**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, 2007




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 333-144685




**WESTERN
      GOLDFIELDS INC.**


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




Ontario
            98
                - 0544546(State
                of other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)




2
      Bloor Street West, Suite 2102 , P.O. Box 110




Toronto,
      Ontario, Canada M4W 3E2


(Address
      of Principal Executive Offices)




416
      324 6000


(Issuer’s
      Telephone Number, Including Area Code)


Western
      Goldfields, Inc.


(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 x No o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).Yes o No 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, par value $.01 value per share
      -
      118,329,335 shares outstanding as of July 31, 2007.




Transitional
      Small Business Disclosure Format:  Yes o No x









INDEX




**PART
                I.**
            
            **FINANCIAL
                INFORMATION (unaudited)**
            
            3Item
                1.
            
            Cautionary
                Note Regarding Forward Looking Statements
            
            3Consolidated
                Financial Statements: (unaudited)Consolidated
                Balance Sheets
            
            4Consolidated
                Statements of Operations and ComprehensiveIncome(Loss)
            
            5Consolidated
                Statements of Shareholders’ Equity
            
            6Consolidated
                Statements of Cash Flows
            
            7Notes
                to the Consolidated Financial Statements
            
            8Item
                2.
            
            Management's
                Discussion and Analysis or Plan of Operation
            
            21Item
                3.
            
            Controls
                and Procedures
            
            32**PART
                II.**
            
            **OTHER
                INFORMATION**
            
            33Item
                1.
            
            Legal
                Proceedings
            
            33Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            33Item
                3.
            
            Defaults
                Upon Senior Securities
            
            33Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            33Item
                5.
            
            Other
                Information
            
            34Item
                6.
            
            Exhibits
            
            34





2




**PART
      1 - FINANCIAL INFORMATION**





**CAUTIONARY
      NOTE REGARDING FORWARD LOOKING STATEMENTS**





We
      have
      included and from time to time may make in our public filings, press releases
      or
      other public statements, certain statements, including, without limitation,
      those under “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in Part I, Item 2. 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. You are cautioned not
      to place undue reliance on these forward-looking statements. In addition, our
      management may make forward-looking statements to analysts, investors,
      representatives of the media and others. These forward-looking statements are
      not historical facts and represent only our beliefs regarding future events
      and,
      by their nature, are inherently uncertain and beyond our control.





The
      nature of our business makes predicting the future trends of our revenues,
      expenses and net income difficult. The risks and uncertainties involved in
      our
      business 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. Important factors that
      could cause actual results to differ from those in the forward-looking
      statements include, without limitation:





·
            the
                effect of political, economic and market conditions and geopolitical
                events;·
            the
                actions and initiatives of current and potential
                competitors;·
            our
                reputation;·
            investor
                sentiment; and·
            other
                risks and uncertainties detailed elsewhere throughout this
                report.




Accordingly,
      you are cautioned not to place undue reliance on forward-looking statements,
      which speak only as of the date on which they are made. We undertake no
      obligation to update publicly or revise any forward-looking statements to
      reflect the impact of circumstances or events that arise after the dates they
      are made, whether as a result of new information, future events or otherwise
      except as required by applicable law. You should, however, consult further
      disclosures we may make in future filings of our Annual Reports on Form 10-KSB,
      Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K, any amendments
      thereto, and in the corresponding documents filed in Canada.




3




**Item
      1. Financial Statements** ****


**WESTERN
                  GOLDFIELDS INC.****CONSOLIDATED
                  BALANCE SHEETS**June
                  30,
              
              December
                  31,2007
              
              2006(Unaudited)
              
              (Audited)**ASSETS**CURRENTASSETSCash
              
              $
              18,750,186
              
              $
              5,502,535Restricted
                  Cash (Note 5)
              
              
              7,500,000
              
              
              -Receivables
              
              
              147,352
              
              
              223,507Inventories
                  (Note 6)
              
              
              551,554
              
              
              511,663Prepaid
                  expenses
              
              
              763,127
              
              
              841,636TOTAL
                  CURRENT ASSETS
              
              
              27,712,219
              
              
              7,079,341Property,
                  plant, and equipment, net ofaccumulated
                  amortization (Note 7)
              
              
              41,862,081
              
              
              4,328,512Construction
                  in progress (Note 8)
              
              
              7,963,092
              
              
              2,880,775Gold
                  hedging contracts - mark-to-market gain (Notes 3, 12)
              
              
              758,877
              
              
              -Investments
                  - reclamation and remediation (Note 9)
              
              
              8,448,953
              
              
              6,337,006Long-term
                  deposits
              
              
              338,371
              
              
              329,146Long-term
                  prepaid expenses (Note 10)
              
              
              1,634,993
              
              
              1,009,555Deferred
                  debt issuance / stock offering costs (Note 11)
              
              
              3,318,806
              
              
              250,000TOTAL
                  OTHER ASSETS
              
              
              64,325,173
              
              
              15,134,994**TOTAL
                  ASSETS**
              
              $
              92,037,392
              
              $
              22,214,335**LIABILITIES
                  & STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              12,554,211
              
              $
              1,663,080Accounts
                  payable to related party (Note 17)
              
              
              25,387
              
              
              31,165Accrued
                  expenses
              
              
              3,364,577
              
              
              835,740Accrued
                  agency and commitment fees (Notes 12, 18)
              
              
              241,250
              
              
              -TOTAL
                  CURRENT LIABILITIES
              
              
              16,185,425
              
              
              2,529,985LONG-TERM
                  LIABILITIESReclamation
                  and remediation liabilities (Note 13)
              
              
              4,825,645
              
              
              4,805,473TOTAL
                  LIABILITIES
              
              
              21,011,070
              
              
              7,335,458COMMITMENTS
                  AND CONTINGENCIES (Note 18)STOCKHOLDERS'
                  EQUITYCommon
                  stock, of no par value, unlimited shares authorized;117,221,002
                  and 78,452,876 shares issued and outstanding,respectively
                  (Notes 14, 15)
              
              
              95,664,291
              
              
              32,884,798Share
                  subscription receivable
              
              
              (150,000
              )
              
              -Stock
                  options and warrants (Note 16)
              
              
              7,841,063
              
              
              7,674,270Accumulated
                  deficit
              
              
              (32,318,943
              )
              
              (25,678,233
              )Accumulated
                  other comprehensive income (loss)
              
              
              (10,089
              )
              
              (1,958
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              71,026,322
              
              
              14,878,877**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              92,037,392
              
              $
              22,214,335




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




4


**WESTERN
                    GOLDFIELDS INC.****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****AND
                    COMPREHENSIVE INCOME (LOSS)****(Unaudited)**Three
                    Months Ended June 30,
                
                Six
                    Months Ended June 30,2007
                
                2006
                
                2007
                
                2006REVENUESRevenues
                    from gold sales
                
                $
                1,546,073
                
                $
                2,104,315
                
                $
                2,778,877
                
                $
                4,878,943COST
                    OF GOODS SOLDMine
                    operating costs
                
