**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10Q-SB**

 

(Mark            One)

 

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

|   | For the quarterly period ended | **June 30, 2007** |
|--------|--------------------------------|-------------------|

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)            OF THE SECURITIES EXCHANGE ACT OF 1934

|   | For the transition period from _________ to                            _________ |
|--------|----------------------------------------------------------------------------------|

 

|   | Commission file number**0-52151** |
|--------|-----------------------------------|

 

**Eastern Goldfields, Inc.**

(Exact Name of Small Business Issuer as Specified in its            Charter)

 

|   | **Nevada** | **88-0441307** |
|--------|------------|----------------|

|   | (State or Other Jurisdiction of | (I.R.S. Employer |
|--------|---------------------------------|------------------|

|   | Incorporation or Organization) | Identification No.) |
|--------|--------------------------------|---------------------|

 

**1660 Hotel Circle North, Suite 207, San Diego, CA            92108-2808**

(Address of Principal Executive Offices)

 

**(619) 280-8000**

(Issuer's Telephone Number, Including Area Code)

 

______________________________________________________________________________

(Former Name, Former Address and Former Fiscal Year,

if            Changed Since Last Report

 

Check whether the issuer (1) filed all reports required to be filed by            Section 13 or 15(d) of the Exchange Act during the past 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.       YesxNo            

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange            Act.                                                                                                                                                     Yes Nox

 

On            August 15, 2007, 9,377,986 shares of the issuer’s common stock were            outstanding.

 

Transitional Small Business Disclosure Format (Check one):            x

 

1

 

 

----

FORM            10Q-SB

TABLE            OF CONTENTS

 

 

                    

|                                                                                               |   | Page No. |
|----------------------------------------------------------------------------------------------------|--------|----------|
| PART I                                                                                             |   |     |
|                                                                                               |   |     |
| Item 1. Financial Statements                                                                       |   | 4        |
| Item 2. Management’s Discussion and Analysis or                            Plan of Operation |   | 18       |
| Item 3 Controls and Procedures                                                                     |   | 25       |
|                                                                                               |   |     |
| PART II                                                                                            |   |     |
| OTHER INFORMATION                                                                                  |   |     |
|                                                                                               |   |     |
| Item 1. Legal Proceedings                                                                          |   | 26       |
| Item 2. Unregistered Sales of Equity Securities and Use                            of Proceeds     |   | 26       |
| Item 3. Defaults Upon Senior Securities                                                            |   | 26       |
| Item 4. Submission of Matters to a Vote of Security                            Holders             |   | 26       |
| Item 5. Other Information                                                                          |   | 26       |
| Item 6. Exhibits                                                                                   |   | 26       |
|                                                                                               |   |     |
|                                                                                               |   |     |
| Signatures                                                                                         |   | 27       |
|                                                                                               |   |     |

 

 

2

 

 

----

THIS            FORM 10-QSB CONTAINS "FORWARD-LOOKING STATEMENTS". FORWARD-LOOKING STATEMENTS ARE            STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, EXPECTATIONS, INTENTIONS,            PROJECTIONS, DEVELOPMENTS, FUTURE EVENTS, PERFORMANCE OR PRODUCTS, UNDERLYING            (EXPRESSED OR IMPLIED) ASUMPTIONS AND OTHER STATEMENTS THAT ARE OTHER THAN HISTORICAL            FACTS. IN SOME CASES FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF            FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," OR            "ANTICIPATES," OR THE NEGATIVE OF THESE WORDS OR OTHER VARIATIONS OF THESE WORDS OR            COMPARABLE WORDS, OR BY DISCUSSIONS OF PLANS OR STRATEGY THAT INVOLVE RISKS AND            UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION THE READER THAT THESE FORWARD-LOOKING            STATEMENTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY’S            MINING OPERATIONS, RESERVE ESTIMATES, GOALS, COMPETITIVE TRENDS AND OTHER MATTERS THAT            ARE NOT HISTORICAL FACTS ARE ONLY PREDICTIONS. NO ASSURANCES CAN BE GIVEN THAT SUCH            PREDICTIONS WILL PROVE CORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED.            ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS            PROVE TO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKING            STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANT FACTORS            DESCRIBED IN THIS FORM 10-QSB, INCLUDING, BUT NOT LIMITED TO "THE FACTORS THAT MAY            AFFECT FUTURE RESULTS" SHOWN AS ITEM 1A AND IN MANAGEMENT’S DISCUSSION AND            ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE, BUT ARE            NOT LIMITED TO, THE RISKS ASSOCIATED WITH AN EARLY-STAGE COMPANY THAT HAS ONLY A            LIMITED HISTORY OF OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE            COMPANY, THE INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS,            AND THE VOLATILITY OF GOLD PRICES IN THE MARKETPLACE. ANY ONE OR MORE OF THESE OR OTHER            RISKS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FUTURE RESULTS            INDICATED, EXPRESSED, OR IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO            OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS,            CIRCUMSTANCES, OR NEW INFORMATION AFTER THE DATE OF THIS FORM 10-QSB OR TO REFLECT THE            OCCURRENCE OF UNANTICIPATED OR OTHER SUBSEQUENT EVENTS.

 

3

 

 

----

**PART I**

**FINANCIAL INFORMATION**

 

| **Item 1.**  | **Financial Statements** |
|-------------------|--------------------------|

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**JUNE 30, 2007**

**(Unaudited)**

 

**ASSETS**

| Cash                                       |   |   |   | $2,300,473  |
|--------------------------------------------|--------|--------|--------|-------------|
| Inventories (Note 3)                       |   |   |   | 400,395     |
| Prepaid expenses and other current assets  |   |   |   | 229,528     |
|                                       |   |   |   |        |
| Total current assets                       |   |   |   | 2,930,396   |
|                                       |   |   |   |        |
| Property, plant, and mine development, net |   |   |   |        |
| (Notes 4)                                  |   |   |   | 9,544,939   |
| Other assets                               |   |   |   | 397,767     |
|                                       |   |   |   |        |
| Total assets                               |   |   |   | $12,873,102 |

 

 

 

 

 

 

 

 

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

 

