        mining policies;

•        monetary policies;

•        unlinking of rates of exchange toworld market prices;

•        environmental regulations;

•        labor relations;

•        return of capital;

•        taxation;

•        delays in obtaining or theinability to obtain necessary governmental permits;

•        governmental seizure of land ormining claims, limitations on ownership;

•        institution of laws requiring repatriationof earnings;

•        increased financial costs;

•        import and export regulations; and

•        establishment of foreign exchangeregulations.

 

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Any such changes may affect our current mining operations and ability to undertake explorationactivities in respect of present and future properties in the manner currentlycontemplated, as well as its ability to explore and eventually develop andoperate those properties in which we have an interest or in respect of which wehave obtained exploration rights to date. Certain changes could result in theconfiscation of property by nationalization or expropriation without faircompensation.  We have no plans to diversify our operations or business to anyother country and we do not anticipate that we will diversify our operations orbusiness outside of South Africa at any time in the foreseeable future.

 

**Uncertainties as to Title Matters in the MiningIndustry:  **While we believe that wehold legal title and rights of ownership to conduct our existing miningoperations, any defects in such title may cause us to forfeit our rights inmineral properties and could jeopardize our business operations.  If the title to or our rights of ownership in ourproperties, prospects and/or claims are challenged or impugned by thirdparties, or the properties, prospects and/or claims in which we have aninterest are subject to prior transfers or claims, such title defects couldcause us to loose our rights in such properties.  If we lose our rights in andto any of our mineral properties, we could incur substantial and protractedlosses.  In the event that our rights are challenged, we may not havethe financial resources to protect and assert our legal claims in suchproperties.

 

**Governmental Permits and Licenses: **Our****current and planned operations requirepermits and licenses from various governmental authorities. If we are unable toobtain and maintain such requisite permits, licenses and approvals, ourbusiness operations and ability to become profitable may be adversely affected.  Such permits and licenses are subject to change inregulations and in various operating circumstances.  We cannot assure you thatwe will be able to obtain or maintain in force all necessary permits andlicenses that may be required to conduct exploration or commence constructionor operation of mining facilities at properties to be explored or to maintaincontinued operations at economically justifiable costs.  Further, certain ofour mineral rights and interests are subject to government approvals.  In allsuch cases such approvals are, as a practical matter, subject to the discretionof the South African government or governmental officials.  No assurance can begiven that we will be successful in maintaining or obtaining any or all of suchapprovals.  Our inability to obtain and maintain the requisite permits,licenses and approvals could materially and adversely affect our operations andability to become profitable.  In the event of any adverse governmental actionagainst our Company or the permits, licenses, and approvals that we currentlyhold, we may incur protracted and significant losses which could result in thetotal loss of the value of our Common Stock. For these and other reasons, apurchaser of our Common Stock must be prepared to accept the total loss of theirinvestment.

 

**Price of Gold: **The revenues that we generate are determined by the quantity of gold weproduce and the price of gold.** **Gold prices can fluctuate on a materialand frequent basis due to numerous factors beyond our control.  Our ability togenerate profits from operations could be materially and adversely affected bysuch fluctuating prices.  Accordingly,the profitability of the Company’s current and future gold mining operations issignificantly affected by changes in the market price of gold.  Between January1, 2008 and December 31, 2008, the “fixed price” for gold on the LondonExchange has fluctuated between $712.50 and $1,023.50 per ounce.  Gold pricesfluctuate on a daily basis and are affected by numerous factors beyond ourcontrol, including:

 

•        level of interest rates;

•        rate of inflation;

•        central bank sales; and

•        world supply of gold.

 

Each of these factors can cause significantfluctuations in gold prices.  Such external factors are, in turn, influenced bychanges in international investment patterns and monetary systems and politicaldevelopments. The price of gold has historically fluctuated widely and,depending on the price of gold, revenues from mining operations may not besufficient to offset the costs of such operations. In that event and if goldprices were to decline to levels that do not allow us to recover our costs, wemay incur significant and protracted losses and we may cease operations.  Inthat event, a holder of our Common Stock would likely lose all or substantiallyall of their investment.