                
                2,662,308
                
                
                1,892,336
                
                
                4,569,386
                
                
                3,871,503Mine
                    site administration
                
                
                681,925
                
                
                348,813
                
                
                1,112,824
                
                
                676,595Selling,
                    transportation, and refining
                
                
                6,252
                
                
                7,534
                
                
                11,627
                
                
                16,876Amortization
                    and accretion
                
                
                377,210
                
                
                335,030
                
                
                752,318
                
                
                647,244Royalties
                
                
                59,423
                
                
                80,383
                
                
                104,360
                
                
                183,243Inventory
                    adjustment
                
                
                115,310
                
                
                9,242
                
                
                (19,351
                )
                
                312,2103,902,428
                
                
                2,673,338
                
                
                6,531,164
                
                
                5,707,671GROSS
                    PROFIT (LOSS)
                
                
                (2,356,355
                )
                
                (569,023
                )
                
                (3,752,287
                )
                
                (828,728
                )EXPENSESGeneral
                    and administrative
                
                
                1,137,758
                
                
                1,105,652
                
                
                2,222,490
                
                
                2,175,604Stock
                    based compensation
                
                
                820,388
                
                
                730,231
                
                
                1,288,554
                
                
                1,770,156Exploration
                
                
                748,594
                
                
                272,260
                
                
                1,031,926
                
                
                711,2172,706,740
                
                
                2,108,143
                
                
                4,542,970
                
                
                4,656,977OPERATING
                    LOSS
                
                
                (5,063,095
                )
                
                (2,677,166
                )
                
                (8,295,257
                )
                
                (5,485,705
                )OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                524,750
                
                
                86,367
                
                
                1,042,253
                
                
                178,614Interest
                    expense
                
                
                (839
                )
                
                -
                
                
                (839
                )
                
                (20,434
                )Agency
                    and commitment fees
                
                
                (241,250
                )
                
                -
                
                
                (241,250
                )
                
                -Amortization
                    of deferred debt issuance costs
                
                
                (109,544
                )
                
                -
                
                
                (109,544
                )
                
                -Gain
                    on extinguishment of debt
                
                
                -
                
                
                -
                
                
                -
                
                
                142,949Gain
                    on mark-to-market of gold hedging contracts
                
                
                758,877
                
                
                -
                
                
                758,877
                
                
                -Gain
                    on foreign exchange
                
                
                124,200
                
                
                -
                
                
                205,050
                
                
                -Loss
                    on sale of assets
                
                
                -
                
                
                (18,837
                )
                
                -
                
                
                (18,837
                )Expenses
                    of Romarco merger termination
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,225,000
                )1,056,194
                
                
                67,530
                
                
                1,654,547
                
                
                (942,708
                )LOSS
                    BEFORE INCOME TAXES
                
                
                (4,006,901
                )
                
                (2,609,636
                )
                
                (6,640,710
                )
                
                (6,428,413
                )INCOME
                    TAXES
                
                
                -
                
                
                -
                
                
                -
                
                
                -NET
                    LOSS
                
                
                (4,006,901
                )
                
                (2,609,636
                )
                
                (6,640,710
                )
                
                (6,428,413
                )PREFERRED
                    STOCK DIVIDENDS (Note 14)
                
                
                -
                
                
                (4,479
                )
                
                -
                
                
                (16,979
                )NET
                    LOSS TO COMMON STOCKHOLDERS
                
                
                (4,006,901
                )
                
                (2,614,115
                )
                
                (6,640,710
                )
                
                (6,445,392
                )OTHER
                    COMPREHENSIVE INCOMEForeign
                    currency translation adjustment
                
                
                (2,874
                )
                
                (4,322
                )
                
                (8,131
                )
                
                (3,813
                )NET
                    COMPREHENSIVE LOSS
                
                $
                (4,009,775
                )
                $
                (2,613,958
                )
                $
                (6,648,841
                )
                $
                (6,432,226
                )BASIC
                    AND DILUTED NET LOSS PER SHARE
                
                $
                (0.04
                )
                $
                (0.04
                )
                $
                (0.06
                )
                $
                (0.11
                )WEIGHTED
                    AVERAGE NUMBER OFCOMMON
                    SHARES OUTSTANDING
                
                
                113,641,025
                
                
                62,389,376
                
                
                108,240,372
                
                
                56,025,181
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  5
  **WESTERN
            GOLDFIELDS INC.**
 **CONSOLIDATED
              STATEMENTS OF STOCKHOLDERS' EQUITY**
 (Six
                      months ended June 30, 2007 - unaudited. Year ended December
                      31, 2006 -
                      audited)Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  Share
                  
                  Stock
                      Options
                  
                  
                  
                  OtherNumber
                  
                  
                  
                  Number
                  
                  
                  
                  Subscription
                  
                  and
                  
                  Accumulated
                  
                  Comprehensiveof 
                      Shares
                  
                  Amount
                  
                  of 
                      Shares
                  
                  Amount
                  
                  Receivable
                  
                  Warrants
                  
                  Deficit
                  
                  Income
                      (Loss)
                  
                  TotalBalance,
                      December 31, 2005
                  
                  
                  1,000,000
                  
                  $
                  10,000
                  
                  
                  39,468,051
                  
                  $
                  13,014,333
                  
                  $
                  -
                  
                  $
                  4,942,188
                  
                  $
                  (14,077,989
                  )
                  $
                  -
                  
                  $
                  3,888,532Common
                      stock and warrants issued by way of privateplacement
                      (unaudited)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  20,000,000
                  
                  
                  4,012,000
                  
                  
                  -
                  
                  
                  1,988,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  6,000,000Common
                      shares issued on conversion ofseries
                      A preferred stock (Note 14)
                  
                  
                  (1,000,000
                  )
                  
                  (10,000
                  )
                  
                  3,125,000
                  
                  
                  25,000
                  
                  
                  -
                  
                  
                  (15,000
                  )
                  
                  -
                  
                  
                  -Common
                      shares issued on conversion ofseries
                      A preferred stock warrants
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,562,500
                  
                  
                  300,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  300,000Common
                      shares issued on conversion ofcommon
                      stock warrants
                  
                  
                  -
                  
                  
                  -
                  
                  
                  12,647,325
                  
                  
                  11,533,811
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  11,533,811Common
                      shares issued on exersiceof common
                      stock options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,135,000
                  
                  
                  632,750
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  632,750Common
                      shares issued for exploration assets andservices
                      and severance agreements
                  
                  
                  -
                  
                  
                  -
                  
                  
                  515,000
                  
                  
                  683,700
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  683,700Options
                      issued for directors' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,032,488
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,032,488Options
                      issued for officers' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,764,945
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,764,945Options
                      issued for employees' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  411,853
                  
                  
                  -
                  
                  
                  -
                  
                  
                  411,853Warrants
                      issued for consultants' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  233,000
                  
                  
                  -
                  
                  
                  -
                  
                  
                  233,000Exercise
                      and expiration of warrants & options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,683,204
                  
                  
                  -
                  
                  
                  (2,683,204
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -Net
                      loss for the twelve monthsended
                      December 31, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (11,583,265
                  )
                  
                  -
                  
                  
                  (11,583,265
                  )Dividend
                      on preferred stock (Note 14)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (16,979
                  )
                  
                  -
                  
                  
                  (16,979
                  )Other
                      comprehensive income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,958
                  )
                  
