Western Goldfields 10QSB 2006 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

                For the quarterly period ended June 30, 2006

OR

o 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 000-51076

WESTERN GOLDFIELDS, INC.

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

IDAHO	38-3661016
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6502 E. Highway 78, Brawley, California 92227

(Address of Principal Executive Offices)

(928) 341-4653

(Issuer's Telephone Number, Including Area Code)

Former Address: 1575 Delucchi Lane, Suite 116, Reno Nevada

(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. Yes oNo x

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

Yes oNo x

State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date: Common Stock, $.01 par value per share, 67,780,801 shares outstanding as of August 11, 2006.

Transitional Small Business Disclosure Format:Yes oNo x

INDEX

PART I.	FINANCIAL INFORMATION (unaudited)
Item 1.	Consolidated Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations and Comprehensive Income(Loss)	2
	Consolidated Statements of Stockholders' Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis or Plan of Operation	18
Item 3.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	29
Item 6.	Exhibits	30

i

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

Western Goldfields, Inc
CONSOLIDATED BALANCE SHEETS
	June 30,			December 31,
	2006			2005
	(Unaudited)			(Audited)
				Restated (Note 15)
ASSETS
CURRENT ASSETS
Cash	$	3,775,058		$	52,387
Receivables		21,189			10,179
Inventories (Note 4)		676,134			905,347
Prepaid expenses		280,468			308,363
TOTAL CURRENT ASSETS		4,752,849			1,276,276
Property, plant, and equipment, net of
accumulated depreciation (Note 5)		4,710,721			4,860,434
Construction in progress		-			10,853
Investments - remediation and reclamation (Note 6)		6,399,916			6,248,220
Long-term deposits		324,158			319,286
Long-term prepaid expenses (Note 7)		1,085,379			1,161,204
TOTAL OTHER ASSETS		12,520,174			12,599,997
TOTAL ASSETS	$	17,273,023		$	13,876,273
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	638,958		$	807,009
Accounts payable to related party (Note 13)		118,201			-
Accrued expenses		972,325			650,071
Dividends payable on preferred stock		-			34,375
Accrued expenses - related party		-			45,834
Loan payable - Romarco (Note 8)		-			705,186
Accrued interest		-			48,696
Loan payable, current portion		-			1,500,000
TOTAL CURRENT LIABILITIES		1,729,484			3,791,171
LONG-TERM LIABILITIES
Reclamation and remediation liabilities		6,314,305			6,196,570
TOTAL LIABILITIES		8,043,789			9,987,741
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 25,000,000 shares authorized;
1,000,000 shares issued and outstanding		-			10,000
Common stock, $0.01 par value, 100,000,000 shares authorized;
67,505,065 and 39,468,051 shares issued
and outstanding, respectively		675,051			394,681
Additional paid-in capital		20,880,297			10,444,652
Additional paid-in capital preferred		-			2,175,000
Stock options and warrants		8,201,080			4,942,188
Accumulated deficit		(20,523,381	)		(14,077,989	)
Accumulated other comprehensive income (loss)		(3,813	)		-
TOTAL STOCKHOLDERS' EQUITY		9,229,234			3,888,532
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	17,273,023		$	13,876,273

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

1

 WESTERN GOLDFIELDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
	(Unadited)						(Unadited)
REVENUES
Gross revenue	$	2,104,315		$	3,139,880		$	4,878,943		$	5,698,487
Royalties		(80,383	)		(284,165	)		(183,243	)		(602,977	)
		2,023,932			2,855,715			4,695,700			5,095,510
COST OF GOODS SOLD
Mine operating costs		1,892,336			1,575,598			3,871,503			3,161,940
Mine site administration		348,813			331,639			676,595			703,456
Selling, transportation and refining		7,534			9,415			16,876			20,289
Depreciation, amortization and accretion		335,030			318,752			647,244			663,747
Inventory adjustment		9,242			695,820			312,210			763,499
Total Cost of Goods Sold		2,592,955			2,931,224			5,524,428			5,312,931
GROSS PROFIT (LOSS)		(569,023	)		(75,509	)		(828,728	)		(217,421	)
EXPENSES
General and administrative		1,105,652			507,515			2,175,604			888,427
Stock based compensation		730,231			83,422			1,770,156			199,861
Exploration - Mesquite		272,260			-			576,299			-
Exploration - Other		-			71,101			134,918			116,798
Total Expenses		2,108,143			662,038			4,656,977			1,205,086
OPERATING LOSS		(2,677,166	)		(737,547	)		(5,485,705	)		(1,422,507	)
OTHER INCOME (EXPENSE)
Expenses of Romarco merger termination		-			-			(1,225,000	)		-
Interest income		86,367			67,199			178,614			93,113
Interest expense		-			(40,902	)		(20,434	)		(94,293	)
Gain on extinguishment of debt		-			-			142,949			-
(Loss) gain on sale of assets		(18,837	)		-			(18,837	)		26,334
Total Other Income (Expense)		67,530			26,297			(942,708	)		25,154
LOSS BEFORE INCOME TAXES		(2,609,636	)		(711,250	)		(6,428,413	)		(1,397,353	)
INCOME TAXES		-			-			-			-
NET LOSS		(2,609,636	)		(711,250	)		(6,428,413	)		(1,397,353	)
PREFERRED STOCK DIVIDENDS		(4,479	)		-			(16,979	)		-
NET LOSS TO COMMON STOCKHOLDERS		(2,614,115	)		(711,250	)		(6,445,392	)		(1,397,353	)
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		(4,322	)		-			(3,813	)		-
Forward sales derivative mark-to-market		-			101,426			-			384,613
NET COMPREHENSIVE LOSS	$	(2,613,958	)	$	(609,824	)	$	(6,432,226	)	$	(1,012,740	)
BASIC AND DILUTED NET LOSS PER SHARE	$	(0.04	)	$	(0.02	)	$	(0.11	)	$	(0.03	)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING		62,389,376			38,865,421			56,025,181			38,808,688

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

2

	WESTERN GOLDFIELDS, INC.
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
	Preferred Stock						Common Stock				Additional			Stock Options						Other
	Number of Shares			Amount			Number of Shares		Amount		Paid-in Capital			and Warrants			Accumulated Deficit			Comprehensive Income (Loss)			Total
Balance, December 31, 2004		1,000,000		$	10,000			38,721,810	$	387,218	$	10,366,305		$	4,779,018		$	(9,003,365	)	$	(687,467	)	$	5,851,709
Options issued for directors' services		-			-			-		-		-			173,658			-			-			173,658
Options issued for officers' services		-			-			-		-		-			281,920			-			-			281,920
Options issued for services by employees		-			-			-		-		-			58,953			-			-			58,953
Options issued for services by consultants		-			-			-		-		-			3,784			-			-			3,784
Common stock issued for services		-			-			746,241		7,463		158,998			-			-			-			166,461
Expiration of warrants & options		-			-			-		-		28,049			(28,049	)		-			-			-
Extension of warrants due to expire		-			-			-		-		-			39,204			-			-			39,204
Surrendered warrants - Newmont		-			-			-		-		366,300			(366,300	)		-			-			-
Net loss for the year ended December 31, 2005		-			-			-		-		-			-			(3,340,249	)		-			(3,340,249	)
Deemed and accrued dividends on preferred stock		-			-			-		-		1,700,000			-			(1,734,375	)		-			(34,375	)
Other comprehensive income		-			-			-		-		-			-			-			687,467			687,467
Balance, December 31, 2005 (Restated - Note 15)		1,000,000			10,000			39,468,051		394,681		12,619,652			4,942,188			(14,077,989	)		-			3,888,532
Common stock and warrants issued by way of private placement (unaudited)		-			-			20,000,000		200,000		3,812,000			1,988,000			-			-			6,000,000
Common shares issued on conversion of series A prefered stock (unaudited)		(1,000,000	)		(10,000	)		2,941,176		29,412		(4,412	)		(15,000	)		-			-			-
Common shares issued on conversion of series A prefered stock warrants (unaudited)		-			-			1,470,588		14,706		285,294			-			-			-			300,000
Common shares issued on conversion of common stock warrants (unaudited)		-			-			3,350,250		33,502		3,316,748			-			-			-			3,350,250
Common stock issued for exploration services and exploration assets acquired  (unaudited)		-			-			275,000		2,750		133,750			-			-			-			136,500
Options issued for directors' services (unaudited)		-			-			-		-		-			704,390			-			-			704,390
Options issued for officers' services (unaudited)		-			-			-		-		-			926,196			-			-			926,196
Options issued for services by employees (unaudited)		-			-			-		-		-			139,571			-			-			139,571
Warrants issued for services by consultants (unaudited)		-			-			-		-		-			233,000			-			-			233,000
Expiration of warrants & options (unaudited)		-			-			-		-		717,265			(717,265	)		-			-			-
Net loss for the six months ended June 30, 2006 (unaudited)		-			-			-		-		-			-			(6,428,413	)		-			(6,428,413	)
Dividend on preferred stock (unaudited)		-			-			-		-		-			-			(16,979	)		-			(16,979	)
Other comprehensive income (unaudited)		-			-			-		-		-			-			-			(3,813	)		(3,813	)
Balance, June 30, 2006 (unaudited)		-		$	-			67,505,065	$	675,051	$	20,880,297		$	8,201,080		$	(20,523,381	)	$	(3,813	)	$	9,229,234