4

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**JUNE 30, 2007**

**(Unaudited)**

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

| Current liabilities:                                                                                                                  |   |        |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
| Accounts payable and other current                            liabilities                                                             |   | $927,322    |
| Current portion of long-term liabilities (Note                            5)                                                          |   | 51,360      |
|                                                                                                                                  |   |        |
| Total current liabilities                                                                                                             |   | 978,682     |
|                                                                                                                                  |   |        |
| Long-term liabilities:                                                                                                                |   |        |
| Long term liabilities, net of current portion (Note                            5)                                                     |   | 14,437      |
| Advance from related party                                                                                                            |   | 1,309       |
| Reclamation and remediation obligations (Note                            6)                                                           |   | 323,470     |
|                                                                                                                                  |   |        |
| Total long-term liabilities                                                                                                           |   | 339,216     |
|                                                                                                                                  |   |        |
| Commitments and contingencies (Note 7)                                                                                                |   | -           |
| Minority interest (Note 8)                                                                                                            |   | 1,410,058   |
|                                                                                                                                  |   |        |
| Stockholders’ equity:                                                                                                           |   |        |
| Common Stock:                                                                                                                         |   |        |
| $0.001 par value, 25,000,000 shares authorized;                            8,856,247 shares issued and outstanding at June 30, 2007   |   | 8,856       |
| A Class Preference Shares:                                                                                                            |   |        |
| $0.00002 par value, 10,000,000 shares authorized;                            2,921,393 shares issued and outstanding at June 30, 2007 |   | 46          |
| Common stock to be issued (Note 9)                                                                                                    |   | 522         |
| Additional paid in capital                                                                                                            |   | 20,605,454  |
| Other comprehensive loss                                                                                                              |   | (1,389,995) |
| Accumulated deficit                                                                                                                   |   | (7,186,334) |
|                                                                                                                                  |   |        |
|                                                                                                                                  |   | 12,038,549  |
| Less: Loan to Lomshiyo (Note 8)                                                                                                       |   | (1,893,403) |
|                                                                                                                                  |   |        |
| Total stockholders’ equity                                                                                                      |   | 10,145,146  |
|                                                                                                                                  |   |        |
| Total liabilities and stockholders’                            equity                                                           |   | $12,873,102 |

 

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

 

5

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

|                                                                       |                    | **Three Months** |                    | **Three Months** |                    | **Six Months** |                    | **Six Months** |
|----------------------------------------------------------------------------|-------------------------|------------------|-------------------------|------------------|-------------------------|----------------|-------------------------|----------------|
|                                                                       | **Ended June 30, 2007** |             | **Ended June 30, 2006** |             | **Ended June 30, 2007** |           | **Ended June 30, 2006** |
| Income:                                                                    |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Sales                                                                      |                    |             | $1,739,577              |             |                    | $2,370,058     |                    |           | $3,167,121 |   |   | $4,017,638 |
| Other income                                                               |                    |             | 75,339                  |             |                    | 41,065         |                    |           | 139,988 |   |   | 106,365 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Total income                                                               |                    |             | 1,814,916               |             |                    | 2,411,123      |                    |           | 3,307,109 |   |   | 4,124,003 |
| Costs and expenses:                                                        |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Cost of production                                                         |                    |             | 1,203,859               |             |                    | 1,308,277      |                    |           | 2,375,926 |   |   | 2,714,246 |
| Exploration costs                                                          |                    |             | 48,953                  |             |                    | -              |                    |           | 156,307 |   |   | - |
| Operating expenses                                                         |                    |             | 570,456                 |             |                    | 488,835        |                    |           | 1,121,793 |   |   | 884,974 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Total costs and expenses                                                   |                    |             | 1,823,268               |             |                    | 1,797,114      |                    |           | 3,654,026 |   |   | 3,599,220 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Income (Loss) from operations                                              |                    |             | (8,352)                 |             |                    | 614,009        |                    |           | (346,917) |   |   | 524,783 |
| Other expenses:                                                            |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Interest                                                                   |                    |             | 4,627                   |             |                    | 6,215          |                    |           | 8,424 |   |   | 15,969 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Income (Loss) before minority interest                                     |                    |             | (12,979)                |             |                    | 607,794        |                    |           | (355,341) |   |   | 508,814 |
| Minority interest                                                          |                    |             | -                       |             |                    | (193,462)      |                    |           | - |   |   | (193,462) |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Income (Loss) before provision for income                            taxes |                    |             | (12,979)                |             |                    | 414,332        |                    |           | (355,341) |   |   | 315,352 |
| Provision for income taxes                                                 |                    |             | -                       |             |                    | -              |                    |           | - |   |   | - |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Net income (loss)                                                          |                    |             | ($12,979)               |             |                    | $414,332       |                    |           | ($355,341) |   |   | $315,352 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Net income (loss) per share, basic                                         |                    |             | ($0.00)                 |             |                    | $0.05          |                    |           | ($0.04) |   |   | $0.04 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Net income (loss) per share, diluted                                       |                    |             | ($0.00)                 |             |                    | $0.05          |                    |           | ($0.04) |   |   | $0.04 |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Weighted average shares outstanding, basic                                 |                    | 8,856,247        |                    | 8,456,247        |                    | 8,856,247      |                    | 7,953,043      |
|                                                                       |                    |             |                    |             |                    |           |                    |           |   |   |   |   |
| Weighted average shares outstanding, diluted                               |                    | 8,856,247        |                    | 8,456,247        |                    | 8,856,247      |                    | 7,953,043      |

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

 

6

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’            EQUITY**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

 

 

|                          |   | **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** |   | **Other Comprehensive****Loss** |   | **Accumulated****Deficit** |   | **Loan to****Lomshiyo** |   | **Total Stockholders’****Equity** |
| Balance at December 31, 2006  |   | 8,856,247               |   | $8,856                        |   | 2,921,393               |   | $46              |   | $-                               |   | $17,819,376                       |   | ($1,488,651)                    |   | ($6,830,993) |   | ($1,761,315) |   | $7,747,319 |
|                          |   |                    |   |                          |   |                    |   |             |   |                             |   |                              |   |                            |   |   |   |   |   |   |
| Common stock issued           |   |                    |   |                          |   |                    |   |             |   |                             |   |                              |   |                            |   |   |   |   |   |   |
| for cash (521,739 shares)     |   | -                       |   | -                             |   | -                       |   | -                |   | 522                              |   | 2,786,078                         |   | -                               |   | - |   | - |   | 2,786,600 |
| Accrual of interest income on |   |                    |   |                          |   |                    |   |             |   |                             |   |                              |   |                            |   |   |   |   |   |   |
| loan to Lomshiyo              |   | -                       |   | -                             |   | -                       |   | -                |   | -                                |   | -                                 |   | -                               |   | - |   | (132,088) |   | (132,088) |
| Net profit (loss)             |   | -                       |   | -                             |   | -                       |   | -                |   | -                                |   | -                                 |   | -                               |   | (355,341) |   | - |   | (355,341) |
| Foreign currency translation  |   | -                       |   | -                             |   | -                       |   | -                |   | -                                |   | -                                 |   | 98,656                          |   | - |   | - |   | 98,656 |
|                          |   |                    |   |                          |   |                    |   |             |   |                             |   |                              |   |                            |   |   |   |   |   |   |
| Balance at June 30, 2007      |   | 8,856,247               |   | $8,856                        |   | 2,921,393               |   | $46              |   | $522                             |   | $20,605,454                       |   | ($1,389,995)                    |   | ($7,186,334) |   | ($1,893,403) |   | $10,145,146 |

 

 

 

 

 

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

 