                  (1,958
                  )Balance,
                      December 31, 2006
                  
                  
                  -
                  
                  
                  -
                  
                  
                  78,452,876
                  
                  
                  32,884,798
                  
                  
                  -
                  
                  
                  7,674,270
                  
                  
                  (25,678,233
                  )
                  
                  (1,958
                  )
                  
                  14,878,877Common
                      shares and warrants issued under prospectussupplement
                  
                  
                  -
                  
                  
                  -
                  
                  
                  33,330,000
                  
                  
                  59,191,197
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  59,191,197Common
                      shares issued on conversion ofcommon
                      stock warrants
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,339,719
                  
                  
                  1,965,552
                  
                  
                  (150,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,815,552Common
                      shares issued on exersiceof
                      common stock options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,098,407
                  
                  
                  500,983
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  500,983Options
                      issued for directors' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  164,650
                  
                  
                  -
                  
                  
                  -
                  
                  
                  164,650Options
                      issued for officers' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  500,582
                  
                  
                  -
                  
                  
                  -
                  
                  
                  500,582Options
                      issued for employees' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  579,147
                  
                  
                  -
                  
                  
                  -
                  
                  
                  579,147Options
                      issued for consultants' services
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  44,175
                  
                  
                  
                  
                  
                  -
                  
                  
                  44,175Exercise
                      and expiration of warrants & options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,121,761
                  
                  
                  -
                  
                  
                  (1,121,761
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -Net
                      loss for the six months endedJune
                      30, 2007
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (6,640,710
                  )
                  
                  -
                  
                  
                  (6,640,710
                  )Other
                      comprehensive income (loss)
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (8,131
                  )
                  
                  (8,131
                  )Balance,
                      June 30, 2007
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  117,221,002
                  
                  $
                  95,664,291
                  
                  $
                  (150,000
                  )
                  $
                  7,841,063
                  
                  $
                  (32,318,943
                  )
                  $
                  (10,089
                  )
                  $
                  71,026,322


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




6


**WESTERN
                  GOLDFIELDS INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(Unaudited)**Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (4,006,901
              )
              $
              (2,609,636
              )
              $
              (6,640,710
              )
              $
              (6,428,413
              )Adjustments
                  to reconcile net loss to net cash provided (used) by operating
                  activities:Amortization
                  and depreciation (Note 7)
              
              
              297,671
              
              
              274,000
              
              
              592,407
              
              
              529,509Amortization
                  of deferred debt issuance costs
              
              
              109,544
              
              
              -
              
              
              109,544
              
              
              -Accretion
                  expense (Note 9)
              
              
              84,294
              
              
              58,868
              
              
              168,588
              
              
              117,735Loss
                  on sale of assets and investments
              
              
              -
              
              
              18,837
              
              
              -
              
              
              18,837Interest
                  on investments - reclamation and remediation
              
              
              (86,644
              )
              
              (67,749
              )
              
              (170,269
              )
              
              (151,696
              )Common
                  stock issued for exploration assets and services
              
              
              -
              
              
              -
              
              
              -
              
              
              136,500Stock
                  based compensation
              
              
              820,388
              
              
              730,232
              
              
              1,288,554
              
              
              2,003,157Gain
                  on mark-to-market of gold hedging contracts
              
              
              (758,877
              )
              
              -
              
              
              (758,877
              )
              
              -Changes
                  in assets and liabilities:Decrease
                  (increase) in:Restricted
                  cash
              
              
              (7,500,000
              )
              
              -
              
              
              (7,500,000
              )
              
              -Accounts
                  receivable
              
              
              174,147
              
              
              (7,459
              )
              
              76,155
              
              
              (11,010
              )Inventories
              
              
              31,405
              
              
              (44,146
              )
              
              (39,891
              )
              
              229,213Prepaid
                  expenses
              
              
              (369,126
              )
              
              50,286
              
              
              (546,929
              )
              
              103,719Long
                  term deposits
              
              
              (5,938
              )
              
              (2,385
              )
              
              (9,224
              )
              
              (4,872
              )Increase
                  (decrease) in:Accounts
                  payable
              
              
              (158,672
              )
              
              (354,565
              )
              
              (948,783
              )
              
              (171,865
              )Accounts
                  payable - related parties
              
              
              5,138
              
              
              118,201
              
              
              (5,778
              )
              
              118,201Accrued
                  expenses
              
              
              (794,623
              )
              
              215,461
              
              
              200,560
              
              
              322,255Accrued
                  expenses - related parties
              
              
              -
              
              
              -
              
              
              -
              
              
              (45,835
              )Accrued
                  interest expense
              
              
              -
              
              
              -
              
              
              -
              
              
              (48,695
              )Accrued
                  agency and commitment fees
              
              
              241,250
              
              
              -
              
              
              241,250
              
              
              -Net
                  cash provided (used) by operating activities
              
              
              (11,916,944
              )
              
              (1,620,056
              )
              
              (13,943,403
              )
              
              (3,283,260
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of property & equipment, including constructionin
                  progress
              
              
              (25,661,610
              )
              
              (146,474
              )
              
              (31,376,510
              )
              
              (387,779
              )Increase
                  in reclamation and remediation investment
              
              
              (2,090,094
              )
              
              -
              
              
              (2,090,094
              )
              
              -Net
                  cash provided (used) by investing activities
              
              
              (27,751,704
              )
              
              (146,474
              )
              
              (33,466,604
              )
              
              (387,779
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Principal
                  payments on loan
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,205,186
              )Deferred
                  debt issuance costs
              
              
              (520,516
              )
              
              -
              
              
              (850,073
              )
              
              -Common
                  stock issued for cash
              
              
              1,006
              
              
              -
              
              
              59,191,196
              
              
              4,012,000Warrants
                  issued for cash
              
              
              -
              
              
              -
              
              
              -
              
              
              1,988,000Exercise
                  of options to purchase common stock
              
              
              355,558
              
              
              3,650,250
              
              
              500,983
              
              
              3,650,250Exercise
                  of warrants to purchase common stock
              
              
              1,436,172
              
              
              -
              
              
              1,815,552
              
              
              -Preferred
                  stock dividends (Note 14)
              
              
              -
              
              
              (51,354
              )
              
              -
              
              
              (51,354
              )Net
                  cash provided (used) by financing activities
              
              
              1,272,220
              
              
              3,598,896
              
              
              60,657,658
              
              
              7,393,710Change
                  in cash
              
              
              (38,396,428
              )
              
              1,832,366
              
              
              13,247,651
              
              
              3,722,671Cash,
                  beginning of period
              
              
              57,146,614
              
              
              1,942,692
              
              
              5,502,535
              
              
              52,387Cash,
                  end of period
              
              $
              18,750,186
              
              $
              3,775,058
              
              $
              18,750,186
              
              $
              3,775,058**SUPPLEMENTAL
                  CASH FLOW DISCLOSURES:**Interest
                  paid
              
              $
              839
              
              $
              69,430
              
              $
              839
              
              $
              69,430**NON-CASH
                  FINANCING AND****INVESTING
                  ACTIVITIES:**Stock
                  options and warrants issued for services
              
              $
              820,388
              
              $
              730,232
              
              $
              1,288,554
              
              $
              2,003,157Exploration
                  fees and assets paid by issuance of stock
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              136,500Equipment
                  purchases included in accounts payable
              
              $
              11,831,783
              
              $
              -
              
              $
              11,831,783
              
              $
              -Deferred
                  debt issuance costs included in accrued expenses
              
              $
              2,016,277
              
              $
              -
              
              $
              2,328,277
              
              $
              -


The
        accompanying notes are an integral part of these consolidated financial
        statements.
  7




**WESTERN
      GOLDFIELDS INC.**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**1.**  **ORGANIZATION
      AND DESCRIPTION OF**  **BUSINESS**




Western
      Goldfields Inc. (hereinafter “the Company” or “WGI Ontario”) and its wholly
      owned subsidiaries are engaged in the exploration for, development of and
      extraction of precious metals, principally in North America. The Company’s four
      wholly owned subsidiaries are: Western Goldfields USA Inc. (a holding company),
      Western Goldfields (Canada) Inc. (a management company), Western Mesquite Mines,
      Inc. (an operating company), and Calumet Mining Company (an exploration
      company).