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

3

WESTERN GOLDFIELDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Six Months Ended June 30,
	2006			2005
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,428,413	)	$	(1,397,353	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation		529,509			509,541
Amortization of loan fees		-			159,716
Accretion expense (Note 9)		117,735			-
(Gain) loss on sale of assets and investments		(18,836	)		(26,334	)
Foreign exchange conversion loss		3,813			-
Interest accrued on investments - reclamation and remediation		(151,696	)		(83,991	)
Common stock issued for exploration assets and services		136,500
Common stock, options and warrants issued for services		2,003,157			368,361
Cost of extending expiry date of warrants		-			5,333
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable		(11,010	)		(6,232	)
Inventories		229,213			684,318
Prepaid expenses		103,719			229,313
Long term deposits		(4,872	)		(2,164	)
Increase (decrease) in:
Accounts payable		(168,051	)		(192,554	)
Accounts payable to related parties		118,201			-
Accrued expenses		322,255			17,579
Accrued expenses - related parties		(45,835	)		11,282
Accrued interest expense		(48,695	)		(18,125	)
Net cash provided (used) by operating activities		(3,283,260	)		258,690
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, including Construction
in Progress		(387,779	)		(10,853	)
Proceeds from sale of investments		-			47,734
Net cash provided (used) by investing activities		(387,779	)		36,881
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on loan		(2,205,186	)		(1,500,000	)
Common stock issued for cash		4,012,000			-
Warrants issued for cash		1,988,000			-
Exercise of warrants to purchase common stock		3,650,250			-
Preferred stock dividends		(51,354	)		-
Net cash provided (used) by financing activities		7,393,710			(1,500,000	)
Change in cash		3,722,671			(1,204,429	)
Cash, beginning of period		52,387			1,534,778
Cash, end of period	$	3,775,058		$	330,349
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid	$	69,430		$	111,238
Income taxes paid	$	-		$	-
NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Stock options and warrants issued for services	$	2,003,157		$	368,361
Exploration fees and assets paid by issuance of stock	$	136,500		$	-
Cost of extending expiry date of warrants	$	-		$	5,333
The accompanying notes are an integral part of these consolidated financial statements.

4

WESTERN GOLDFIELDS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  ORGANIZATION AND DESCRIPTION OF BUSINESS

Western Goldfields, Inc. (hereinafter “the Company”) and its wholly owned subsidiaries are engaged in the exploration for, development of and extraction of precious metals principally in the state of California. The Company’s three wholly owned subsidiaries are Western Goldfields Canada Inc. (a management company), Western Mesquite Mines, Inc. (an operating company), and Calumet Mining Company (an exploration company).

The Company was in the exploration stage until late 2003. With the acquisition of the Mesquite Mine in November 2003, the Company exited the exploration stage and became an operating mining company. The Company’s first sale of gold from its production occurred in mid-January 2004.

In November and December 2003, the Company obtained significant additional capital through a private placement of its stock. Management used the majority of the proceeds from the financing for operations of the Mesquite Mine, as well as exploration and development on the Mesquite Mine and other properties.

During 2005 the Company’s deteriorating liquidity position resulted in the rescheduling of bank loan payments that were due on July 31 and October 31, 2005. As at December 31, 2005, the Company’s working capital deficit was $2,514,895. The Company obtained additional capital by completing a private equity financing in February 2006. The proceeds from the private equity financing were used to repay the current loan payable and the loan payable to Romarco Minerals Inc., to fund the Mesquite Mine feasibility study and for general corporate purposes. At June 30, 2006, the Company had working capital of $3,024,364.

The Company’s year-end for reporting purposes is December 31.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

These financial statements include the accounts of Western Goldfields, Inc. and its 100% owned subsidiaries: Western Goldfields Canada Inc., Western Mesquite Mines, Inc., and Calumet Mining Company (collectively “Western Goldfields”.) The financial statements include the assets and liabilities of Western Goldfields as at June 30, 2006 and its results of operations and its cash flows for the period ended June 30, 2006. All significant inter-company accounts and transactions have been eliminated on consolidation.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of mineral reserves, reclamation and remediation obligations, impairment of assets, useful lives for depreciation and amortization, measurement of metal-in-process and finished goods inventories, value of options and warrants, and valuation allowances for future tax assets. Actual results could differ from these estimates.

5

                The accounting policies followed in preparing these financial statements are those used by Western Goldfields as set out in the audited financial statements for the period ended December 31, 2005. These interim statements should be read together with Western Goldfields’ audited financial statements for the period ended December 31, 2005. The financial statements and notes are representations of the Company’s management which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

3.  MINERAL PROPERTIES

The Company controls the following mineral properties:

California Property - Mesquite Mine

In July 2003, the Company issued 111,859 shares of common stock as a deposit on the purchase of the Mesquite Mine, in Imperial County, California, from Newmount Mining Corporation. In November 2003, the Company completed this purchase and issued an additional 2,217,609 shares of common stock and 2,494,810 warrants with an exercise price of $1.00 per share. In December 2003, the Company issued 1,125,000 shares of common stock and 5,596,370 warrants for the purchase of one share of common stock each, with an exercise price of $1.00 per share in final settlement of its obligations under this agreement (See note 12).

	Amount		Value per share		Value
Reclamation Obligation Assumed		-		-	$	5,998,994
Western Goldfields Common Stock	$	3,454,468	$	0.52		1,789,891
Warrants - Western Goldfields stock, exercisable at $1.00 per share of common 450 days from issuance and for five years thereafter(1)		2,494,810		0.18		449,066
Warrants - Western Goldfields stock, exercisable at $1.00 per share of common 815 days from issuance and for five years thereafter (1)		5,596,370		0.16		895,419
Total Consideration					$	9,133,370

Allocation to Fixed Assets:
Property, plant and equipment, including buildings	$	6,471,000
Mineral properties		2,662,370
	$	9,133,370

(1)   See Note 12

The fair market value of the acquired property, plant and equipment was determined by review by the mine operations contractor. (See Note 13) The remaining value was allocated to mineral properties, and expensed in December 2003, as a part of $2,791,603 in exploration expense.

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4.INVENTORIES

Inventories consist of the following as at June 30, 2006 and December 31, 2005:

	June 30, 2006		December 31, 2005
Metal-in-process		357,217		669,426
Supplies		318,917		235,921
Inventories	$	676,134	$	905,347

Metal-in-process inventory contained approximately 607 and 1,406 ounces of gold as of June 30, 2006 and December 31, 2005 , respectively.

	June 30, 2006			December 31, 2005
Beginning Metal-in Process Inventory	$	669,426		$	1,476,058
Operating Costs for the Period		4,880,045			7,977,474
Depreciation, Depletion & Amortization for the Period		644,376			1,217,564
Less Cost of Metal Sales		(5,836,630	)		(10,011,670	)
Inventories	$	357,217		$	669,426

5.PROPERTY AND EQUIPMENT

The following is a summary of property, equipment, and accumulated depreciation at June 30, 2006 and December 31, 2005:

	June 30, 2006			December 31, 2005
Buildings	$	3,550,000		$	3,550,000
Equipment		3,844,692			3,480,495
		7,394,692			7,030,495
Less accumulated depreciation		(2,683,971	)		(2,170,061	)
Net Property and Equipment	$	4,710,721		$	4,860,434

Depreciation expense for the six months ended June 30, 2006 and for the year ended December 31, 2005 was $529,509 and $1,018,682, respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the present value of future cash flows estimated to be generated by these assets to their respective carrying amounts or by comparing the carrying value to the estimated values from used equipment brokers for plant and equipment. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

7

6.RECLAMATION AND REMEDIATION INVESTMENTS AND BONDS

The Company paid $7,661,615 for a reclamation cost policy with American International Specialty Lines Insurance Company in conjunction with the acquisition of the Mesquite Mine. The policy covers liability for reclamation up to $14,000,000 and establishes a reimbursement account with an initial balance of $5,998,994 and prepays the excess coverage with an additional premium of $1,642,621, which is to be amortized over an eleven-year period.