 

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**Foreign Currency: **We sell gold in South Africa in South African Rands.  If applicablecurrency exchange rates fluctuate, our revenues and results of operations maybe materially and adversely affected.**** We exclusively sell our gold to The Rand Refinery Ltd. which is aSouth African corporation and the world’s largest gold refinery.  Such salesare paid for with South African Rands.  We also incur a significant amount ofits expenses which are payable in South African Rands.  As a result of therequired utilization of the South African Rand, our financial performance isaffected by fluctuations in the value of the South African Rand to the U.S.Dollar.  At the present time, we have no plan or policy to utilize forwardcontracts or currency options to minimize this exposure, and even if thesemeasures are implemented there can be no assurance that such arrangements willbe available, be cost effective or be able to fully offset such future currencyrisks.

** **

**Dependence upon Key Executives and Employees:**  Oursuccess depends to a great extent upon the continued successful performance ofkey executives and employees in general and specifically Mr. MichaelMcChesney.  Mr. McChesney is presently employed by us as our President andChief Executive Officer.  Mr. McChesney also serves as one of our directors. If Mr. McChesney and certain other present key executives and employees areunable to perform their duties for any reason, our ability to operate in South Africa will be materially adversely effected.  We do not have a key man lifeinsurance policy on the life of Mr. McChesney or any other key executives andemployees and we have no plans to acquire any key man life insurance in thefuture.

 

**Enforcement of Civil Liabilities: **Substantially all our assets are located outside ofthe United States, and certain of our directors and officers are residentoutside of the United States.  As a result, it may be difficult or impossibleto enforce judgments granted by a court in the United States against our assetsor our directors and officers residing outside of the United States. 

** **

**InternalControls:** Effective internal controlsare necessary for us to provide reliable financials reports and effectivelyprevent fraud.  If we cannot provide reliable financial reports or preventfraud, our operating results could be harmed.  We have in the past discovered,and may in the future discover, areas of our internal controls that needimprovement.  Any failure to implement required new or improved controls, ordifficulties encountered in their implementation, or lack of resources toproperly implement internal controls, could harm our operating results or causeus to fail to meet our reporting obligations.  Inferior internal controls couldalso cause investors to lose confidence in our reported financial information,which could have a negative effect on the trading price of our stock. 

 

**SarbanesOxley:**  The Sarbanes-Oxley Act of2002 was enacted in the United States in response to public concerns regardingcorporate accountability in connection with recent accounting scandals.  Thestated goals of the Sarbanes-Oxley Act are to increase corporateresponsibility, to provide for enhanced penalties for accounting and auditingimproprieties at publicly traded companies, and to protect investors byimproving the accuracy and reliability of corporate disclosures pursuant to thesecurities laws.  The Sarbanes-Oxley Act generally applies to all companiesthat file or are required to file periodic reports with the SEC, under theSecurities Exchange Act of 1934.  As a public company, we are required tocomply with the Sarbanes-Oxley Act.  The enactment of the Sarbanes-Oxley Act of2002 has resulted in a series of rules and regulations by the SEC that increaseresponsibilities and liabilities of directors and executive officers.  Theperceived increased personal risk associated with these recent changes maydeter qualified individuals from accepting these roles.  As a result, it may bemore difficult for us to attract and retain qualified persons to serve on ourboard of directors or as executive officers.  Sarbanes Oxley 404 compliance isa costly and time-consuming process and there can be no assurance that we willcontinue to be compliant.  We have limited internal and external resources todevote to maintaining SOX 404 compliance and there can be no assurance that wecan maintain compliance.  We continue to evaluate and monitor developments withrespect to these rules, and we cannot predict or estimate the amount of additionalcosts we may incur or the timing of such costs. 