7

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

|                                                                                             |   | **Six Months****Ended June 30, 2007** |   | **Six Months****Ended June 30, 2006** |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------|
| Cash flows from operating activities:                                                            |   |                                  |   |                                  |
| Net income (loss)                                                                                |   | ($355,341)                            |   | $315,352                              |
|                                                                                             |   |                                  |   |                                  |
| Adjustments to reconcile net loss to net cash                            used                    |   |                                  |   |                                  |
| in operating activities:                                                                         |   |                                  |   |                                  |
| Depreciation, depletion and amortization                                                         |   | 41,504                                |   | 415,773                               |
| Stock-based compensation                                                                         |   | -                                     |   | 110,523                               |
| Accrued interest income on Loan Lomshiyo                                                         |   | (132,088)                             |   | (78,852)                              |
| Accrual for minority interest                                                                    |   | -                                     |   | 193,462                               |
| Changes in assets and liabilities:                                                               |   |                                  |   |                                  |
| Decrease (Increase) in inventories                                                               |   | (41,981)                              |   | 135,119                               |
| (Increase) in other assets                                                                       |   | (397,767)                             |   | -                                     |
| Decrease in prepaid expenses and other current                            assets                 |   | 47,377                                |   | 216,101                               |
| (Decrease) Increase in accounts payable and other                            current liabilities |   | 15,652                                |   | (355,285)                             |
| Increase in reclamation and remediation                            obligations                   |   | -                                     |   | 6,588                                 |
| Net cash provided from (used in) operations                                                      |   | (822,644)                             |   | 958,781                               |
| Cash flows from investing activities:                                                            |   |                                  |   |                                  |
| Purchase of property and equipment                                                               |   | (839,663)                             |   | (957,410)                             |
| Net cash used in investing activities                                                            |   | (839,663)                             |   | (957,410)                             |
| Cash flows from financing activities:                                                            |   |                                  |   |                                  |
| Advances from stockholders and related party                                                     |   | (5,164)                               |   | (5,841)                               |
| Repayment of long-term debt                                                                      |   | (49,555)                              |   | (68,102)                              |
| Proceeds from common stock to be issued                                                          |   | 2,786,600                             |   | -                                     |
| Net cash provided by (used in) financing                            activities                   |   | 2,731,881                             |   | (73,943)                              |
| Effect of exchange rates on cash                                                                 |   | 127,466                               |   | 264,929                               |
| Net increase (decrease) in cash                                                                  |   | 1,197,040                             |   | 192,357                               |
| Cash, beginning of period                                                                        |   | 1,103,433                             |   | 207,885                               |
| Cash, end of period                                                                              |   | $2,300,473                            |   | $400,242                              |
| **Supplemental disclosure of cash flow                            information:**                 |   |                                  |   |                                  |
| Cash paid for interest                                                                           |   | $8,424                                |   | $15,969                               |
| **Supplemental disclosure of non-cash                            operating,**                    |   |                                  |   |                                  |
| **investing and financing activities:**                                                          |   |                                  |   |                                  |
| Stock based compensation                                                                         |   | $-                                    |   | $110,523                              |
|                                                                                             |   |                                  |   |                                  |
| Accrual of interest income on loan to                            Lomshiyo                        |   | $132,088                              |   | $78,852                               |

 

 

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

 

8

 

----

 

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

             

| **1.** | **ORGANIZATION AND HISTORY** |
|--------|------------------------------|

             

Eastern Goldfields, Inc. (the “Company" or "EGI"), was            incorporated under the laws of the State of Nevada on July 15, 1998 and is the            parent company of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a            corporation organized under the laws of the Republic of South Africa. EGSA conducts all            of the Company’s business operations in South Africa through its South African            corporation subsidiaries.

             

On October 1, 2005, EGSA, acquired, via a share exchange, 100% of the            issued and outstanding common or ordinary stock of Eastern Goldfields Limited            (“EGL”), a South African gold producer and developer corporation. EGL            conducts mining operations in the Barberton Greenstone Belt area of the Mpumalanga            Province, South Africa. EGL itself is a South African holding company which has three            South African subsidiary corporations: Makonjwaan Imperial Mining Company (Pty) Ltd.            (“MIMCO”), Eastern Goldfields Exploration (Pty) Ltd. (“EGE”)            and Centurion Mining Company (Pty) Ltd. (“Centurion”). This share exchange            for the acquisition of EGL by EGI’s wholly owned South African subsidiary, EGSA,            was accounted for as a reverse acquisition, and, accordingly, for financial statement            purposes, EGL was considered the accounting acquiror and the subject transaction was            considered a recapitalization of EGL rather than an acquisition by the Company.            Accordingly, the historical financial statements prior to this share exchange are those            of EGL, however, the name of the consolidated corporation going forward is Eastern            Goldfields, Inc.

             

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING                            PRINCIPLES** |
|--------|-----------------------------------------------------------------------------|

             

**Basis of Accounting and Principles of            Consolidation**

             

The consolidated financial statements of the Company have been prepared            on the accrual basis of accounting and are in conformity with accounting principles            generally accepted in the United States of America and prevailing industry            practice.

             

The interim consolidated financial statements of the Company and its            subsidiaries are unaudited. In the opinion of management, all necessary adjustments for            a fair presentation of these interim statements have been included. The results            reported in these interim consolidated financial statements are not necessarily            indicative of the results that may be reported for the entire year. The accompanying            interim consolidated financial statements of the Company should be read in conjunction            with the Company’s Annual Report on Form 10-KSB for the year ended December 31,            2006.

             

9

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING                            POLICIES**(Continued) |
|--------|--------------------------------------------------------------------------------------|

 

**Basis of Accounting and Principles of Consolidation**(Continued)

 

The consolidated financial statements include the financial statements            of the Company and its wholly owned subsidiaries. All amounts are in U.S. dollars            unless otherwise indicated. All significant intercompany balances and transactions have            been eliminated in consolidation.

 

**Stock Option Expense** 

             

Compensation cost recognized in 2006 includes: (a) compensation cost for            all share-based payments granted prior to, but not vested as of January 1, 2006, based            on the grant-date fair value estimated in accordance with the original provisions of            FAS 123, and (b) compensation cost for all share-based payments granted subsequent to            January 1, 2006, based on the grant-date fair value estimated in accordance with the            provisions of FAS 123(R).

             

Prior to 2006, the Company accounted for share-based payment s under the            recognition and measurement provisions of APB Opinion No. 25,*Accounting for Stock Issued to Employees*,            and related Interpretations, as permitted by FASB Statement No. 123,*Accounting for Stock-Based Compensation*. In            accordance with APB 25, compensation expense was recognized for options granted that            had an exercise price equal to or less than the market value of the underlying common            stock on the date of grant.

 

**Net Loss Per Share**

             

In February 1997, the Financial Accounting Standards Board (FASB) issued            SFAS No. 128 Earnings Per Share which requires the Company to present basic and diluted            earnings per share for all periods presented. The computation of loss per common share            (basic and diluted) is based on the weighted average number of shares actually            outstanding during the period. Diluted earnings per share have been calculated to give            effect to the number of additional common stock that would have been outstanding if the            potential dilutive instruments had been issued in the six months ended June            30, 2007, and 2006. The weighted average number of outstanding shares includes the            common stock as well as the A Class Preference Shares, as the holders of the A Class            Preference Shares have the same rights and entitlements as those attached to the common            stock. The computation of dilutive loss per common share does not assume conversion,            exercise or contingent exercise of securities that would have an anti-dilutive effect            on earnings.