On
      June
      19, 2007 the shareholders of the Company’s predecessor, Western Goldfields,
      Inc., an Idaho corporation (“WGI Idaho”), approved an agreement and plan of
      merger effective June 29, 2007 whereby the Company’s place of incorporation was
      changed from Idaho, USA to Ontario, Canada, and its name was changed from
      Western Goldfields, Inc. to Western Goldfields Inc. For accounting purposes,
      the
      reorganization has been treated as a reorganization of entities under common
      control which has not resulted in any changes in the consolidated carrying
      amounts of assets, liabilities and shareholders’ equity. As used herein, the
      term “the Company” refers to WGI Ontario and its predecessor WGI
      Idaho.





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. Since that time, the Company’s operations
      have been restricted to the production of gold from material that was placed
      on
      heap leach pads by previous owners of the mine. Revenue from gold sales since
      January 2004 has helped to sustain operations pending reactivation of the
      mine.





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with Investec Bank (UK) Limited,
      dated March 30, 2007 and amended and restated on May 31, 2007, under which
      facility WMMI can borrow up to $105,000,000 in connection with the development
      of the Mesquite Mine. Interest on advances will be at U.S. LIBOR plus 2.2%
      until
      completion of the project (as defined) and 1.75% after completion. On June
      14,
      2007 the Company announced that it had satisfied or had received a waiver on
      all
      conditions precedent to the availability of the term loan facility. The Company
      anticipates drawing $87,300,000 to complete the Mesquite development plan.
      The
      agreement, in conjunction with the equity financing in January and February
      of
      2007, completes the financing requirements for Mesquite.





In
      January and February, 2007 the Company completed a common share equity
      financing, including an underwriters’ over-allotment option, which provided the
      Company with net proceeds of approximately $59,200,000.





In
      August, 2006 the Company announced the completion of the Mesquite feasibility
      study, which indicated proven and probable reserves of 2.36 million ounces
      of
      gold. In addition in March 2007, the Company announced that proven and probable
      reserves had increased to 2.77 million ounces.





In
      November, 2006 the Company placed orders valued at approximately $60,900,000
      for
      the majority of the mining vehicle fleet required for resumed mining operations
      at Mesquite. As at June 30, 2007 orders worth approximately $73,800,000 had
      been
      placed for the fleet and ancillary equipment, against which deliveries of
      approximately $37,600,000 had been received.





In
      February 2006, the Company announced the appointment of new directors and a
      new
      management team and the completion of a $6,000,000 private placement financing.
      This financing significantly improved the Company’s financial position, enabling
      it to repay all outstanding debt and proceed towards completion of the Mesquite
      feasibility study.





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




8




**2.**  **BASIS
      OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**





The
      consolidated financial statements include the accounts of Western Goldfields
      Inc. and its 100% owned subsidiaries: Western Goldfields USA Inc., Western
      Goldfields (Canada) Inc., Western Mesquite Mines, Inc., and Calumet Mining
      Company (collectively “Western Goldfields”.) The consolidated financial
      statements include the assets and liabilities of Western Goldfields as at June
      30, 2007 and its results of operations and its cash flows for the period ended
      June 30, 2007. All significant inter-company accounts and transactions have
      been
      eliminated on consolidation.





The
      classification of certain items in these financial statements differs from
      that
      adopted in prior periods as a result of grouping or allocation. Such items
      have
      been reclassified in the financial statements of the prior period to conform
      to
      the new basis.





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.





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, 2006. These interim statements should be read
      together with Western Goldfields’ audited financial statements for the period
      ended December 31, 2006. 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.
      DERIVATIVE INSTRUMENTS**





The
      Company accounts for its forward sales of gold in conformity with the following
      statements issued by the Financial Accounting Standards Board (“FASB”):
      Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137,
“Accounting for Derivative Instruments and Hedging Activities - Deferral of
      the
      Effective Date of FASB No. 133,” SFAS No. 138, “Accounting for Certain
      Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.
      These standards establish accounting and reporting standards for derivative
      instruments, including certain derivative instruments embedded in other
      contracts, and for hedging activities. They require that an entity recognize
      all
      derivatives as either assets or liabilities in the balance sheet and measure
      those instruments at fair value.





A
      derivative may be specifically designated as a hedge of financial risk exposures
      of anticipated transactions if, both at the inception of the hedge and
      throughout the hedge period, the changes in fair value of the contract
      substantially offset the effect of commodity price changes on the anticipated
      transactions and if it is probable that the transactions will occur. Pursuant
      to
      such a designation, the income effect of the change in derivative values was
      previously accounted for in other comprehensive income based upon the Company's
      valuation of the associated financial gain or loss. Any change arising from
      the
      determination of the derivative's effectiveness is accounted for as a charge
      to
      current operations.





The
      Company has not designated its gold forward sales contracts entered into in
      2007
      as effective hedges. Accordingly the hedge accounting rules of SFAS No.133
      are
      not being applied and the period-end mark-to-market of these contracts is
      immediately reflected on the income statement of the Company and the cumulative
      effect is reflected as an asset or liability on the balance sheet.




9




**4.**  **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      February 2007 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an amendment of FASB Statement No.115”. The Statement permits entities
      to choose to measure many financial instruments and certain other items at
      fair
      value. The objective is to improve financial reporting by providing entities
      with the opportunity to mitigate volatility in reporting earnings caused by
      measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. The Statement is expected to expand the
      use
      of fair value measurement and is effective as of the start of the Company’s
      first fiscal year that commences after November 15, 2007. The Company is
      currently evaluating the impact of adoption of SFAS No.159 on its overall
      results of operations or financial position.





**5.**  **RESTRICTED
      CASH**





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with Investec Bank (UK) Limited,
      dated March 30, 2007 and amended and restated on May 31, 2007 (note 12). Under
      the terms of this facility the Company has set aside $7,500,000 in a Cost
      Overrun Account until Completion of the Mesquite Mine development project,
      which
      occurs on satisfaction of physical and economic completion tests as set out
      in
      the credit agreement. At Completion, unused funds will be applied to fund a
      Debt
      Service Reserve Account, established to hold an amount equal to the debt service
      amounts payable on the next Repayment Date as set out in the credit agreement,
      and thereafter any surplus funds may be returned to the Company. Interest earned
      on restricted cash is for the account of the Company.