The reimbursement account has a balance of $6,399,916 and $6,248,220 as of June 30, 2006 and December 31, 2005 respectively.

The following bonds are covered by this insurance arrangement:

Bond Number	Inception Date	Contract Amount	Obligee(s)
ESD 7315360	11/7/2003	$ 1,179,465	Imperial County, CA
			California Department of Conservation
			U.S. Bureau of Land Management
ESD 7315361	11/7/2003	$ 1,190,614	Imperial County, CA
			California Department of Conservation
			U.S. Bureau of Land Management
ESD 7315362	11/7/2003	$ 61,783	Imperial County, CA
			California Department of Conservation
			U.S. Bureau of Land Management
ESD 7315363	11/7/2003	$ 550,000	California Water Quality Control Board
ESD 7315358	11/7/2003	$ 3,984,199	U.S. Bureau of Land Management
ESD 7315359	11/7/2003	$ 50,000	CA State Lands Commission

8

7.LONG-TERM PREPAID EXPENSES

The Company has entered into insurance contracts to insure the environmental and pollution risk up to $14,000,000 at its Mesquite Mine project. The policy covers reclamation risk, above the amount covered by the investment - remediation and reclamation account, up to $14,000,000 associated with the Mesquite Mine project. The policies cover risk for up to eleven years. Their costs are being amortized against earnings monthly and are summarized below.

	June 30,			December 31,
	2006			2005
Original Policy Premiums	$	1,642,621		$	1,642,621
Amortization to date		(405,593	)		(329,768	)
Unamortized Premium Cost		1,237,028			1,312,853
Current Portion		(151,649	)		(151,649	)
Long-Term Prepaid Expenses	$	1,085,379		$	1,161,204

8. LOANS PAYABLE

Romarco Minerals Inc.

On September 30, 2005, the Company entered into an Agreement and Plan of Merger and Reorganization (“the Merger Agreement”) with Romarco Minerals Inc. (“Romarco”), pursuant to which, if completed, the Company would be merged with Romarco. Pending completion of the Merger Agreement the Company obtained financing from Romarco by way of promissory notes, convertible into common stock at a market closing price ranging from $0.26 to of $0.17. The notes were payable on demand and bore interest at a rate of 12%. As at December 31, 2005 the liability to Romarco in respect of principal and interest was $705,186. On February 13, 2006, the Company announced that it and Romarco had terminated the Merger Agreement and had entered into a Termination Agreement under which, amongst other things, the company repaid all outstanding promissory notes payable to Romarco, totaling $728,257 including principal and interest.

Project Financing

As part of the acquisition of the Mesquite Mine, the Company entered into a credit facility agreement on November 5, 2003, with R.M.B. International, (Dublin) Limited (“RMB”), a Republic of Ireland corporation. This two-year credit facility agreement resulted in the Company receiving $6,000,000 for a mortgage, security, assignment, and financing agreement. Substantially all of the assets acquired in the Mesquite Mine were pledged and mortgaged under these agreements, as well as most of the Company’s other property. Interest was accrued on this credit facility at LIBOR plus 6% per annum, on a monthly basis. In January, April, July and October 2004, the Company made the first four quarterly payments of $750,000 plus interest leaving a balance of $3,000,000 to be paid in 2005. In January and April of 2005 the Company made two more quarterly payments leaving a balance of $1,500,000 to be paid in 2005. On August 2, 2005 the Company entered into a Supplemental Agreement with RMB under which. RMB agreed that it would not demand the loan payment due July 31, 2005 until October 31, 2005. On November 3, 2005 the Company issued RMB 576,241 shares of common stock to extend the two remaining loan payments until April 26, 2006. The loan was paid in full with interest on February 12, 2006.

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As part of the credit facility agreement, the Company entered into a gold hedging program under which it sold forward 26,399 ounces of gold at $382.95 per ounce, or approximately 50% of expected production of gold from the heaps. These ounces were scheduled to begin delivery on January 30, 2004 and every three months thereafter until October 30, 2005. On each of the settlement dates, the Company settled in cash for the difference between the sales price and the hedged price times the number of scheduled ounces to be sold for that three month period. Unlike a conventional hedge, the Company was not required to put up collateral, and the Company is not subject to any margin requirements.

The Company sold gold for more than the hedged price in the periods ended January 30, April 30, July 30, and October 30, 2004 and 2005, it made payments under the hedge totaling $261,768 in 2004 and $687,480 in 2005, reducing revenue by corresponding amounts.

Since October 30, 2005, the Company has reverted to selling its gold production at prevailing market prices since all of the hedges were delivered into.

9.RECLAMATION AND REMEDIATION LIABILITIES

Federal, state and local laws and regulations concerning environmental protection affect the Company’s operations. Under current regulations, the Company is required to meet performance standards to minimize environmental impact from operations and to perform site reclamation and remediation activities. The Company’s provisions for reclamation and remediation liabilities are based on known requirements. It is not possible to estimate the impact on operating results, if any, of future legislative or regulatory developments. The Company’s estimate of the net present value of these obligations for the Mesquite mine is based upon existing reclamation standards at December 31, 2005 and SFAS No. 143.

As part of the consideration for the Mesquite mine acquisition, the Company assumed the liability for final reclamation and closure of the mine. On November 7, 2003, the Company purchased from American International Specialty Lines Insurance Company a reclamation cost policy. The reclamation cost policy includes several components: a reimbursement account (Note 6), reclamation cost cap insurance, pollution liability insurance and surety bonds. The increase in the net present value of the liability is recognized for accounting purposes as accretion expense during the period under review.

The following table sets out the activity for the Company’s reclamation and remediation liabilities for the six months ending June 30, 2006 and for the year ending December 31, 2005:

	June 30, 2006		December 31, 2005
Opening Balance	$	6,196,570	$	6,358,994
Accretion		117,735		381,540
Reduction in the present value of obligations		-		(543,964	)
Ending Balance	$	6,314,305	$	6,196,570

The Company completed a review of the reclamation plan and the SFAS No. 143 reclamation and remediation liability as at December 31, 2005. The net present value of these obligations was revised to $6,196,570. The Company recorded a recovery in 2005 of $543,964 due to a reduction in the net present value of these obligations at December 31, 2005. This adjustment was predominately due to an adjustment in the timing of the reclamation and remediation costs.

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10.PREFERRED STOCK

The Company has 25,000,000 shares, $0.01 par value per share, of preferred stock authorized. As of June 30, 2006 and December 31, 2005, there were nil and 1,000,000 shares issued and outstanding, respectively

On December 31, 2004, the Company entered into a subscription agreement with RAB Special Situations ("RAB") pursuant to which the Company issued and sold to RAB 1,000,000 shares of its Series "A-1" Convertible Preferred Stock (the "Series A Preferred Stock" or the "Preferreds") and warrants to purchase up to 500,000 shares of Series A Preferred Stock for an aggregate purchase price of $500,000. The Series A Preferred Stock is convertible at any time at the option of the holder. The warrants are exercisable up to December 31, 2006 at the option of the holder. The holders of the Preferreds are entitled to receive dividends at a rate of 7.5% of the conversion price (as defined) per annum. The Company paid accrued dividends in the amount of $51,354 on conversion of the Series A Preferred Stock on May 31, 2006.

The number of shares of Series A Preferred and the purchase price per share are subject to adjustment pursuant to anti-dilution provisions, including upon the deemed issuance of additional shares of common stock. On August 25, 2005, the Company entered into a stock option agreement with Romarco Minerals, Inc. ("Romarco") pursuant to which the Company granted to Romarco an irrevocable option to purchase, under certain circumstances, up to such number of shares of the Company's common stock as equals 19.9% of the issued and outstanding shares of the Company's common stock at the first time of exercise of the stock option at a purchase price equal to $0.16 per share. This transaction constituted a deemed issuance of additional shares of common stock. Accordingly the 1,000,000 shares of Series A Preferred, originally exercisable into common stock at $0.50 per share, became exercisable into 3,125,000 shares of common stock at $0. 16, and the 500,000 warrants, originally exercisable into common stock at $0.60 per share, became exercisable into 1,562,500 shares at $0.192.

The warrants issued under the subscription agreement entitled the holder to purchase up to 500,000 shares of Series A Preferred initially at an exercise price per share of $0.60. The warrants were exercisable for a period of two years at any time on or after December 31, 2004.