 

10

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

 

| **2.** | **SUMMARY OF SIGNIFICANT ACCOUNTING                            POLICIES**(Continued) |
|--------|--------------------------------------------------------------------------------------|

             

**Recently Issued Accounting Standards**

             

**Fair Value Measurements** 

             

In September 2006, the FASB issued SFAS No. 157, "Fair Value            Measurements" (SFAS 157). SFAS 157 provides guidance for using fair value to measure            assets and liabilities. SFAS 157 addresses the requests from investors for expanded            disclosure about the extent to which companies measure assets and liabilities at fair            value, the information used to measure fair value and the effect of fair value            measurements on earnings. SFAS applies whenever other standards require (or permit)            assets or liabilities to be measured at fair value, and does not expand the use of fair            value in any new circumstances. SFAS 157 is effective for financial statements issued            for fiscal years beginning after November 15, 2007 and will be adopted by the Company            in the first quarter of fiscal year 2009. We do not expect that the adoption of SFAS            157 will have a material impact on our financial condition or results of            operations.

             

**The Fair Value Option for Financial Assets and Financial            Liabilities**

             

In February 2007, the Financial Accounting Standards Board issued            Statement of Financial Accounting Standards No. 159, “The Fair Value Option for            Financial Assets and Financial Liabilities - Including an amendment of FASB Statement            No. 115” (hereinafter “SFAS No. 159”). This statement permits            entities to choose to measure many financial instruments and certain other items at            fair value. The objective is to improve financial reporting by providing entities with            the opportunity to mitigate volatility in reported earnings caused by measuring related            assets and liabilities differently without having to apply complex hedge accounting            provisions. This statement is expected to expand the use of fair value measurement,            which is consistent with the Board’s long-term measurement objectives for            accounting for financial instruments. This statement is effective as of the beginning            of an entity’s first fiscal year that begins after November 15, 2007, although            earlier adoption is permitted. Management has not determined the effect that adopting            this statement would have on the Company’s financial condition or results of            operations.

             

 

11

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

 

| **3.** | **INVENTORIES** |
|--------|-----------------|

             

Inventories at June 30, 2007 consist of the following:

             

|  

Precious metals in process

Stockpiles |  

$ |  

259,900

140,495 |
|------------------------------------------------|-----------|--------------------------|
|                                           |  

$ |  

400,395          |

             

| **4.**     | **PROPERTY, PLANT AND MINE DEVELOPMENT**  |
|--------------------------------|------------------------------------------------|

Major classes of property, plant, and mine development as of June 30,            2007 are as follows:

             

|  

Land and buildings

Mining assets

Mine development costs

Mining rights

Motor vehicles

Furniture and equipment

Metallurgical plant

Plant and equipment

Environmental rehabilitation fund |  

$ |  

88,869

5,692,325

3,295,912

1,452,034

95,280

58,588

1,691,840

209,351

323,483 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|----------------------------------------------------------------------------------------------|
|  

                             

Less: accumulated depreciation                                                                                                                             |      |  

12,907,682

(3,362,743)                                                              |
|  

Net property and equipment                                                                                                                                                                     |  

$ |  

9,544,939                                                                            |

             

Depreciation, depletion and amortization expense is $41,504 for the six            months ended June 30, 2007.

 

12

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

             

| **5.**     | **LONG TERM LIABILITIES**  |
|--------------------------------|---------------------------------|

 

|  

Standard Bank Vehicle and Asset Finance

Less: Current portion |  

$ |  

65,797

(51,360) |
|------------------------------------------------------------------------|-----------|--------------------------|
|                                                                   |  

$ |  

14,437           |

Secured banking facility against mining equipment bearing interest at            the prime bank overdraft rate less 1% and repayable in monthly installments of South            African Rands 64,584 ($9,175).

             

Maturities of the liabilities are as follows:

             

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

2007

2008 |   |   |   |  

$ |  

51,360

14,437 |
|-----------------------------------------------------------------------------|--------|--------|--------|-----------|------------------------|
|  

                                                               |   |   |   |  

$ |  

65,797         |

             

| **6.** | **RECLAMATION AND REMEDIATION** |
|--------|---------------------------------|

             

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

             

At June 30, 2007 $323,470 were accrued for reclamation obligations            relating to currently or recently producing mineral properties.

             

 

13

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

 

| **6.** | **RECLAMATION AND                            REMEDIATION****(Continued)** |
|--------|---------------------------------------------------------------------------|

             

The following is a reconciliation of the total liability for reclamation            and remediation:

 

|  

Balance, December 31, 2006

Increase, change in estimate and other

Liabilities settled

Accretion expense |   |   |   |  

$ |  

323,038

432

-

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

Balance, June 30, 2007                                                                                     |   |   |   |  

$ |  

323,470            |

             

             

| **7.**     | **COMMITMENTS AND CONTINGENCIES** |
|--------------------------------|-----------------------------------|

 

A first continuing covering bond amounting to South African Rands            200,000 ($28,413) was registered over the property held by a subsidiary, Makonjwaan            Properties Henry Nettman Two Eight (Pty) Ltd., in lieu of financial guarantees            amounting to South African Rands 164,000 ($23,298) issued in favor of the Department of            Minerals and Energy.

             

During the year ended December 31, 2006, the Company entered into a            Service and Support Agreement with Cheston Minerals PTY Limited (“CML”), a            company owned by EGI’s President. This agreement covers the rental of the            Company’s South African office and use of the office equipment and supplies,            which are owned by CML. The agreement requires a monthly payment of $15,000. The term            of the agreement is one year and is renewable on an annual basis. The Company charged            $90,000 to operating expense for the six month period ended June 30, 2007.

             

During the year ended December 31, 2006, the Company entered into an            Agreement for Consulting Services and Public Relations with Zenith Premier Limited            (“ZPL”), a company in which EGI’s CFO serves as a director. This            agreement covers the investor relation services to be provided by ZPL to EGI. The            agreement requires a monthly payment of $16,500. The Company charged $99,000 to            operating expense for the six month period ended June 30, 2007.

             

             

 

 

14

 

 

----

**EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2007**

**(Unaudited)**

             

| **8.**     | **MINORITY INTEREST** |
|--------------------------------|-----------------------|

 

The current South African mining legislation promulgated under            “Mineral and Petroleum Resources Development Act of 2004 (“MPRDA”)            seeks, among other things, (i) to expand opportunities for historically disadvantaged            South Africans to enter the mineral industry and obtain benefits from the exploitation            of mineral resources; and (ii) to promote employment, social and economic welfare as            well as ecologically sustainable development. In order to convert an old order mining            right to a new order mining right the holder is required to submit a social and labor            plan. The plan should describe how it will expand opportunities for historically            disadvantaged South Africans to enter the mineral industry.