**6.**  **INVENTORIES**





Inventories
      consist of the following:





**June
                30,**
              **2007**
            
            **December
                31,**
              **2006**Metal-in-Process
            
            $
            289,996
            
            $
            270,645Supplies
            
            
            261,558
            
            
            241,018Total
                inventories
            
            $
            551,554
            
            $
            511,663





Metal-in-process
      contained approximately 460 and 441 ounces of gold as of June 30, 2007 and
      December 31, 2006, respectively.




**7.**  **PROPERTY
      AND EQUIPMENT**





The
      following is a summary of property, equipment, and accumulated depreciation
      at
      June 30, 2007 and December 31, 2006:





**June
                30,**
              **2007**
            
            **December
                31,**
              **2006**Buildings
            
            $
            3,550,000
            
            $
            3,550,000Equipment
            
            
            42,146,465
            
            
            4,020,49145,696,465
            
            
            7,570,491Less
                accumulated amortization and depreciation
            
            
            (3,834,384
            )
            
            (3,241,979
            )Net
                Property and Equipment
            
            $
            41,862,081
            
            $
            4,328,512





Amortization
      and depreciation expense for the six months ended June 30, 2007 and 2006 was
      $592,407 and $529,509 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. 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.




10




**8.**  **CONSTRUCTION
      IN PROCESS**





The
      following is a summary of the major components of construction in process at
      June 30, 2007 and December 31, 2006:





**June
                30,**
              **2007**
            
            **December
                31,**
              **2006**Mining
                fleet and ancillary equipment
            
            $
            -
            
            $
            327,359Leach
                pad expansion
            
            
            1,980,573
            
            
            -Building
                construction and site infrastructure
            
            
            4,059,317
            
            
            2,237,614Development
                drilling
            
            
            1,923,202
            
            
            315,802$
            7,963,092
            
            $
            2,880,775





Construction
      in process is accumulated and carried forward at cost until completion of
      construction or until the equipment is placed into service and thereafter is
      amortized over its expected useful life.





Development
      drilling represents drilling costs at Mesquite Mine that have been determined
      will add to previously established proven and probable reserves. These costs
      are
      accumulated until commencement of production and thereafter are amortized on
      a
      units-of-production basis.





**9.**  **RECLAMATION
      AND REMEDIATION INVESTMENTS AND BONDS**





The
      Company has a bonding and insurance program, primarily with American
      International Specialty Lines Insurance Company (“AIG”), in respect of the
      operations and closure liabilities of the Mesquite Mine. Under the program,
      the
      Company initially paid $5,998,994 into a reimbursement account with AIG,
      representing the net present value of expected reclamation costs. The
      feasibility study completed in August 2006 estimated proven and probable mineral
      reserves at 2.36 million gold ounces. In March 2007 the Company announced that
      it had increased proven and probable reserves at Mesquite from 2.36 million
      ounces to 2.77 million ounces and had increased the reserve life of the mine
      by
      approximately two years. On the basis of these increases, the Company has agreed
      with AIG and the regulatory agencies to revisions in its reclamation cost
      estimates. As a consequence, in May 2007 the bonding program was increased
      from
      approximately $8,700,000 to approximately $11,300,000 and the Company was
      required to place an additional $2,090,094 in the reimbursement account with
      AIG. In addition, changes were made to the insurance program as more fully
      described in Note 10 below.





During
      the second half of 2006, the Company commenced closure procedures in respect
      to
      the Vista heap leach pad and since that time has submitted related costs of
      $349,330 to AIG for reimbursement.





The
      following is a summary of cumulative activity in the reimbursement account
      as at
      June 30, 2007 and December 31, 2006:


**June
                    30,**
                  **2007**
                
                
                **December
                    31,**
                  **2006**Original
                    policy premium
                
                $
                5,998,994
                
                $
                5,998,994Additional
                    policy premium
                
                
                2,090,094
                
                
                -Interest
                    earned from inception
                
                
                709,195
                
                
                538,8178,798,283
                
                
                6,537,811Reclamation
                    costs reimbursed
                
                
                (349,330
                )
                
                (200,805
                )Closing
                    balance
                
                $
                8,448,953
                
                $
                6,337,006





11




The
      following bonds have been issued by AIG and approved by regulatory agencies
      under the bonding component of the insurance program:





**Bond
                Number**
            
            **Inception
                Date**
            
            **Value**
            
            **Obligee(s)**ESD
                7315360
            
            
            11/7/2003
            
            $
            1,218,200
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315361
            
            
            11/7/2003
            
            $
            1,468,000
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315362
            
            
            11/7/2003
            
            $
            61,783
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315363
            
            
            11/7/2003
            
            $
            550,000
            
            
            California
                Water Quality Control BoardESD
                7315358
            
            
            11/7/2003
            
            $
            6,978,400
            
            
            U.S.
                Bureau of Land ManagementESD
                7315359
            
            
            11/7/2003
            
            $
            50,000
            
            
            California
                State Lands CommissionESD
                7315533
            
            
            5/30/2007
            
            $
            976,800
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementCalifornia
                State lands Commission




**10.**  **LONG-TERM
      PREPAID EXPENSES**




The
      Company has paid advance premiums in respect of insurance policies to cover
      environmental risks at the Mesquite Mine. The insurance program has recently
      been re-evaluated in light of the increase in reserves and forecast mine life
      at
      Mesquite.





The
      insurance program covers closure and reclamation risk in excess of the amount
      covered by the Investment - Remediation and Reclamation account ($8,448,953
      as
      at June 30, 2007), to an aggregate limit of $17,500,000 and expires November
      7,
      2020. The program limit and term were increased from $14,000,000 and November
      7,
      2014 respectively, effective May 30, 2007.





The
      program also covers pollution and remediation risk up to $10,000,000. Coverage
      pertaining to existing conditions and new conditions expires on November 7,
      2013
      and November 7, 2008 respectively. The program limit was increased from
      $5,000,000 effective May 31, 2007.





The
      premium cost is being amortized over the terms of the policies and is summarized
      below.





**June
                30,**
            
            **December
                31,****2007**
            
            **2006**Original
                Policy Premiums
            
            $
            1,642,621
            
            $
            1,642,621Additional
                Policy Premium
            
            
            724,163
            
            
            -Amortization
                to date
            
            
            (555,205
            )
            
            (481,417
            )Unamortized
                Premium Cost
            
            
            1,
                811,579
            
            
            1,161,204Current
                Portion
            
            
            (176,586
            )
            
            (151,649
            )Long-Term
                Prepaid Expenses
            
            $
            1,634,993
            
            $
            1,009,555





12




**11.**
            **DEFERRED
                DEBT ISSUANCE COSTS**





Debt
      issuance costs, primarily bank fees and professional fees and expenses,
      associated with the term loan facility (note 12), incurred to June 30, 2007
      were
      $3,468,350. These costs are being amortized on a straight line basis over the
      term of the facility to December 31, 2014. Amortization in the three month
      period to June 30, 2007 was $109,544.