On May 31, 2006, RAB converted its holding of 1,000,000 Series A Preferreds at an exercise price of $0.16 per share to acquire 3,125,000 common shares and exercised its warrants at an exercise price of $0.19 each to acquire 1,562,500 common shares. 257,736 of there shares were issuable to RAB at June 30, 2006.

In connection with the subscription agreement, the Company entered into a registration rights agreement, pursuant to which, the Company agreed under certain circumstances to register under the Securities Act of 1933, the shares of common stock issuable upon conversion or exercise of the securities sold in the transaction.

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11.COMMON STOCK

On May 31, 2006 the Company issued 2,941,178 shares of common stock upon the conversion by RAB Special Situations, LLP (“RAB”) of its holding of 1,000,000 shares of Series A Preferred stock at an exercise price of $0.16. At the same date the Company issued 1,470,588 shares of common stock at a price of $0.19 per share for cash consideration of $300,000, upon the exercise by RAB of the warrants, originally to purchase 500,000 shares of common stock at $0.60. A further 275,736 common shares were issuable to RAB in respect of these transactions at June 30, 2006.

During the six months period to June 30, 2006, the Company has issued 3,350,250 shares of common stock for cash consideration of $3,350,250 upon the exercise of warrants to purchase common shares at $1.00 each.

On February 13, 2006 the Company announced the closing of the initial $3,700,000 of a non-brokered private placement financing of $6,000,000. On February 20, 2006, the Company announced the closing of the balance of $2,300,000 of the private placement. The private placement was in respect of 20,000,000 units at a purchase price of $0.30 per unit. Each unit comprises one share of common stock and one half common stock purchase warrant. Each full common stock purchase warrant has an exercise price of $0.45 and a term of two years. The consideration for the units has been allocated $200,000 as to common stock, $3,812,000 as to additional paid in capital, and $1,988,000 as to warrants.

From time to time the Company has issued shares of common stock in satisfaction of obligations. Such issuances were made by reference to the closing price of the share on the date of issuance.

On January 2, 2006, the Company issued 37,500 shares of common stock to Mountain Gold Exploration Inc. and 37,500 shares of common stock to IW Exploration Co. for work commitments required under the terms of a mineral lease. The shares were valued at $16,500.

On February 22, 2006, the Company issued 200,000 shares of common stock to the shareholders of Nevada Colca Gold Inc. under the terms of an Asset Purchase Agreement dated January 24, 2006. The shares were valued at $120,000.On February 10, 2005 the Company issued 25,000 shares of common stock for lease payments due under an Exploration and Mining Lease Agreement.

On March 1, 2005 the Company issued 50,000 shares of common stock for lease payments due under an Exploration and Mining Lease Agreement.

On April 26, 2005, the Company issued 70,000 shares of common stock for work commitments required under the terms of an Exploration and Mining Lease Agreement. On the same date, the Company issued 25,000 Shares of common stock to a company controlled by a director, in consideration for the negotiation of a subscription agreement with RAB.

On August 2, 2005 the Company entered into a Supplemental Agreement with RMB. RMB agreed that it would not demand the Company pay the loan payment due July 31, 2005 until October 31, 2005. On November 3, 2005 the Company issued RMB 576,241 shares of common stock to extend the two remaining loan payments until April 26, 2006.

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12.STOCK OPTIONS AND WARRANTS

The Company estimates the fair value of options and warrants using the Black-Scholes Option Price Calculation. During the six month period ended June 30, 2006 the Company used the following assumptions in estimating fair value: risk-free interest rate in a range from 4.6% to 5.0% (2005 - 4%), volatility rate - 104% to 107% (2005 - 70%), and expected life of the options and warrants in a range from two to seven years (2005 - two to ten years). The Company also assumed that no dividends would be paid on common stock. Some warrants may be exercised under the cash-less method requiring a corresponding reduction in the amount of common stock issued in relationship to its cash value at the time the warrants are exercised.

On June 14, 2006, the Company issued 500,000 options to an officer, with an exercise price of $2.03 per share. The options are exercisable in three equal annual installments beginning on June 14, 2006. The options were valued at $884,000.

On April 13, 2006, the Company issued 320,000 options to consultants, with an exercise price of $0.93 per share. The options are exercisable in three equal installments beginning on June 14, 2006 and thereafter on April 13, 2007 and 2008. The options were valued at $252,800.

On February 13, 2006, the Company issued 7,600,000 options to certain directors, officers and employees, with an exercise price of $0.34. The options are exercisable in three equal annual installments beginning on June 14, 2006. The options were valued at $2,500,400.

In the fourth quarter of 2005, the Company granted 150,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested of $0.40. These options generally vest over periods up to 12 months.

In the second quarter of 2005, the Company granted 1,423,500 options exercisable for the purchase of one share of common stock each with an exercise price when vested of $0.40. These options generally vest over periods up to 12 months.

In the first quarter of 2005, the Company granted 250,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested of $0.50. These options generally vest over periods up to 18 months.

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The following is a summary of stock options for the six month period ending June 30, 2006 and for the year ended December 31, 2005:

	Shares			Weighted Average Exercise Price		Weighted Average Fair Value
Balance January 1, 2005		5,023,084		$	0.76
Granted		1,823,500		$	0.41
Cancelled / Expired		(173,684	)	$	-
Outstanding at December 31, 2005		6,672,900		$	0.69
Exercisable at December 31, 2005		6,385,984		$	0.69
Weighted average fair value of options as of December 31, 2005						$	0.26
Balance January 1, 2006		6,672,900		$	0.69
Granted		8,420,000		$	0.46
Cancelled / Expired		(766,950	)	$	0.81
Outstanding at June 30, 2006		14,325,950		$	0.55
Exercisable at June 30, 2006		8,7425,701		$	0.60
Weighted average fair value of options as of June 30, 2006						$	0.37

Warrants outstanding to acquire common shares of the Company at June 30, 2006 are as follows:

Warrants Outstanding	Exercise Price	Expiry Date
175,000	$0.60	September 28, 2006 - October 31, 2006
225,000	0.60	5 years after the 1st anniversary of the effective date of the registration agreement in respect of the warrants and shares of warrant stock (1)
780,000	1.00	November 3, 2007 (2)
6,056,180	0.76	5 years after the 2nd anniversary of the effective date of the registration agreement in respect of the warrants and shares of warrant stock (1) (3)
10,399,750	1.00	November 3, 2006 - March 15, 2007 (4)
10,000,000	0.45	June 13,2008 (1)
1,000,000	0.30	2 years after closing date of the private placement (1)(5)
150,000	1.00	December 18, 2006 (1)
28,785,930

(1) As at June 30, 2006, the warrants and shares of warrant stock had not become effective by way of a registration statement.

(2) Issued to RMB Resources Limited initially for a three year term in connection with a credit facility provided by RMB International (Dublin) Limited effective November 3, 2003. On October 20, 2005 the board of directors of the Company approved the extension of the term of the warrants by one year..

(3) 8,091,180 warrants were issued to Newmont Mining Corporation (“Newmont”) pursuant to the Asset Purchase Agreement effective November 7, 2003. On April 18, 2005, Newmont renounced 2,035,000 of these warrants to hold 6,056,180 at December 31, 2005. On April 12, 2006 the Company agreed with Newmont to defer the earliest exercise date in respect of 3,296,370 of the warrants from June 10, 2006 to June 10, 2007. Under the anti-dilution provisions of the warrant the exercise price was reduced from $1.00 to $0.76 upon the issuance of common shares and warrants by way of private placement on February 13, 2006.

(4) The warrants were initially issued for a 2 year term. On October 20, 2005 the board of directors of the Company approved the extension of the term of the warrants by one year.

(5) Issued to Metalmark Management LLC in respect of services rendered in connection with private placement dated February 14, 2006

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13.RELATED PARTY TRANSACTIONS

In March 2006, the Company concluded a cost sharing agreement with Silver Bear Resources Inc. (an Ontario corporation) (“ Silver Bear”) under which a portion of Silver Bear’s office overhead is now charged to the Company on the basis of the expected time commitment of the staff involved. The Company is related to Silver Bear as the senior executives of Silver Bear also serve as senior executives and directors of the Company. At June 30, 2006, $118,201 was payable  to Silver Bear under this agreement.

On February 22, 2006, the Company issued 200,000 shares of common stock to the shareholders of Nevada Colca Gold Inc. (“Nevada Colca”) pursuant to an Asset Purchase Agreement dated January 24, 2006. The Company thereby acquired certain assets comprising office equipment, property files, an environmental bond and cash for consideration of $120,000. Lawrence O’Connor, who at the time was the Company’s Vice President - Operations, also served as President of Nevada Colca.