             

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

             

Accordingly, and pursuant to the requirements of MPRDA, EGL on December            9, 2005 entered into a “Heads of Agreement” to sell 26% of its ordinary            stock to Lomshiyo Investments (Proprietary) Limited (“Lomshiyo”) for a            consideration of R9,900,000 (At June 30, 2007 – $1,406,450). This amount is a            loan to Lomshiyo and is reflected as a reduction of equity in the Company’s June            30, 2007 consolidated balance sheet. Lomshiyo is a South African corporation whose            majority shareholders are historically disadvantaged South Africans. The transaction            closed on February 2, 2006. The ownership percentage of net assets of EGL acquired by            Lomshiyo at December 31, 2005 amounted to $1,379,142 or 26%.

             

The purchase of ordinary stock was financed with a note receivable            bearing an annual interest rate of the South African Prime Rate (12.5% at June 30,            2007). The note accrues interest and is payable to the Company on January 2, of each            year. A total of $267,616 of accrued interest has been added to the note receivable.            The note is due and payable on December 31, 2010. The Company’s common stock            collaterizes the note receivable.

             

|   | **9.** | **COMMON STOCK** |
|--------|--------|------------------|

             

In May 2007, the Company will issue 521,739 shares of common stock            through a private placement for gross cash proceeds of $3,000,000. The Company received            $2,786,600 and incurred offering costs of $213,400.

             

 

15

 

 

----

**Item 1A. Factors That May Affect Future Results**

 

*As used herein, the term “we,” “our,            “us,” and the “Company” shall refer to Eastern Goldfields,            Inc., a Nevada corporation and its subsidiaries unless otherwise noted.*

             

**Small Company, Limited Resources & Need for Additional            Capital**: We are a small company with limited financial            resources relative to the many competitors in our industry. In the event of any            unexpected problems or difficulties in our business and operations, we may not have the            ability to obtain sufficient additional capital on terms that are reasonable in light            of our current circumstances and market conditions. Further, we currently estimate that            we will need to raise an additional $20,000,000 in additional capital. We have not            received any assurances that this additional capital can be obtained or if it is            obtained, that can be obtained on reasonable terms and in a timely fashion to allow us            to execute our plans.

 

**Calculation and Estimation of Reserves.**We            have undertaken prudent efforts to calculate and estimate our mineral reserves for the            purpose of accurately understanding and evaluating the mineral deposits that we seek to            extract. Further, we are currently undertaking a formal feasibility study to fully            understand and evaluate the full extent of our reserves and the mineral deposits on the            properties wherein our mining operations are conducted. While we are awaiting the            completion of the feasibility study and we are hopeful that it will confirm the            economic feasibility of the reserves that we have calculated and estimated previously            and we will separately disclose the outcome of the formal feasibility study when it is            completed and becomes available, we cannot assure you that the formal feasibility study            that is currently being conducted will confirm the reserves that we have calculated and            estimated previously.

 

**Limited Trading Market for Common Stock:**The            Company’s common stock is presently traded in the over-the-counter market and is            quoted on the “Pink Sheets”. While we seek to obtain trading of our common            stock on the OTC Bulletin Board and possibly the London AIM market, we can not give any            assurances that we will be successful in these efforts. Our stock trades on a limited            and sporadic basis and we cannot assure you that a continuous liquid trading market            will develop or, if it does develop, that it will be sustained for any continuous            period.

 

**Lack of Profits and Positive Cash Flow:**During the six months ended June 30, 2007, we recorded a net loss of            $355,341 compared to a net income of $315,532 for the six months ended June 30, 2006            and positive cash flow during both periods. While we believe that if we can            successfully implement our business plan and if market and competitive conditions allow            we will achieve profitability, we can not assure you that we will achieve profitability            or if we do achieve profitability, that we can sustain profitability and positive cash            flow in the future.

 

**Lack of Dividends**: The Company’s            board of directors determines whether to pay dividends on the Company’s issued            and outstanding shares. The declaration of dividends will depend upon the            Company’s future earnings, its capital requirements, its financial condition and            other relevant factors. The Company’s board of directors does not intend to            declare any dividends on the Company’s shares for the foreseeable future. The            Company anticipates that it will retain any earnings to finance the growth of its            business and for general corporate purposes.

 

**Competition & Lack of Diversification**:            Gold properties eventually become depleted or uneconomical to continue mining. As a            result, the Company’s long-term success is dependent on its ability to acquire,            discover, develop and mine new properties. The acquisition of gold properties and their            exploration and development are subject to intense competition. Companies with greater            financial resources, larger staffs, more experience and more equipment for exploration            and development may be in a better position than the Company to compete for such            mineral properties. If the Company is unable to locate, develop and economically mine            new properties, it most likely will not be able to be profitable on a long-term basis.            In addition, all of our assets and operations are concentrated in the mining business            described in this Form 10-QSB and we have no current plans to diversify into any other            business activity.

 

16

 

 

----

**Limited Trading History for our Common            Stock**: Our common stock has had only a limited trading            history. As a result and given the limited trading market for our common stock, the            price of our common stock may be far more volatile and unpredictable than the prices of            common stocks and other securities that have a long and established trading            history.

 

**Possible Rule 144 Stock Sales**: A large            portion of our outstanding Common Stock is "restricted securities" and may be sold only            in compliance with Rule 144 adopted under the Securities Act of 1933 or other            applicable exemptions from registration. Rule 144 provides that a person holding            restricted securities for a period of one year may thereafter sell in brokerage            transactions, an amount not exceeding in any three month period the greater of either            (i) 1% of the Company's outstanding Common Stock, or (ii) the average weekly trading            volume during a period of four calendar weeks immediate preceding any sale. Persons who            are not affiliated with the Company and who have held their restricted securities for            at least two years are not subject to the volume limitation. Possible or actual sales            of the Company's Common Stock by present shareholders under Rule 144 may have a            depressive effect on the price of the Company's Common Stock in any market which may            develop.