**12.**  **LOANS
      PAYABLE**





**Term
      Loan Facility**





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with Investec Bank (UK) Limited,
      dated March 30, 2007 and amended and restated on May 31, 2007, under which
      WMMI
      can borrow up to $105,000,000 in connection with the development of the Mesquite
      Mine. The facility is for a term of 7.75 years until December 31, 2014 and
      comprises a multiple-draw term loan of which $87,300,000 will be available
      as
      required for the development of the Mesquite Mine; the remainder will be
      available for up to 12 months after completion for corporate purposes.  The
      facility is secured by all of the assets of WMMI and a pledge of the shares
      of
      WMMI owned by the Company. In addition, until Completion, the facility will
      be
      guaranteed by the Company.





Interest
      on the term loan is charged at U.S. LIBOR plus 2.2% prior to completion and
      U.S.
      LIBOR plus 1.75% after completion.  Completion occurs upon the satisfaction
      of certain technical and financial criteria as defined in the credit agreement.
       Repayment of the project facility will be on a semi-annual basis,
      commencing December 31, 2008. The
      first
      four semi-annual repayments will be based on 9.0%, 8.5%, 9.0% and 7.0%,
      respectively, of the loan outstanding at the end of the Availability Period.
      The
      following eight repayments will range from 5.5% to 7.25% of the loan
      outstanding, and the final repayment on December 31, 2014 will be 16.25% of
      the
      loan outstanding. In
      addition to the scheduled repayments, mandatory prepayments are required
      semi-annually based on excess cash flow from the Mesquite Mine. A commitment
      fee
      of 0.75% is payable on the undrawn balance of the facility.





The
      availability of funds under the term loan facility was subject to certain
      conditions precedent including WMMI entering into an acceptable gold hedging
      program. On June 14, 2007 the Company announced that all requirements needed
      to
      make the facility available for drawdown had been met and that it had executed
      flat forward sales contracts for 429,000 ounces of gold at a price of $801
      per
      ounce. The hedging contracts represent a commitment of 5,500 ounces per month
      for 78 months commencing July 2008 with the last commitment deliverable in
      December 2014. The contracts were marked-to-market as at June 30, 2007 and
      a
      gain of $758,877 has been included as a reduction in other income (expense)
      for
      the period.





**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 price
      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.




13




**13.**  **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, 2006 and is in conformity with SFAS No.
      143. The increase in the net present value of the liability is recognized for
      accounting purposes as accretion expense during the period under
      review.





The
      feasibility study completed in August 2006 estimated a mineral reserve for
      the
      Mesquite Mine of 1.23 million gold ounces of proven reserves and 1.13 million
      gold ounces of probable reserves and a project life of 13 years. In light of
      this information, the Company completed a review of the reclamation plan and
      the
      SFAS No. 143 reclamation and remediation liability as at September 1, 2006.
      The
      net present value of these obligations was revised to $4,893,690. The difference
      between this revised estimate and the accreted value up to August 31, 2006,
      was
      accounted for as a recovery of $1,459,859.





The
      following table sets out the activity for the Company’s reclamation and
      remediation liabilities for the period ended June 30, 2007 and the year ended
      December 31, 2006:





**June
                30,**
              **2007**
            
            **December
                31, 2006**Opening
                Balance
            
            $
            4,805,473
            
            $
            6,196,570Accretion
            
            
            168,588
            
            
            269,568Reclamation
                costs incurred
            
            
            (148,416
            )
            
            (200,805
            )Reduction
                in the present value of obligations
            
            
            -
            
            
            (1,459,859
            )Ending
                Balance
            
            $
            4,825,645
            
            $
            4,805,473




**14.**  **PREFERRED
      SHARES**




Following
      the reorganization effective June 29, 2007, the Company has no authorized class
      of preferred shares. Prior to the reorganization, Western Goldfields, Inc.
      had
      25,000,000 shares, $0.01 par value per share, of preferred stock authorized
      of
      which nil were issued. As of December 31, 2006, there were nil shares issued
      and
      outstanding.





On
      December 31, 2004, the Company entered into a subscription agreement with RAB
      Special Situations, LLP (“RAB”), pursuant to which the Company issued and sold
      to RAB 1,000,000 shares of its Series “A-1” convertible preferred stock (“Series
      A Preferred”) and warrants to purchase up to 500,000 shares of its Series A
      Preferred stock, for an aggregate purchase price of $500,000.





The
      holders of Series A Preferred were 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
      on
      May 31, 2006.





The
      number of shares of Series A Preferred and the purchase price per share of
      Series A Preferred were subject to adjustment under certain circumstances,
      including upon the deemed issuance of additional shares of the Company’s common
      stock. On August 25, 2005, the Company issued an option to Romarco to purchase
      common shares at a price of $0.16 each, which constituted a deemed issuance.
      Accordingly the conversion price of the Series A Preferred was reduced to
      $0.16.




14




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. Pursuant to the deemed issuance referred
      to
      above, the exercise price of the warrants was reduced to $0.19





On
      May
      31, 2006, RAB converted its holding of 1,000,000 Series A Preferreds at a
      conversion price of $0.16 per share to acquire 3,125,000 shares of common stock
      and exercised its warrants at a conversion price of $0.19 each to acquire
      1,562,500 shares of common stock. 275,736 of these shares were issued to RAB
      on
      August 11, 2006.




**15.**  **COMMON
      SHARES**





**Reclassification
      of Additional Paid In Capital**





Pursuant
      to the reorganization effective June 29, 2007, the Company’s authorized share
      capital, as an Ontario corporation, comprises solely an unlimited number of
      common shares of no par value. Prior to the reorganization, the Company’s
      authorized common stock, as an Idaho corporation, was 500,000,000 common shares
      of $0.01 par value. The impact of the conversion from shares of $0.01 stated
      value to shares of no par value has been reflected in the financial statements
      on a retroactive basis. Accordingly, amounts at credit of the Additional Paid
      In
      Capital component of Shareholders’ Equity as at June 30, 2007 and December 31,
      2006 have been reclassified as Common Stock.





**Public
      Offering of Common Shares**





During
      the first quarter of 2007, the Company issued 33,330,000 common shares at a
      price of $1.91 (Cdn. $2.25) under a prospectus supplement to the Company’s shelf
      prospectus dated October 27, 2006. Net proceeds to the Company, after estimated
      expenses of approximately $4,500,000, were approximately $59,200,000.


**Other
        Issuances of Common Shares**


On
      January 18, 2007, the Company announced that it was offering 1,950,000 common
      shares to certain of its shareholders at the same price as the above offering.
      This offering was made because certain shareholders of the Company’s
      predecessor, WGI Idaho, who owned shares of common stock issued prior to July
      1,
      1997 may have had preemptive rights to purchase shares to maintain their
      proportional stock ownership in the WGI Idaho; however, the Company believes
      there is uncertainty with respect to whether such rights existed. In light
      of
      this uncertainty and without admitting that such rights existed, in connection
      with the market offering, WGI Idaho provided holders of its common stock whose
      holdings could be traced back to common stock issued prior to July 1, 1997,
      the
      opportunity to purchase shares on the same terms as this offering. No
      shareholders responded to the offering which expired, unexercised, on February
      14, 2007. No pre-emptive rights attach to the shares of WGI
      Ontario.