On February 10, 2005 the Company issued 12,500 shares of common stock to IW Exploration Co. (“IW”) and 12,500 shares of common stock to Mountain Gold Exploration, Inc. (“Mountain Gold”) for lease payments due under an Exploration and Mining Lease Agreement (“the Lease Agreement”), and on March 1, 2005 the Company issued 25,000 Common Shares to IW and 25,000 Common Shares to Mountain Gold for lease payments due under the Lease Agreement. Thomas Callicrate, who at the time was the Company’s Vice President of Exploration and a Director, is the President, Secretary and Treasurer of Mountain Gold.

On April 26, 2005, the Company issued 35,000 shares of common stock to Mountain Gold. and 35,000 shares of common stock to Lane Griffin for work commitments required under the terms of the Lease Agreement. Thomas Callicrate, who at the time was the Company’s Vice President of Exploration and a Director, is the President, Secretary and Treasurer of Mountain Gold. On the same date, the Company issued 25,000 shares of common stock to Proteus Capital Corp. (“Proteus”), a corporation owned and controlled by Douglas Newby, who at the time was Executive Vice-President and a Director of the Company, in consideration for the negotiation of a subscription agreement with RAB.

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Mr. Newby had a separate consulting relationship with the Company, whereby Proteus is compensated for consulting services at the rate of $4,000 per month plus expenses. On February 15, 2005 Proteus agreed to provide executive management and director services on a part-time basis for the Company for a monthly fee of $9,167. Mr. Newby resigned as Chairman of the Board, President and Chief Executive Officer effective February 13, 2006 and as a Director effective March 29, 2006.

In order to complete the transition of operations when the Company closed the acquisition of the Mesquite Mine in November 2003, the Company retained the services of Harrison Western Construction Corporation (“Harrison”) to manage the Mine for an initial period of six months. Under the contract, Harrison charged a management fee of cost plus 10%. Prior to July 8, 2004, the President of Harrison was also a director of the Company.

14.COMMITMENTS AND CONTINGENCIES

Mining Industry

The Company is engaged in the exploration and development of mineral properties. At present, the Company is in the process of preparing, but does not have, feasibility studies establishing proven and probable reserves.

Although the minerals exploration and mining industries are inherently speculative and subject to complex environmental regulations, the Company is unaware of any pending litigation or of any specific past or prospective matters which could impair the value of its mining claims.

Lease Agreement

On November 1, 2005, the Company leased office space in Reno, Nevada to provide for corporate offices. This lease was for a term of three years, requiring monthly minimum lease payments of $2,215. The lease was renewable for three one-year renewal periods at a 5% increase in base rent to $2,326 per month and $2,558 in the third year. The Company closed the Reno corporate office in June 2006 and the Company’s obligations were terminated by way of an assignment and assumption of lease agreement dated July 5, 2006.

Contract with the County Sanitation District of Los Angeles

During its ownership of the Mesquite Mine, Hanson Natural Resources, a prior operator of the mine, entered into an agreement with the County Sanitation District of Los Angeles County, which then developed and permitted a plan to create a 100 year landfill at the Mesquite Mine that when completed is expected to be the largest residential waste disposal in the United States.

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Waste is expected to be dumped on lined pads on the pediment commencing in an area to the southwest of the Mesquite pits, ultimately including the southern sections of the leach pads. The waste dumps can utilize much of the material mined at Mesquite as liner and seal. Each cell of the landfill is expected to be sealed as it is completed.

Under the agreement with the County Sanitation District of Los Angeles County, the Company has the right to explore, mine, extract, process, market and sell ore, and otherwise conduct mining and processing activities, anywhere on the property for an initial period through 2024 with automatic extensions until 2078. Much of the infrastructure at the property is likely to be retained by the landfill after mining operations are completed and the Company has met certain reclamation standards. Landfill operations are not expected to begin until 2008.

15.CORRECTION OF ERROR

Subsequent to release of its audited financial statements for the year ended December 31, 2005, the Company has determined that the conversion option of its Series A Preferred stock (see Note 10) constitutes a contingent “beneficial conversion feature” in terms of EITF 98-5. Previously, the Company had not recognized any conversion benefit arising to holders of the Series A Preferred stock when the Company granted an option to Romarco Minerals Inc. on August 25, 2005. The Company has valued the conversion benefit arising to holders of the Series A Preferred stock and warrants as $1,700,000 and has accounted for this as a deemed dividend as at the date of the trigger event, August 25, 2005. The Company has revised its financial statements for the year ended December 31, 2005 to reflect this error correction.

	December 31, 2005
	As Originally
	Reported			As Restated
Financial Position;
Additional paid-in capital preferred	$	475,000		$	2,175,000
Accumulated deficit	$	(12,377,989	)	$	(14,077,989	)

16.SUBSEQUENT EVENT

On August 9, 2006, the Company announced the results of the feasibility study initiated in March 2006 for the re-commencement of production at the Mesquite Mine. Key findings of the study are a) that proven reserves and probable reserves are 1.23 and 1.13 million ounces of gold, respectively, and that b) after tax returns of 41% are projected at a gold selling price of $700 per ounce; 30% at a selling price of $600 per ounce, and 16% at a gold selling price of $500 per ounce. Based on the feasibility study, the Company announced that it expects to make its first gold pour at Mesquite Mine in less than 19 months.

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Item 2:Management’s Discussion and Analysis or Plan of Operations

Overview

We are an independent precious metals production and exploration company with operations focused in the western United States. In November 2003 we acquired the assets of the Mesquite Mine (“Mesquite” or “the Mine” from a subsidiary of Newmont Mining Corporation (“Newmont”). Mesquite is our most important asset, providing us with current gold production based on leaching the material that was placed on the heap leach pads by Newmont and previous owners of the property. As a result of the current relatively high selling price for gold, since the acquisition from Newmont, this production has provided us with operating cash flow to help sustain our operations pending completion of a feasibility study which we believe may justify resumption of mining operations.

There are two phases to the Mesquite Project. The first phase is comprised of the continuing leaching operations of minerals inventoried on the pads prior to September 2001. The second phase is to develop a detailed mine plan and model to be used to conduct a feasibility study of the expanded operation. We plan to complete this work by mid-August 2006.

In February 2006, we closed a $6,000,000 private placement financing which significantly improved our financial position, enabled us to repay all our outstanding debt and proceed towards completion of the Mesquite feasibility study. We also announced the appointment of new directors and a new management team.

Overall Performance

During the six month period ended June 30, 2006 (“2006 YTD”) and the year ended December 31, 2005 (“2005”), our operational activities have been focused on optimizing gold recovery from the leach pads. Production from Mine operations during 2006 YTD resulted in sales of 8,375 ounces of gold for revenues of $4,878,943 compared with sales during the six month period ended June 30, 2005 (“2005 YTD”) of 14,092 ounces for revenues of $5,698,487. Sales of gold ounces decreased due to lower solution grades coming from the leach pads. With no new material being placed on the leach pads, it is becoming increasingly difficult to extract the residual gold. In early 2006 we commenced phased installation of a “wobbler” spray system to replace the old drip system as part of our program of production improvement. The new system is designed to give better spray coverage and increase the overall grade of solution in the coming months. The average selling price increased from $404.38 per ounce in 2005 YTD to $582.56 per ounce in 2006 YTD, reflecting strong pricing in world markets and our sale in 2006 of all of our output on the spot market. Under our credit facility with RMB International (Dublin) Limited (“RMB”) we were required to hedge a substantial portion of our gold production. On satisfaction of our hedging undertakings to RMB effective October 30, 2005, we have been free to pursue our preferred strategy of selling 100% of our production on the spot market.

General and administration costs for 2006 YTD were $2,175,604 compared with 2005 YTD costs of $888,427. The increase in costs relates to significantly higher legal and travel costs in connection with the proposed merger with Romarco Minerals Inc., costs of $233,000 relating to warrants issued for services provided in connection with the private placement in February 2006 and termination costs for several employees aggregating $466,510. Increased costs also derive from the transition to the new management team and other administrative costs related to completion of the feasibility study and planning for recommencement of production at Mesquite.

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Stock based compensation for 2006 YTD was $1,770,156 compared with 2005 YTD costs of $199,861. The increase relates to the grant of options to the new management team in February and June 2006.

On February 13, 2006 we announced that we and Romarco had terminated our Agreement and Plan of Merger and Reorganization of September 30, 2005, and that we had entered into a Termination Agreement under which we agreed to pay Romarco a termination fee of $1,000,000, together with reimbursement of $225,000 for their out-of-pocket expenses in pursuing the merger. In addition, we agreed to repay all outstanding promissory notes payable to Romarco, totaling $728,257 including principal and interest. The Termination Agreement also provided for a mutual release of all claims in connection with the termination of the Agreement and Plan of Merger and Reorganization.