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds.**

 

OnMarch 28, 2008, our subsidiary, EGSA, entered into a Convertible Loan Agreementwhich was completed without the use of an underwriter.  The transaction and theagreements were completed directly without any intermediary.

 

Throughour subsidiary, EGSA, we received net proceeds of $3,361,697 (32,000,000 SARands) (based on current exchange rates). 

 

Inentering into the transaction with the Lender, we received assurances that: 

 

(1)the Lender had received information, business and financial documents, andother disclosures regarding the Company, EGSA, and management equivalent tothat found in a registration statement; 

 

(2)the Lender had a full and unrestricted opportunity to ask questions of theCompany’s and EGSA’s officers and directors and to receive answers to all suchquestions; 

 

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(3) the Lender is an Accredited Investor who is experienced and sophisticated ininvestment transactions made with small public companies;

 

(4)the Lender understood that it acquired the Convertible Loan (and subsequently,any shares of EGSA’s common stock thereby) as “restricted securities,” forinvestment purposes only and not with a view toward their resale; and

 

(5) the transaction with the Lender was not the product of any general solicitationor advertising but was the result of a pre-existing business relationship.

 

Onthis basis, we relied upon the exemption provided by Section 4(2) of the SecuritiesAct of 1933.

 

Allof the proceeds were and are to be used by EGSA to increase its working capitaland for capital expenditures.

 

Theloan principal can convert into 6.9% of the total issued and outstanding sharesof ordinary capital (of EGSA) after the conversion of the loan by EGSA.  IfEGSA is able to list its shares with the Johannesburg Stock Exchange Limited(JSE) within six months of the agreement date then no interest is due andpayable. If EGSA is not able to list its ordinary shares with the JSE withinsix months of the agreement date then interest will accrue at the South AfricanPrime Rate.  If EGSA list its ordinary shares with JSE after six months butbefore twelve months of the agreement date, then interest will accrue and bepaid on a monthly basis until conversion or repayment of the loan.  If EGSA hasbeen unable to list its ordinary shares with JSE within twelve months of theagreement date, then the lender can demand repayment of principal and accruedinterest or conversion of the debt into the corresponding shares of ordinaryshares of EGSA.

 

OnOctober 30, 2008, we received a commitment letter agreement from Investec BankLimited (“Investec”).  Under the terms of the agreement, Investec has agreed toextend the maturity date of our existing bridging loan (the “Existing Loan”)from the original maturity date of November 28, 2008 to May 29, 2009 (the “LoanExtension”).

 

As consideration for the LoanExtension, the Company agreed to the following:

 

(1)                To grant Investec 820,000 CommonStock Purchase Warrants for the purchase of 820,000 shares of the Company’sCommon Stock at an exercise price equal to the lower of $3.75 per share and theprice at which the Company raises equity capital in its next offering;

 

(2)                To increase the interest rate onthe Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

(3)                To confirm that the Company hassufficient working capital for the period through the last date of the LoanExtension;

 

(4)                To subordinate all shareholder loans to the ExistingLoan;

 

(5)                To prohibit the payment of anyinterest and principal on all shareholder loans;

 

(6)                To prohibit further indebtednesswithout the prior written approval of Investec; and

 

(7)                To provide Investec on or beforethe 5th calendar day of each month, monthly management accounts andan update on the Company’s financing strategy and provide Investec with anopportunity to review the strategy with Investec, upon Investec’s request.

 

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Wedid not use an underwriter or pay any fees or commissions to any third party inconnection with the Loan Extension.  All of the Warrants granted to Investecwere granted pursuant to the exemption provided by Section 4(2) of theSecurities Act of 1933 pursuant to the representations and assurances that theCompany received from Investec and the due diligence conducted by Investec. The Warrants were issued to Investec with a restricted securities legend andInvestec agreed that it was acquiring the Warrants for investment purposesonly.