Under
      the
      terms of severance agreements dated October 21, 2005 with two former executives,
      the Company was obligated to issue an aggregate of 240,000 shares of common
      stock in the event of the completion of a feasibility study in respect of the
      Mesquite Mine. Completion of such a study was announced on August 9, 2006 at
      which date the closing price of the Company’s common shares was $2.28. The
      shares issuable in respect of this obligation were issued on October 25, 2006
      and the cost of $547,200 was recorded as compensation expense.





On
      May
      31, 2006 the Company issued 2,941,176 shares of common stock upon the conversion
      by 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 issued to RAB
      in
      respect of these transactions on August 11, 2006.




15





On
      February 22, 2006, the Company issued 200,000 shares of common stock to the
      shareholders of Nevada Colca Gold Inc. (“Nevada Colca”) under the terms of an
      Asset Purchase Agreement dated January 24, 2006. The shares were valued at
      $120,000.





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.




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.





During
      the year ended December 31, 2006, the Company issued 12,647,325 shares of common
      stock for cash consideration of $11,533,810 upon the exercise of 11,421,310
      warrants to purchase common shares at $1.00 each, 250,000 warrants to purchase
      common shares at $0.45 each, and upon the cashless exercise of a further
      2,501,138 warrants.





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





In
      addition, 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.





**16.**  **STOCK
      OPTIONS AND WARRANTS**





The
      Company estimates the fair value of options and warrants using the Black-Scholes
      Option Price Calculation. Some options and warrants may be exercised by means
      of
      a “cash-less exercise” to receive a number of shares of common stock equal in
      market value to the difference between the market value of the shares of common
      stock issuable under the option or warrant and the total cash exercise price
      of
      the option or warrant being exercised.





**Options**





During
      the six months ended June 30, 2007, 1,145,282 options were exercised for cash
      proceeds of $500,983. Of these options exercised, 150,000 were exercised under
      the cashless method requiring a corresponding reduction in the amount of common
      stock issued in relationship to its cash value at the time the options were
      exercised.





On
      June
      29, 2007, the Company issued 50,000 options to an employee with an exercise
      price of $2.46 per share. The options vest in three equal annual installments
      beginning on June 29, 2007, and were fair valued at $101,500.





On
      April
      4, 2007, the Company issued 655,000 options to employees with an exercise price
      of $1.96 per share. The options vest in three equal annual installments
      beginning on April 4, 2007 and were fair valued at $1,074,200.





On
      August
      9, 2006, the Company issued 475,000 options to employees, with an exercise
      price
      of $2.28 per share. The options vest in three equal annual installments
      beginning on August 9, 2006. The options were fair valued at
      $931,950.





On
      June
      14, 2006, the Company issued 500,000 options to an officer, with an exercise
      price of $2.03 per share. The options vest in three equal annual installments
      beginning on June 14, 2006. The options were fair 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 vest in three equal installments beginning
      on June 14, 2006 and thereafter on April 13, 2007 and 2008. The options were
      fair 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 vest in
      three equal installments beginning on June 14, 2006 and thereafter on February
      13, 2007 and 2008. The options were fair valued at $2,500,400.




771,650
      options expired and 1,135,000 options were exercised at an average price of
      $0.56 for proceeds of $632,750 during the year ended December 31, 2006.




16




The
      following is a summary of stock option activity for the six month period ended
      June 30, 2007 and the year ended December 31, 2006:


**Shares**
              
              
              **Weighted
                  Average Exercise Price**
              
              
              **Weighted
                  Average Fair Value**Balance
                  January 1, 2006
              
              
              6,672,900
              
              $
              0.69Granted
              
              
              8,895,000
              
              $
              0.56Exercised
                  / Expired
              
              
              (1,906,650
              )
              
              0.66Outstanding
                  at December 31, 2006
              
              
              13,661,250
              
              $
              0.61Exercisable
                  at December 31, 2006
              
              
              7,697,922
              
              $
              0.64Weighted
                  average fair value of options as ofDecember
                  31, 2006
              
              
              
              
              
              
              
              $
              0.43Balance
                  January 1, 2007
              
              
              13,661,250
              
              $
              0.61Granted
              
              
              705,000
              
              $
              2.00Exercised
                  / Expired
              
              
              (1,145,282
              )
              $
              0.52Outstanding
                  at June 30, 2007
              
              
              13,220,968
              
              $
              0.68Exercisable
                  at June 30, 2007
              
              
              10,264,588
              
              $
              0.64Weighted
                  average fair value of options as of
                June
                  30, 2007
              
              
              
              
              
              
              
              $
              0.43




**Warrants**





On
      February 14, 2006, the Company issued 10,000,000 warrants as part of a private
      placement of 20,000,000 units. Each unit consisted of one share of common stock
      and one half of one warrant to purchase one share of common stock, exercisable
      at $0.45 per share. In addition, on February 18, 2006, the Company issued
      1,000,000 warrants to a consulting firm at an exercise price of $0.30 per
      share.





The
      following is a summary of warrant activity for the six month period ended June
      30, 2007 and the year ended December 31, 2006:


**6
                    Months**
                  **Ended
                    June 30, 2007**
                
                **Year
                    ended**
                  **December
                    31, 2006**Balance,
                    start of period
                
                
                17,054,232
                
                
                22,302,849Issued
                
                
                -
                
                
                11,000,000Cancelled
                    / Expired
                
                
                -
                
                
                (2,076,169
                )Exercised
                
                
                (4,339,719
                )
                
                (14,172,448
                )Balance,
                    end of period
                
                
                12,714,513
                
                
                17,054,232





Warrants
      outstanding to acquire common shares of the Company at June 30, 2007 are as
      follows:





**Warrants
                Outstanding**
            
            **Exercise****Price**
            
            **Expiry
                Date**5,433,333
            
            
            0.45
            
            
            February
                13, 20081,000,000
            
            
            0.30
            
            
            February
                17, 2008
            (1)225,000
            
            
            0.60
            
            
            February
                23, 20106,056,180
            
            
            0.76
            
            
            (2)12,714,513




(1)
            Issued
                to Metalmark Management LLC in respect of services rendered in connection
                with private placement dated February 14,
                2006




17




(2)
            Newmont
                Mining Corporation received warrants as part of the purchase price
                for
                Mesquite in November 2003. Under the anti-dilution provisions of
                the
                warrants, 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. The warrants expire between June 9, 2011 and June
                9,
                2012




**17.**  **RELATED
      PARTY TRANSACTIONS**





During
      June 2007, prior to the reorganization and change of domicile of the Company
      effective June 29, 2007, Canadian resident officers and directors exercised
      warrants to purchase common shares of the Company’s stock at a price of $0.45
      per share as follows:





·
            Rockcliff
                Group Limited, a corporation of which our Chairman of the Board,
                Randall
                Oliphant, is the sole shareholder, Chairman and Chief Executive Officer
                -
                1,250,000 warrants





·
            TerraNova
                Partners L.P., a limited partnership of which our Director, Vahan
                Kololian, is the founder and managing partner - 416,667
                warrants




·
            Brian
                Penny, our Chief Financial Officer - 166,667
                warrants





·
            Sandra
                Meddick-Ruth, the wife of our Director, Gerald Ruth - 250,000 warrants





·
            Muriel
                A. Ruth, the mother of our Director, Gerald Ruth - 66,667
                warrants




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 charged to the Company on the basis of the expected
      time commitment of the staff involved. The Company is related to Silver Bear
      because certain senior executives and directors of Silver Bear also serve as
      senior executives and directors of the Company. During the six and three month
      periods ended June 30, 2007 overhead costs of $118,228 and $61,285, respectively
      (2006 - $114,136 and 61,154), were charged to the Company under this agreement.
      As at June 30, 2007 and December 31, 2006, $25,387 and $20,249, respectively,
      was payable to Silver Bear.