On February 13, 2006, we closed the initial $3,700,000 of a non-brokered private placement financing of $6,000,000. We sold 12,333,333 units at a purchase price of $0.30 at the initial closing. On February 20, 2006, we closed the balance of $2,300,000 of the private placement. We sold 7,666,667 units at a purchase price of $0.30 at the second closing. Each unit is comprised of one share of common stock and one half common stock purchase warrant. Each full common stock purchase warrant has an exercise price of $0.45 and a term of two years.

The proceeds from the non-brokered private placement have been or will be used as follows:

·   to repay in full our outstanding debt facility with RMB of $1,500,000 plus accrued interest;

·   to pay Romarco $1,953,257 in full satisfaction of amounts owing upon termination of the merger agreement;

·   to finance the completion of the Mesquite feasibility study; and

·   for general corporate purposes.

In conjunction with the appointment of the new directors and management team, we granted 7,600,000 options to the new team in February 2006 and 500,000 to newly hired executive in June 2006.

Critical Accounting Policies Listed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported.

Depreciation and Amortization

Expenditures for new facilities or equipment and expenditures that extend the useful lives of existing facilities or equipment are capitalized and depreciated using the straight line method at rates sufficient to depreciate such costs over the estimated useful lives of such facilities or equipment.

We have no deferred development costs and no proven and probable reserves and therefore no amortization is computed on units-of-production basis.

The expected useful lives used in depreciation and amortization calculations are based on applicable facts and circumstances, as described above. Significant judgment is involved in the determination of useful lives, and no assurance can be given that actual useful lives will not differ significantly from the useful lives assumed for purposes of depreciation and amortization.

Carrying Value of Long-Lived Assets

We review and evaluate the carrying value of our long-lived assets for impairment when events or changes in circumstances indicate the carrying values may be impaired. We determine impairment by comparing the present value of future cash flows estimated to be generated by these assets with their carrying amounts or by comparing the carrying values with estimated values obtained from used equipment brokers for plant and equipment. We review the used equipment market annually to determine whether the carrying values of plant and equipment are recoverable in the used equipment market. We have no deferred development costs. Our costs are primarily associated with the fair values of the plant and equipment acquired upon completion of the Mesquite acquisition.

Material changes to any of these factors or assumptions discussed above could result in future impairment charges.

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Metal on Leach Pad and Metal-in-Process Inventory

Pursuant to an Asset Purchase Agreement dated November 7, 2003, Western Mesquite Mines Inc., our then newly formed, wholly-owned subsidiary acquired certain properties, equipment, permits and contracts from Newmont Mining Corporation and then its wholly owned subsidiary, Hospah Coal Company, (collectively, “Newmont). The operating assets included the ore already placed on the leach facility, which included all mineralized material and contained precious metals that had been mined and placed on one of the three leach pad areas at the Mesquite site prior to November 7, 2003.

The purchase price for the Mesquite Mine assets was determined to be $9,133,370. The transaction was accounted for under the purchase method of accounting, with $6,471,000 of the purchase price being allocated to property, plant and equipment, based on the fair market value as determined by the mine operations contractor, with the balance of $2,662,370 being allocated to mineral properties. Since management had determined that there was no assurance that a commercially viable mineral deposit existed on any of the properties, it was concluded that the recoverability of capitalized mining exploration costs was likely to be unsupportable under SFAS 144. Accordingly, the allocation of value to mineral properties was expensed as exploration expense in 2003.

At November 7, 2003, since no reserve study was available at the time to support management’s estimate, no value was attributed to metal on leach pads and metal-in-process inventory. We continue to place no value on metal on leach pads.

During the years ended December 31, 2005 and December 31, 2004, we produced 21,776 and 27,398 ounces respectively from the leach pads into metal-in-process inventory. Sales from metals-in-process inventory during the years ended December 31, 2005 and December 31, 2004, were 23,818 and 27,357 ounces respectively. Prior to November, 2003, we had no production activities.

The determination of both the ultimate recovery percentage and quantity of metal expected over time requires the use of estimates, which are subject to revision since they are based upon metallurgical test work. We expect to continue to process and recover metal from the leach pads until no longer considered economically feasible.

Reclamation and Remediation Liabilities:

Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. In August 2001, Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” which established a methodology for accounting for estimated reclamation and remediation costs. The statement was adopted in July 2003 upon the acquisition of Mesquite when we recorded the estimated present value of the reclamation and remediation liabilities. The reclamation and remediation liabilities will be adjusted for the passage of time and for revisions to either the timing or amount of the original present value estimate.

Accounting for reclamation and remediation liabilities requires management to make estimates at the end of each period of the undiscounted costs expected to be incurred. Such cost estimates include, ongoing care, maintenance and monitoring costs. Changes in estimates are reflected in earnings in the period an estimate is revised.

Accounting for reclamation and remediation liabilities requires management to make estimates of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the amount of reclamation and remediation work required. Any such increases in future costs could materially impact the amounts charged to earnings for reclamation and remediation.

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Results of Operations

Three Months Ended June 30, 2006 (“Q2/06”) Compared to the Three Months Ended June 30, 2005 (“Q2/05”)

Poured gold production for Q2/06 was 3,412 ounces compared with 5,996 ounces in Q2/05. Since no new ore has been placed on the leach pads since 2001, the productive capacity of the leach pads is diminishing and we are continuing with various strategies, initiated in the first quarter of 2006, to maintain output levels. Gold sales for Q2/06 were 3,375 ounces at an average selling price of $623.50 for revenues of $2,104,315 compared with 7,744 ounces at an average selling price, after hedging, of $405.46 for revenues of $3,139,880 in Q2/05. The higher average selling price reflects the increase in the world price for gold and our sale of all production in the spot market. We incurred no hedging losses in Q2/06 as compared to a loss of $185,838 in Q2/05.

Mine operating costs for Q2/06 were $1,892,336, compared to $1,575,598 for Q2/05. The increase reflects higher costs for power, cyanide, labor and an increase in consulting services in connection with the mine feasibility study. During the quarter we implemented cost reduction strategies aimed at concentrating production on the most productive areas of the leach pads. Mine site administration costs for Q2/06 were $348,813 compared with $331,639 in Q2/05. The reduction in costs relates primarily to lower property insurance costs. Depreciation, amortization and accretion expense for Q2/06 was $335,030 compared with $318,752 in Q2/05. Costs associated with the change in metal-in-process inventories in Q2/06 were $9,242 compared with $695,820 in Q2/05 as work in process inventories declined to 607 ounces at June 30, 2006 from 1,963 ounces at June 30, 2005. The foregoing factors resulted in a gross loss of $569,023 for Q2/06 compared with $75,509 in Q2/05.

General and administrative expense increased to $1,105,652 for Q2/06 from $507,515 for Q2/05. These administrative expenses include payments to consultants, legal and accounting fees, director’s fees and general and administrative expenses for the corporate office. The major reasons for the increase in Q2/06 over the previous year are costs associated with the transition to the new management team, transfer of corporate office activities from Reno, Nevada, to Toronto, Ontario, and greater activity focused on the feasibility study and planned re-commencement of production at Mesquite.

Stock based compensation represents the non-cash costs of options, as calculated under the Black-Scholes option pricing model, granted to directors, officers and employees. The increase in expense to $730,231 in Q2/06 from $83,422 in Q2/05 relates primarily to the options granted to the new management team in February and June of 2006.

Exploration activities at Mesquite were $272,260 and relate to the continuing costs of the recently completed mine feasibility study.

The above were the major factors in our reporting a net loss to common shareholders for Q2/06 of $2,614,115 or $0.04 per share, compared with a net loss of $711,250 or $0.02 per share in Q2/05.

In Q2/06, other comprehensive income includes a loss of $4,322 arising on conversion of the currency of the accounts of a foreign subsidiary to U.S. dollars. In Q2/05 other comprehensive income includes a gain of $101,426 in respect of the mark-to-market of forward gold sales contracts. We had no comparable income or expense in Q2/06 since we delivered into all hedge contracts in 2005.

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Our net comprehensive loss in Q2/06 was $2,613,958 compared with $428,063 in Q2/05.

Six Months Ended June 30, 2006 (“2006 YTD”) Compared to the Six Months Ended June 30, 2005 (“2005 YTD”)

Poured gold production for 2006 YTD was 7,864 ounces compared with 12,532 ounces in 2005 YTD. Gold sales for 2006 YTD were 8,375 ounces at an average selling price of $582.56 for revenues of $4,878,943 compared with 14,092 ounces at an average selling price, after hedging, of $404.38 for revenues of $5,698,487 in 2005 YTD. We incurred no hedging losses in 2006 YTD as compared to a loss of $326,056 in 2005 YTD.