 

17

 

 

----

|   | **ITEM 2.**  | **MANAGEMENT'S DISCUSSION and ANALYSIS or PLAN OF                            OPERATION** |
|--------|-------------------|------------------------------------------------------------------------------------------|

 

| **2.1** | **Production** |
|---------|----------------|

 

In October 2005 the company acquired Eastern Goldfields Limited in South            Africa together with its open pit production activities and highly prospective mineral            tenements. Operating results for the past two years have been as follows:

 

|  

Year ended |  

Ore Milled |  

Recovered Grade |  

Gold Produced | Cash

Operating Profit |
|--------------------|--------------------|-------------------------|-----------------------|------------------------|
|               | Tons               | g/t                     | oz/t                  | kg                     | Oz | $ |
| 2005               | 168,000            | 2.37                    | 0.074                 | 398                    | 12,800 | 396,712 |
| 2006               | 166,200            | 2.27                    | 0.071                 | 377                    | 12,100 | 2,558,929 |

 

**Results of Operations for the Six Months Ended June 30, 2007 and            2006**

 

*As used herein, the term “we,” “our,            “us,” and the “Company” shall refer to Eastern Goldfields,            Inc., a Nevada corporation and its subsidiaries unless otherwise noted.*

 

A summary of our comparative operations, which arise only from open pit            mining operations at its Lily Mine were as follows:

 

|                                                   | **Six months period**

**ended June 30,** |     | **Three months period ended June 30,** |
|--------------------------------------------------------|-------------------------------------------|----------|----------------------------------------|
|                                                   | **2007**                                  | **2006** |                                   | **2007** | **2006** |
| Ore Tons                            Milled             | 76,282                                    | 87,599   |                                   | 35,404 | 46,542 |
| Yield – grams per                            ton | 1.93                                      | 2.46     |                                   | 2.22 | 2.81 |
| Gold Sold –                            oz        | 4,722                                     | 7,181    |                                   | 2,535 | 4,212 |
| Gold price -                            $/oz           | $662                                      | $550     |                                   | $670 | $622 |
|                                                   |                                      |     |                                   |   |   |
| Total Income*                                          | $3,307                                    | $4,124   |                                   | $1,815 | $2,411 |
| Cost of                            Production*         | ($2,376)                                  | ($2,714) |                                   | ($1,204) | ($1,308) |
| Exploration                            Costs*          | ($156)                                    | -        |                                   | ($49) | - |
| Operating                            Income*           | $775                                      | $1,410   |                                   | $562 | $1,103 |
| Operating Expenses,                            net*    | ($1,130)                                  | ($901)   |                                   | ($575) | ($495) |
| Minority                            Interest*          | -                                         | ($193)   |                                   | - | ($194) |
| Net Income (Loss)                            *         | ($355)                                    | ($316)   |                                   | ($13) | $414 |

  

*            Expressed in Thousands

 

 

 

18

 

 

----

 

***Comparative Results of the Six Months Ended June 30, 2007 and            2006***

 

**Revenues:**For the 2007 period covering six            months of commercial production from January 1, 2007 to June 30, 2007 (“First            Half-Year 2007”), we recorded revenues of approximately $3,167,000 from sales of            gold versus revenues of approximately $4,018,000 for the six month period from January            1, 2006 to June 30, 2006 (the “First Half-Year 2006”), which amounted to a            decrease of approximately 21%. The principal factors affecting this decrease in revenue            were as follows:

             

|   | **•** | Open pit operation at our Lily Mine was originally                            expected to cease in June 2006. During the last quarter of 2005, a                            total of 4,511 meters of diamond drilling was completed in 19 boreholes                            of which 12 intersected the Lily orebody and the remainder were used to                            define the outer limits of the mineralization. As a result, we were                            able to revise our mineral reserves at the Lily open pit and a new                            estimate of 17,000 ounces was made enabling the Company to continue                            production to the end of calendar year 2006. In September 2006, we                            completed a Reverse Circulation (RC) drilling program over an area                            immediately east of the existing Lily Mine open pit, the objective of                            which was to further extend the life of the open pit. This program                            involved the drilling of 26 shallow RC holes to probe the eastern                            strike extension of the Lily orebody. Positive outcome of this drilling                            program resulted in the development of a new extension (Lily East) to                            the existing open pit at the Lily Mine. Having already extended the                            life of the open pit by six months to the end of calendar year 2006,                            this RC drilling program proved up an additional 10,000 ounces,                            providing a further extension of open pit mining operations to                            mid-2007. Accordingly, production in 2006 related to our existing open                            pit operations at the Lily Mine, whereas production in 2007 related to                            Lily East, the new extension to the existing open pit. However, Lily                            East extension did not prove up to expectations. Initially we                            experienced problems with the viscosity of the oxide ore in the                            thickening stage, thus hindering the mill throughput. At a later stage,                            we established that there has been loss of carbon in the process which                            adversely affected the recovery rates. As a result, Lily East yielded                            1.93 grams per ton as compared with a yield of 2.46 grams per ton at                            the Lily Mine in 2006; a reduction in yield of 22%. However, this                            reduction in production was in part compensated by the increase in the                            price of gold. Whereas, our 2006 sales averaged $550 per ounce of gold,                            our 2007 sales have averaged $662 per ounce of gold; an increase in the                            price of gold of 20.4%. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Cost of Production:**Although ore tons            milled remained approximately the same during the First Half-Year 2007 compared to the            First Half-Year 2006, the reduction in yield resulted in lower production, however, at            a higher cost of production. During the First Half-Year 2007, we produced 4,722 ounces            of gold for $2,376,000, whereas, during the Half-Year 2006, we produced 7,181 ounces of            gold for $2,714,000. Accordingly, per ounce cost of production for the First Half-Year            2007 was $503 whereas per ounce cost of production for First Half-Year 2006 was $378;            an increase in the per ounce production

             

19

 

             

----

of gold of 33%. Major reason for this increase was due to the higher            than expected volume of waste tons mined. During the First Half-Year 2006, 115,000 tons            of waste were mined whereas 376,000 tons of waste were mined during the First Half-Year            2007. Although, the strip ratio (waste to ore tons mined) in the initial phases of an            open pit is expected to be high, the overburden at the Lily East open pit was much            greater than was originally estimated.

             

**Operating Expenses for the First Half-Year 2007:** Our operating expenses increased by 26.7%; from approximately            $885,000 in the First Half-Year 2006 to approximately $1,122,000 in the First Half-Year            2007. The increase is mainly due to legal and audit fees relating to the periodic            reporting requirements of the company.

             

**Changes in Exchange Rates:**Changes in            exchange rates did not have a significant impact on the comparability of our results            for the First Half-Year 2007 versus the First Half-Year 2006. The average rates of            exchange for the interim periods ended June 30, 2007 and June 30, 2006 were SAR 7.0439            to $1 and SAR 6.7565 to $1, respectively – approximately 4.25% weakening of the            South African Rand against the US Dollar. Had the exchange rate remained the same            during the First Half-Year 2007 as that during the First Half-Year 2006 , the results            of our operations arising from South African Rand transactions would have been            approximately $5,144 positively affected.

             

Changes in exchange rates also did not have a significant impact on the            comparability of our balance sheets as of June 30, 2007 versus June 30, 2006. The rates            of exchange as at June 30, 2006 and June 30, 2007 were SAR 7.1680 to $1 and SAR 7.0390            to $1, respectively – approximately 1.8% strengthening of the South African Rand            against the US Dollar. Had the exchange rate remained the same in 2007 as that of 2006,            our total South African Rand based net assets would have been approximately $98,656            higher. This variation in the main relates to our property, plant and mine development            costs.