 

On February 16, 2009, 554,228 shares of restrictedcommon stock at $3.00 per share and 554,228 Common Stock Purchase Warrants inthe form of a unit security at $3.00 per unit were issued for cash for a totaloffering of $1,662,684 less offering costs of $29,134 totaling $1,633,550. Theshare certificates were issued on May 7, 2009.

 

OnApril 30, 2009, we entered into the Restated Convertible Loan and OptionAgreement (the “Restated Agreement”) with Asian Investment Management ServicesLimited (“AIMS”).  Under the terms of the Restated Agreement, AIMS agreed toprovide funds to allow us to pay our outstanding commitments that we have toInvestec Bank Limited (“Investec”) and we also granted AIMS an option topurchase shares of our Common Stock.

 

Inentering into the Restated Agreement with AIMS, we received assurances that: 

 

(1)AIMS had received copies of our 2006, 2007, and 2008 Form 10-K as filed withthe U.S. Securities and Exchange Commission, our audited financial statementsfor each of those years together with other information, business and financialdocuments, and other disclosures equivalent to that found in a registrationstatement; 

 

(2)AIMS had a full and unrestricted opportunity to ask questions of the Company’sofficers and directors and to receive answers to all such questions; 

 

(3) AIMS had full and unrestricted access to our corporate books and records;

 

(4)AIMS is an Accredited Investor who is experienced and sophisticated ininvestment transactions made with small public companies;

 

(5)AIMS understood that the securities acquired by AIMS pursuant to the RestatedAgreement are “restricted securities” acquired by it for investment purposesonly and not with a view toward any resale; and

 

(6) the transaction with AIMS as recited in the Restated Agreement was not theproduct of any general solicitation or advertising but was the result of apre-existing business relationship.

 

Onthis basis, we relied upon the exemption provided by Section 4(2) of theSecurities Act of 1933.

 

Theproceeds we received under the Restated Agreement are to be used to repay theoutstanding balance of the bridging loan that we have with Investec that is duefor payment no later than May 29, 2009.

 

** **

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**Item 3. Defaults Upon Senior Securities.**

** **

None

** **

**Item 4. Submission of Matters to a Vote of SecurityHolders.**

 

None

 

**Item 5. Other Information.**

 

OnMay 13, 2009, a majority of our stockholders executed an Action by a Majorityof the Holders of our Common Stock by Written Consent in lieu of a Meeting (the“Written Consent”).

 

Bythe terms of the Written Consent, the holders of a majority of our outstandingCommon Stock approved the Restated Convertible Loan and Option Agreement (the“Restated Agreement”) with Asian Investment Management Services Limited(“AIMS”).  The Restated Agreement and its terms and conditions are set forth inour Form 8-K that we filed on May 5, 2009.

 

We intend to file Schedule 14C with the Commission inthe near future and to meet the requirements set forth in Section 14 of theSecurities Exchange Act of 1934 and the rules adopted by the Commission thereunder in connection stockholder actions arising out of this Written Action.

 

**Item 6. Exhibits.**

** **

**Regulation**

**S-BNumber                                              Exhibit**

** **

31.1                                Rule13a-14(a) Certification of Chief Executive Officer

 

31.2                                Rule13a-14(a) Certification of Chief Financial Officer

 

32.1                                               Certification Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 of Chief Executive Officer

 

32.2                                               CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 of ChiefFinancial Officer

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**SIGNATURES**

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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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                                                                                                EASTERN GOLDFIELDS, INC.
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Date:  May 20, 2009                                                                  BY:*/s/ Michael Mcchesney*
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                                                                                        MICHAEL MCCHESNEY
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                                                                                        Chief Executive Officer
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Date:  May 20, 2009                                                                  BY:*/s/ Tamer Muftizade*
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                                                                                        TAMER MUFTIZADE
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                                                                                                       Chief Financial Officer
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