Mine operating costs for 2006 YTD were $3,871,503, compared to $3,161,940 for 2005 YTD. Mine site administration costs for 2006 YTD were $676,595 compared with $703,456 in 2005 YTD. Depreciation, amortization and accretion expense for 2006 YTD was $647,244 compared with $663,747 in 2005 YTD. Costs associated with the change in metal-in-process inventories in 2006 YTD were $312,210 compared with $763,499 in 2005 YTD as work in process inventories dropped to 607 ounces at June 30, 2006 from 1,963 ounces at June 30, 2005. The foregoing factors resulted in a gross loss of $828,728 for 2006 YTD compared with $217,421 in 2005 YTD.

General and administrative expense increased to $2,175,604 for 2006 YTD from $888,427 for 2005 YTD. The increase in costs relates to higher spending in the first quarter on legal and travel costs in connection with the proposed merger with Romarco Minerals Inc., costs of $233,000 relating to warrants issued for services provided in connection with the private placement in February 2006, and termination costs for several employees aggregating $466,510. In the second quarter, increased costs also derive from the transition to the new management team, the transfer of corporate office activities form Reno, Nevada, to Toronto, Ontario, and greater activity focused on the feasibility study and planned re-commencement of production at Mesquite.

The increase in stock based compensation expense to $1,770,156 in 2006 YTD from $199,861 in 2005 YTD relates primarily to the options granted to the new management team in February and June of 2006.

Exploration activities for 2006 YTD at Mesquite of $576,299 relate to the mine feasibility study.

We paid Romarco a “one- time” fee of $1,000,000 and expense reimbursement costs of $225,000 in Q1/06 in connection with our Termination Agreement.

Interest expense for 2006 YTD was $20,434 compared with $94,293 for 2005 YTD. The decrease reflects the repayment of the RMB and Romarco loans with the proceeds of the first tranche of $3,700,000 of private placement units that closed on February 13, 2006. Completion of the second tranche of $2,300,000 on February 20, 2006 provided us with significant cash balances for the remainder of the period ended June 30, 2006 which accounts for interest income increasing from $93,113 in 2005 YTD to $178,614 in 2006 YTD.

During Q1/06 we negotiated a no-cost settlement of certain liabilities we had previously assumed and expensed in connection with land exploration rights. This has been recorded as a gain on settlement of debt in the amount of $142,949.

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The above were the major factors in our reporting a net loss to common shareholders for 2006 YTD of $6,445,392 or $0.11 per share, compared with $1,397,353 or $0.04 per share in 2005 YTD.

Our net comprehensive loss for 2006 YTD was $6,432,226 compared to $1,012,740 in 2005 YTD.

Liquidity and Capital Resources

At June 30, 2006 our cash balance was $3,775,058 and our working capital was $3,023,365. This represents a significant improvement in our financial position since December 31, 2005 when we reported cash of $52,387 and a working capital deficit of $2,514,895. At that time we were illiquid and our ability to continue as a going concern in the absence of additional financing was in question.

The working capital deficit at December 31, 2005 included the loan of $1,500,000 from RMB payable on April 26, 2006. Under the original terms of the RMB credit facility of $6,000,000, two repayments of $750,000 were scheduled for July 31, 2005 and October 31, 2005 respectively. In view of our illiquid condition, on August 1, 2005 we entered into a Supplemental Agreement with RMB which deferred repayment of the $1,500,000 until October 31, 2005. On November 3, 2005 we issued RMB 576,241 common shares to extend the remaining loan payments until April 26, 2006. The working capital deficit at December 31, 2005 also included short-term advances received during 2005 from Romarco of $705,186.

Developments in February 2006 enabled us to repay the RMB and Romarco debt and allowed us to begin work on the feasibility study for Mesquite that we had deferred for the past two years.

On February 13, 2006 we announced that we and Romarco had terminated our proposed merger. We agreed to pay Romarco a termination fee of $1,000,000, together with reimbursement of $225,000 for their out-of-pocket expenses in pursuing the merger. In addition, we agreed to repay all outstanding promissory notes payable to Romarco, then totaling $728,257 including principal and interest.

In addition, on February 13, 2006 we announced the restructuring of our Board, the appointment of a new senior management team and the closing of the initial $3,700,000 of a non-brokered private placement financing of $6,000,000. On February 20, 2006, we announced the closing of the balance of $2,300,000 of the private placement.

During the second quarter of 2006, 3,350,250 warrants to purchase shares of common stock were exercised for proceeds of $3,350,250. In addition, 500,000 preferred share warrants were exercised to purchase 1,470,588 common shares for proceeds of $300,000. The funds will be used to finance expansion plans at Mesquite once the feasibility study is completed.

Cash flows from operating activities in 2006 YTD were negative $3,283,260 compared with positive $258,690 in 2005 YTD. The major elements in the 2006 deficit were our net loss of $6,428,413, offset in part by non-cash depreciation and accretion expense of $647,244 and a decrease in non-cash working capital items totaling $494,925. Cash in 2006 YTD was also generated by the issuance of common stock, options and warrants for stock-based compensation, exploration assets and services in the amount of $2,139,656. In 2005 YTD, our net loss was $1,397,353, offset by non-cash depreciation and amortization of deferred loan financing costs of $669,257 and a decrease in non-cash working capital items of $723,417. Cash requirements for operating activities in 2005 YTD were also reduced by the issuance of common stock, options and warrants issued for services in the amount of $368,361.

In view of the deteriorating liquidity situation that continued into the early weeks of Q1/06 from 2005, investing activities continued at a low level. Subsequent to the management changes in February 2006 we have invested $387,784 on a new “wobbler” spray system designed to enhance solution grades coming from the leach pads.

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Net cash provided by financing activities in 2006 YTD was $7,393,710. Cash receipts comprise the $6,000,000 proceeds of sale of 20,000,000 units in February 2006, the $3,350,250 received on exercise of 3,350,250 common share warrants at $1.00 and $300,000 received on exercise of preferred share warrants. Cash payments include the repayment of $2,205,186 of principal on the RMB and Romarco loans. In 2005 YTD, net cash used was $1,500,000 in respect of payments of principal on the RMB loan.

The foregoing factors resulted in an increase in our cash position during 2006 YTD of $3,722,671 and a decrease in our cash position during 2005 YTD of $1,204,429.

Recent Accounting Pronouncements

In November 2004, FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. We have evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to our overall results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an option. SFAS No. 123(R) is effective for small business issuers at the beginning of the first interim or annual period beginning after December 15, 2005.

As permitted by SFAS No. 123, management currently accounts for share-based payments to employees using the Black-Scholes option pricing model and has recorded the related compensation expense in all periods presented.

In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes SFAS No. 153 produces financial reporting that more faithfully represents the economics of the transactions. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of SFAS No. 153 shall be applied prospectively. We have evaluated the impact of the adoption of SFAS No. 153, and does not believe the impact will be significant to our overall results of operations or financial position.

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In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB No. 107”), which provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS No. 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB No. 107 will have on our consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. We will adopt FIN 47 beginning the first quarter of fiscal year 2006 and we do not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This new standard replaces APB Opinion No. 20, “Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,” and represents another step in the FASB’s goal to converge its standards with those issued by the IASB. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005 . We have evaluated the impact of the adoption of SFAS No. 154 and does not believe the impact will be significant to our overall results of operations or financial position.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which is intended to simplify the accounting and improve the financial reporting of certain hybrid financial instruments (i.e., derivatives embedded in other financial instruments). The statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125.” SFAS No. 155 is effective for all financial instruments issued or acquired after the beginning of an entity's first fiscal year that begins after September 15, 2006. We are currently evaluating the impact SFAS No. 155 will have on our consolidated financial statements, if any.

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Contractual Obligations

The following table presents the contractual obligations outstanding as at June 30, 2006.

	Total	Less than 1 Year	2- 3 Years	4- 5 Years	More than 5 Years
Reclamation and remediation obligations	$ 6,314,304	$           408,650	$ 5,580,419	$ 70,404	$ 254,831

2006 Outlook

The closing of the $6,000,000 non-brokered private placement financing in February 2006 resolved the pressing liquidity issues faced by us. We have repaid our bank facility with RMB and the loans advanced by Romarco. The proceeds have been used to finance the Mesquite feasibility study which we plan to complete in August 2006. Our current expectation is to produce approximately 14,000 ounces of gold during 2006 assuming we continue to leach the material that was placed on the heap leach pads by pervious operators. We will continue to monitor our production and in the event of an unexpected drop in production or gold prices we could commence rinsing of the heap leach pads and reclamation activities.