             

**Development** 

 

                         In April 2006, we completed our pre-feasibility study for underground mining at the            Lily Mine. The results, which have since been revised, currently suggests that a Life            of Mine plan showing 1.25 million tons of ore to be milled at a yield of 3.92 grams per            ton to recover approximately 160,000 ounces of gold over a period of 8 years. The grade            distribution of the orebody dictates that production in the first 2 years will be            approximately 30,000 ounces per annum reducing to 18,000 ounces per annum in the            remaining 5 to 6 years based on our current estimates. As a result, the mine appears to            be highly profitable in the first two years and provides adequate returns in the            subsequent years. The development of this underground mine has commenced in July 2007.            Capital expenditure to develop this underground mine is currently estimated at            approximately $12 million and we plan to raise this amount through an Initial Public            Offering (IPO) in London’s AIM market through a secondary listing in autumn 2007.            We may incur additional capital expenditures or revise our estimates further as we            evaluate our capital requirements in the future.

 

20

 

 

----

The inauguration ceremony for our Lily underground mine was held on            February 15, 2007 with the first blast officially set off by the wife of Chief Dlamini,            head of the Lomshiyo Tribal Community, the company’s Black Economic Empowerment            partner. The occasion marked the mine’s transformation from a previously            open-cast mine into an underground mine, the completion of the planning and preparation            of the upper section of the Lily underground mine and the commencement of the            development of the adit portal. Underground development commenced in July 2007 with the            first production from the underground section expected mid-2007 and full production in            2008. Undoubtedly, this was a historic moment for us all. From our local social            standpoint, we look forward to evidencing the benefits from the Lily underground mine,            showing that EGI brings hope and opportunity to the overall area. We will focus on            social responsibility programs, job creation and rural renewal, to the extent that we            are able.

             

With the finalization of the last of three phases of diamond drilling at            the Company’s Lily Mine, we announced a 76% increase in the Company’s            mineral reserves to 366,100 ounces since March 31, 2006. This was based on our            estimates and assessments at that time.

 

The following table summarises our estimated mineral reserves as at            December 31, 2006:

 

| **Category** | **Tons** | **Grade** | **Content** |
|--------------|----------|-----------|-------------|

|   | **(000)** | **g/t** | **Kg** | **Oz** |
|--------|-----------|---------|--------|--------|

| Proved | 93 | 2.58 | 240 | 7,700 |
|--------|----|------|-----|-------|

| Probable |  2,089 | 5.34 |   11,150 |  358,400 |
|----------|-------------|------|---------------|---------------|

| **Total** | ** 2,182** | **5.22** | **11,390** | **366,100** |
|-----------|-----------------|----------|------------|-------------|

 

The success, to date, of the drilling programs in the Lily Project area            is further reflected in the discovery of additional zones of gold mineralization over            some 2.5 km of strike (horizontal continuation) of the Lily ore body. This has lead to            the establishment of the new Lily East open pit and the identification of the economic            potential of a more laterally extensive area for shallow underground mining than            originally thought when the underground pre-feasibility study was completed a year ago.            The estimates given above may be changed or revised as we continue to further review            our mineral reserves in light of further studies in the future. We can not assure you            that we will not change or revise our estimates.

             

Furthermore, following the successful results of a Reverse Circulation            drilling programme in the vicinity of the old Rosie's Fortune workings, situated at the            eastern extremity of the Lily Fault within the Company's mining title, another open pit            has been established. The drilling results indicated open pitable Mineral Reserves of            approximately 100,000 tonnes at an average grade of 3.5 g/t, representing a gold            content of 10,000 oz. Production commenced in July 2007 and is expected to continue            until March 2008.

 

**Exploration**

 

The relatively limited amount of exploration drilling completed over the            past year has not only added to our Mineral Reserve inventory, at a low cost of            discovery, but it has also provided us with enhanced information on the geological            controls and continuity of gold mineralization in the areas where we have concentrated            our activities thus far.

 

21

 

 

----

 

During the last quarter of 2006 and into the first quarter of 2007, we            also carried out a Phase 1 drilling program on our dormant Worcester Mine. This program            comprised of 3,125 meters of core. This phase of drilling was planned to probe the            immediate strike and depth extension of the known, previously mined ore body with the            objective of gathering geological information on the complex structure and gold            distribution trends in the Worcester Reef. The results confirmed that the Worcester            Reef continues in depth, and that the well mineralized portions have been dislocated by            faulting and shearing. We plan to carry out a next phase of drilling which will be            designed to delineate the main zones of mineralization. While we remain optimistic that            further exploration will confirm and possibly add to our Mineral Reserve inventory, we            cannot assure you that further exploration will result in these outcomes. We may            encounter additional difficulties and unexpected problems as we continue our            exploration drilling activity. For these and other reasons, we can not assure you that            we will not change or reduce our estimates in the future.

 

Further, analytical results of the first batch of geochemical soil            samples and ground magnetometer surveys covering 3 of the Company's 18 currently            identified prospects have been received. All 3 prospects are located on strike            extensions of the Lily Fault, the main mineralizing structure within the Lily mining            right area. The results indicate the presence of anomalous gold concentrations in the            soil cover in proximity to the Lily Fault and associated structures. We will continue            with the next phase of prospecting in these localities which will entail the digging of            trenches to expose the sub-outcropping sources of the anomalies, followed by reverse            circulation drilling, where applicable.

 

**Requirement for Additional Capital**

 

In general and in accordance with the Company’s current plans, the            Company’s current capital 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 Worcester project areas; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Partial financing of acquisitions. |
|--------|------------|------------------------------------|

 

The development of the underground mine at Lily is of primary importance            and the capital expenditure estimate for this project is $12 Million based solely upon            our current estimates. If these estimates remain accurate, we believe that this may            allow for the development of the underground workings and the mine infrastructure as            well as the construction of a new processing plant at the Lily Mine site. However, the            estimated cost for this project may change or increase if difficulties or problems            arise.

             

Ongoing exploration is currently expected to continue at the Worcester            Mine and the other target locations within the Company’s mineral rights. In most            cases encouraging results have been obtained so far and a further amount of $3.5            Million is required for exploration purposes over the next 18 months if current            estimates remain accurate.

             

22

 

 

----

In line with our current growth strategy and if market conditions allow,            we intend to make at least one acquisition in 2007 and will require funds in order to            secure such acquisition or to provide initial support for the acquired operation. An            amount of $3.5 Million has been estimated for this purpose which, based on our current            estimates, appears to be a reasonable estimate

             

Accordingly we seek to raise additional capital in the third quarter of            2007 that may allow us to raise an additional $20 Million in new capital. There can be            no assurance that we will be successful in raising any such additional new capital or,            if we are successful, that the additional new capital can be raised on terms that are            reasonable in light of our current circumstances. The use of funds, as currently            estimated, is summarized below:

             

| Lily underground mine |   | $12.0 M |
|-----------------------|--------|---------|
| Exploration           |   | $ 3.5 M |
| Acquisition           |   | $ 3.5 M |
| Other                 |   | $ 1.0 M |
| Total                 |   | $20.0 M |

             

             

We plan to raise this amount via a secondary listing of our common stock            in London’s AIM market in September/October 2007.