We expect to fund a significant portion of the capital expenditures associated with developing Mesquite from the proceeds received from exercise of warrants during Q2/06 and warrants outstanding at June 30, 2006. In addition, we expect the continuing operations to generate sufficient cash flow to cover current production costs. If required, we plan on pursuing a debt facility to help finance our capital expenditures upon completion of the feasibility study.

Subsequent Event

On August 9, 2006, we announced the results of the feasibility study initiated in March 2006 for the re-commencement of production at the Mesquite Mine. Key findings of the study are a) that proven and probable reserves are 1.23 and 1.13 million ounces of gold, respectively, and that b) after tax returns of 41% are projected at a selling price of $700 per ounce, 30% at a selling price of $600, and 16% based on a gold selling price of $500 per ounce. Based on the feasibility study, we announced that we expect to make our first gold pour at Mesquite Mine in less than 19 months.

Safe Harbor Statement

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained above under “2006 Outlook” and in this Item 2, “Management’s Discussion and Analysis or Plan of Operation,” are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements.

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The nature of our business makes predicting the future trends of our revenues, expenses and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our businesses could affect the matters referred to in such statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements.

·   the effect of political, economic and market conditions and geopolitical events;

·   legislative and regulatory changes that affect our businesses;

·   the availability of funds and working capital;

·   the actions and initiatives of current and potential competitors;

·   investor sentiment; and

·   our reputation.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the Securities and Exchange Commission should be considered in evaluating forward-looking statements.

We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this prospectus or supplements to this prospectus. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements.

Item 3.  Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our principal executive officer and of our principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, these officers concluded that, as of the date of their evaluation, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports.

During the period covered by this report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings.

None.

Item 2. Unregistered Sales of Securities and Use of Proceeds.

On April 13, 2006, we issued 320,000 options to consultants, with an exercise price of $0.93 per share, as compensation for services rendered. The options are exercisable into 320,000 shares of Common Stock, vesting in three annual installments beginning on June 14, 2006. The options were valued at $252,800. We relied upon the exemption from registration found in Section 4(2) of the Securities Act of 1933, as amended (“Section 4(2)”) in connection with these issuances.

On May 31, 2006, we issued 2,941,178 shares of common stock upon the conversion by RAB Special Situations, LLP (“RAB”) of its holding of 1,000,000 shares of Series A Preferred stock at an exercise price of $0.16. On the same date we issued 1,470,588 shares of common stock at a price of $0.19 per share for cash consideration of $300,000, upon the exercise by RAB of the warrants, originally to purchase 500,000 shares of common stock at $0.60. A further 257,736 common shares were issuable to RAB in respect of these transactions at June 30, 2006. We relied upon the exemption from registration found in Section 4(2) in connection with these issuances.

On June 14, 2006, we issued 500,000 options to an officer, with an exercise price of $2.03 per share, as compensation for services rendered. The options are exercisable into 500,000 shares of Common Stock, vesting in three equal annual installments beginning on June 14, 2006. The options were valued at $884,000. We relied upon the exemption from registration found in Section 4(2) in connection with this issuance.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submission of Matters to a Vote of Security Holders.

At our Annual Meeting of Stockholders held on June 14, 2006, our stockholders:

1.   Elected the following five (5) directors to serve as the Board of Directors until the next annual meeting of stockholders and until their successors are duly elected and qualified:

Name	Votes For	Withheld
Randall Oliphant	32,759,863	216,440
Raymond Threlkeld	32,939,963	116,340
Vahan Kololian	32,839,863	216,440
Martyn Konig	32,764,363	211,940
Gerald Ruth	32,759,963	216,340

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2.   Approved an amendment to our articles of incorporation to increase number of shares of common stock authorized from 100,000,000 to 500,000,000.

Votes For	Votes Against	Abstain
31,259,545	1,076,184	720,574

3.   Approved an amendment to our articles of incorporation to change the number of directors to not less than three and not more than nine.

Votes For	Votes Against	Abstain
32,217,676	31,951,010	122,086

4.   Approved our 2006 Stock Incentive Plan, which provides for the issuance of up to 5,000,000 shares of our Common Stock pursuant to options to our employees (including executive officers), directors and consultants and our affiliates.

Votes For	Votes Against	Abstain
31,257,538	1,033,960	21,975

5.   Ratified the appointment of HJ & Associates, LLC as our independent registered public accounting firm for the fiscal year ending December 31, 2006.

Votes For	Votes Against	Abstain
32,960,429	90,641	5,233

Item 5.Other Information.

Severance Agreement

On August 9, 2006, we entered into Severance Agreements with Raymond Threlkeld, Brian Penny, Graham Desson, Wes Hanson , and Paul Semple (the “Executives”). The following summary of the severance Agreements is qualified in its entirety by reference to the full text of the Severance Agreement, a copy of which is attached to this Report as Exhibit 10.1. All capitalized terms in the following paragraph shall have the meanings ascribed to them in the severance agreement

Pursuant to the Severance Agreements, the Executives will receive the following compensation upon termination of employment: (1) for termination without Cause, the Executive will receive an amount between 100% and 150% of the Executive’s Annual Compensation, the Executive will have six months from termination to exercise any vested stock options to purchase shares of Common Stock (after six months the stock options will expire), and benefits will be continued for twelve months; (2) for termination for Cause, no amount will be paid; (3) for termination due to disability, the Executive will receive an amount equal to the Executive’s Annual Compensation for the first year, and at our discretion thereafter; (4) termination within the 18 months following a Change of Control, excluding death, disability, or Cause, or if the Executive terminated his employment within 6 months of a Triggering Event, the Executive will receive a sum equal to the Severance Amount (defined as 2 times the Executive’s Annual Compensation), the Executive’s options to purchase shares of Common Stock or rights to acquire our securities will become immediately exercisable (subject to the necessary regulatory approvals), and we will pay the Executive’s reasonable legal fees and expenses incurred as a result of the termination (including those incurred contesting or disputing the termination or enforcing any right or benefit under the Severance Agreement). As a condition precedent to receiving any payment(s) upon termination, the Executive must execute a Release, which releases us from any action, causes of action, claims, or demands the Executive has or thereafter may have regarding any matters existing on the date of the Release. Subject to certain events and the Executive’s failure to tender the Release or his revocation thereof, our payment obligation to the Executive may change.

Indemnification Agreement

        On August 9, 2006, we entered into Indemnification Agreements with our directors and officers.  The following summary of the Indemnification Agreements is qualified in its entirety by reference to the full text of the Indemnification Agreement, a copy of which is attached to this Report as Exhibit 10.2 All capitalized terms in the following paragraph shall have the meanings ascribed to them in Indemnification Agreement.

        Under the Indemnification Agreements, if the Indemnitee is a party to an Action or is threatened to be made party to an Action, or is a witness on our behalf or on behalf of our affiliate(s), because of his service to us as an officer, director, or another Entity in any capacity at our request, we are obligated to defend, indemnify, and hold harmless the Indemnitee against judgments, fines, settlement payments and expenses, reasonable attorneys’ fees, expenses and costs of investigation, and any related appeals.  Notwithstanding the foregoing, we are not obligated to indemnify the Indemnitee where a judgment or final adjudication adverse to the Indemnitee shows (1) his acts were committee in bad faith or by gross negligence, or were the result of his active and deliberate dishonesty, which was material to the cause of action, or (2) the Indemnitee personally gained, in fact, a financial profit or other advantage, illegally obtained.  If the Indemnitee is only partially successful, we will indemnify the Indemnitee to the extent he was successful.  We will advance funds to the Indemnitee to pay expenses incurred in defending an Action in advance of to its final disposition, however, the Indemnitee must repay such advances if a court determines that the Indemnitee was not entitled to such advances.  The Indemnification Agreement will continue until the later of (1) 6 years after the Indemnitee has ceased to serve as an officer, director, or another Entity in any capacity at our request, or (2) the final termination of all pending or threatened Actions involving the Indemnitee. 

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Item 6.                       Exhibits

10.1	Form of Severance Agreement between us and our officers	*
10.2	Form of Indemnification Agreement between us and our directors and officers	*
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002	*
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002	*
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002	*

* Filed herewith

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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.

Date: August 14, 2006
	WESTERN GOLDFIELDS, INC.
	By: Raymond Threlkeld
	Name: Raymond Threlkeld Title: President and Chief Executive Offier

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