             

In the interim, the Company requires funding in order to implement its            plans prior to the main funding discussed above. Accordingly, in May 2007, the Company            raised US$3,000,000 via a private placement offering of 521,739 restricted common            shares.  The Company received $2,786,600 and incurred offering costs of            $213,400.

             

More specifically, this Phase 3 interim funding is planned to meet the            costs of the following activities:

 

|   | **•** | Additional drilling at the Lily Mine; |
|--------|------------|---------------------------------------|

|   | **•** | Initial stages of underground mining; |
|--------|------------|---------------------------------------|

|   | **•** | Ensuring the sufficiency of the Company’s tailings                            dam through the installation of a paste thickener; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Continuation of the regional exploration                            program; |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | Planned secondary listing program discussed                            below. |
|--------|------------|-------------------------------------------------------------------------------|

             

**Prospects for the Future**

             

We are pursuing a strategy of growth in the development of our mineral            reserves through optimization of our current operations, exploration and additional            selective acquisitions. Furthermore, we believe that, if current market and competitive            conditions allow, we are likely to have the personnel and properties necessary to            successfully make the transition from our current production status as a small mining            company to a “junior resource company”.

             

We hold mineral claims covering 14,000 hectares (approximately 34,600            acres) in the Barberton Greenstone Belt, which has been an active mining district for            more than 100 years, yet is still largely

 

23

 

 

----

under-explored. Our producing mine, the Lily Mine, has been operating            since 2000 as an open pit with production of about 15,000 ounces of gold annually.            However, production, from the Lily Mine open pit operation is presently anticipated to            terminate in mid-2007.

 

Accordingly, we have planned to expand the life of the operations at the            Lily Mine area by commencing underground operations in 2007. In September 2005, we were            able to raise $2,750,000 via a Phase I private placement offering which was primarily            utilized to conduct a drilling program which confirmed and enhanced the results of            earlier preliminary studies with respect to our Mineral reserves located at the Lily            Mine area. The results of this drilling program were incorporated in a Prefeasibility            Study prepared by us to assess the future development of the Lily Mine. The            international mining consultant firm of Behre Dolbear was engaged by us to provide an            independent expert opinion on the Prefeasibility Study.

 

In line with this Prefeasibility study, and the recommendations of its            consultants, we raised further funds of $2,000,000 in October 2006 and carried out the            recommended additional drilling program thereby strengthening and confirming its            mineral reserves. Our current plan has been revised to include the building of the new            processing in 2008 to become operational in 2009.

             

Prior to this planned new processing plant becoming operational,            underground ore will be transported to the Makonjwaan processing plant where it will be            treated in the same way as it has over the last 6 years of operations at the Lily Mine.            The funding required to establish the new underground mine, is estimated at            $12,000,000. To the extent that we are able, we plan to raise this amount via a            secondary listing of our common stock in London’s AIM market in September/October            2007.

 

24

 

 

----

**ITEM 3.** **CONROLS AND PROCEDURES**

             

Disclosure controls and procedures are controls and other procedures            that are designed to ensure that information required to be disclosed in company            reports filed or submitted under the Securities Exchange Act of 1934 (the            “Exchange Act”) is recorded, processed, summarized and reported, within the            time periods specified in the Securities and Exchange Commission’s rules and            forms. Disclosure controls and procedures include, without limitation, controls and            procedures designed to ensure that information required to be disclosed in company            reports filed under the Exchange Act is accumulated and communicated to management,            including the Company’s Chief Executive Officer and Chief Financial Officer (the            “Certifying Officers”), as appropriate to allow timely decisions regarding            required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, the            Certifying Officers carried out an evaluation of the effectiveness of the design and            operation of the Company’s disclosure controls and procedures as of June 30,            2007. Their evaluation was carried out with the participation of other members of the            Company’s management. Based upon their evaluation, the Certifying Officers            concluded that the Company’s disclosure controls and procedures were            effective.

 

The Company’s internal control over financial reporting is a            process designed by, or under the supervision of, the Certifying Officers and effected            by the Company’s Board of Directors, management and other personnel, to provide            reasonable assurance regarding the reliability of the Company’s financial            reporting and the preparation of the Company’s financial statements for external            purposes in accordance with generally accepted accounting principles. Internal control            over financial reporting includes policies and procedures that pertain to the            maintenance of records that in reasonable detail accurately and fairly reflect the            transactions and dispositions of the Company’s assets; provide reasonable            assurance that transactions are recorded as necessary to permit preparation of the            Company’s financial statements in accordance with generally accepted accounting            principles, and that the Company’s receipts and expenditures are being made only            in accordance with the authorization of the Company’s Board of Directors and            management; and provide reasonable assurance regarding prevention or timely detection            of unauthorized acquisition, use or disposition of the Company’s assets that            could have a material effect on its financial statements. There has been no change in            the Company’s internal control over financial reporting that occurred in the            half-year ended June 30, 2007, that has materially affected, or is reasonably likely to            affect, the Company’s internal control over financial reporting.

 

25

 

 

----

**PART II**

**OTHER INFORMATION**

 

| **Item 1.**  | **Legal Proceedings** |
|-------------------|-----------------------|

             

The Company is not a party to any pending legal proceedings, and no such            proceedings are known to be threatened or contemplated.

             

| **Item 2.** | **Unregistered Sales of Equity Securities and Use of                            Proceeds** |
|-------------|--------------------------------------------------------------------------------------------|

             

None

             

| **Item 3.** | **Defaults Upon Securities** |
|-------------|------------------------------|

             

None

             

| **Item 4.** | **Submission of Matters to a Vote of Security                            Holders** |
|-------------|------------------------------------------------------------------------------------|

             

None

             

| **Item 5.** | **Other Information** |
|-------------|-----------------------|

             

None

             

| **Item 6.** | **Exhibits** |
|-------------|--------------|

             

**Regulation**

| **S-B Number** | **Exhibit** |
|----------------|-------------|

             

| 31.1 | Rule 13a-14(a) Certification of Chief Executive                            Officer |
|------|------------------------------------------------------------------------------------|

 

| 31.2 | Rule 13a-14(a) Certification of Chief Financial                            Officer |
|------|------------------------------------------------------------------------------------|

 

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

 

| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of                            Chief Financial Officer |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

26

 

 

----

             

**SIGNATURES**

 

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.

 

|   | EASTERN GOLDFIELDS,                            INC. |
|--------|-----------------------------------------------------|

             

             

| Date: August17, 2007 | BY:/s/ MICHAEL                            MCCHESNEY |
|----------------------|-----------------------------------------------------|

|   | MICHAEL                            MCCHESNEY |
|--------|----------------------------------------------|

|   | Chief Executive                            Officer |
|--------|----------------------------------------------------|

 

| Date: August17, 2007 | BY:/s/ TAMER                            MUFTIZADE |
|----------------------|---------------------------------------------------|

|   | TAMER                            MUFTIZADE |
|--------|--------------------------------------------|

                                                          Chief Financial Officer

 

 

27