On
      February 22, 2006, the Company issued 200,000 shares of common stock to the
      shareholders of 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.





In
      February 2006, the Company sold 20,000,000 units at the purchase price of $0.30
      per unit to 28 accredited investors for an aggregate sales price of $6,000,000.
      Each unit consisted of one share of our common stock and one half of one warrant
      to purchase one share of our common stock, exercisable at $0.45 per share (the
      “February Private Placement”). The warrants became exercisable upon approval by
      our shareholders of an amendment to our articles of incorporation increasing
      the
      number of our authorized shares of common stock to a number in excess of
      115,000,000. Each of the following officers and directors invested in the
      February Private Placement:





·
            Rockcliff
                Group Limited, a corporation of which our Chairman of the Board,
                Randall
                Oliphant, is the sole shareholder, Chairman and Chief Executive Officer,
                purchased 2,500,000 units for an aggregate purchase price of
                $750,000;




18




·
            Martyn
                Konig, our Director, purchased 333,333 units for an aggregate purchase
                price of $100,000;





·
            TerraNova
                Partners L.P., a limited partnership of which our Director, Vahan
                Kololian, is the founder and managing partner, purchased 833,334
                units for
                an aggregate purchase price of
                $250,000;




·
            Raymond
                Threlkeld, our Chief Executive Officer, purchased 333,334 units for
                an
                aggregate purchase price of
                $100,000;





·
            Brian
                Penny, our Chief Financial Officer, purchased 333,333 units for an
                aggregate purchase price of
                $100,000;





·
            Sandra-Meddick-Ruth,
                the wife of our Director, Gerald Ruth, purchased 500,000 units for
                an
                aggregate purchase price of $150,000;
                and





·
            Muriel
                A. Ruth, the mother of our Director, Gerald Ruth, purchased 133,334
                units
                for an aggregate purchase price of
                $40,000.





On
      January 3, 2006, the Company issued 37,500 shares to Mountain Gold Exploration,
      Inc. (“Mountain Gold”) in settlement of an amount due under an exploration and
      mining lease agreement (the “Lease Agreement”). Thomas Callicrate, who prior to
      January 3, 2006 was the Company’s Vice President of Exploration and a Director,
      and was the President, Secretary and Treasurer of Mountain Gold.





**18.**  **COMMITMENTS
      AND CONTINGENCIES**





**Mining
      Industry**




The
      Company is engaged in the exploration and development of mineral properties
      and
      in August 2006 completed a feasibility study establishing proven and probable
      reserves at the Mesquite Mine.





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.





**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.





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. Construction operations are now underway and landfill operations
      are
      expected to begin in 2008.





**Mesquite
      Expansion**





The
      Company has planned spending of $73,300,000 and has made purchase commitments
      of
      approximately $70,600,000 in respect of the mining fleet and ancillary mining
      equipment required for resumption and expansion of mining operations at the
      Mesquite Mine. Of this total, equipment to a value of approximately $37,600,000
      had been delivered as at June 30, 2007.




19





In
      addition, the Company has planned capital spending of approximately $37,600,000
      on other aspects of the mine expansion program. Of this amount, approximately
      $5,900,000 had been spent as at June 30, 2007.





**19.**  **SUBSEQUENT
      EVENTS**




**Accession
      to Term Loan Facility Agreement**




The
      Company’s place of incorporation was changed from Idaho, USA, to Ontario,
      Canada, and its name was changed from Western Goldfields, Inc. to Western
      Goldfields Inc. as a result of an agreement and plan of merger dated June 29,
      2007.




Pursuant
      to this reorganization, in July 2007, the Company entered into a Deed of
      Accession with the Agent, the Security Trustee, the Banks and Hedging Banks
      that
      are parties to the Term Loan Facility, under which the Company acceded to the
      Credit Agreement and Intercreditor Deed relating to the Term Loan Facility.
      The
      Company thereby assumed as Guarantor the obligations previously undertaken
      by
      Western Goldfields (USA) Inc. (formerly Western Goldfields, Inc.) in relation
      to
      amounts owing under the Term Loan Facility by Western Mesquite Mines,
      Inc.





**Drawdown
      Under Term Loan Facility**





Subsequent
      to submission of a drawdown notice in the amount of $20,447,241 submitted to
      Investec Bank (UK) Limited on July 16, 2007, the Company, through its wholly
      owned subsidiary, Western Mesquite Mines, Inc., received these funds on July
      18,
      2007. This represents the first advance under the $87,300,000 portion of the
      Term Loan Facility available for development of Mesquite Mine.





**Holly
      Gold Property**





The
      Company was a lessee under a mining lease dated October 20, 2004 with Mountain
      Gold Exploration Inc. / IW Exploration Co. (“the Claim Owners”). On June 19,
      2006, the Company assigned its leasehold interest to Dome Copper, Inc. (“Dome”)
      and Dome assumed all of the Company’s obligations and liabilities under the
      lease. Dome thereafter apparently failed to perform its obligations under the
      lease. The Claim Owners then alleged that the Company failed to follow required
      procedures in assigning the lease, that the assignment was null and void, and
      that the Company was therefore responsible for the obligations not met by
      Dome.





On
      July
      9, 2007, the Company and the other parties to this dispute, without admitting
      fault and at no cost to the Company, entered into a Settlement Agreement for
      the
      purpose of resolving all disputes concerning the lease and the Holly Gold
      Property. The Company has provided a quitclaim deed and has released all
      geologic data pertaining to the Holly Gold Property to the other parties.





**Grant
      of Options**




On
      July
      31, 2007, the Company issued 200,000 options to a director and 195,000 options
      to two new employees. The price of the options is to be based on the closing
      price in Canadian dollars of the Company’s shares on August 2, 2007. The options
      vest in three equal annual installments beginning on August 2, 2007. The fair
      value of the options has yet to be determined.




20


**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS (in dollars, except per share amounts)**





The
      following discussion provides information that management believes is relevant
      to an assessment and understanding of the consolidated financial condition
      and
      results of operations of Western Goldfields Inc. and its subsidiaries and
      including its predecessor, Western Goldfields, Inc. (collectively “Western
      Goldfields” or the “Company”). **This
      item should be read in conjunction with our unaudited consolidated financial
      statements and the notes thereto. The information is presented as of July 31,
      2007. All amounts in this discussion are expressed in U.S. dollars, unless
      otherwise specified.**





**Overview**





We
      are an
      independent precious metals production and exploration company with operations
      focused in North America. Our principal asset is the Mesquite Mine (“Mesquite”
or “the Mine”) which we acquired from Newmont Mining Corporation (“Newmont”) in
      November 2003. Mesquite has provided us with residual gold production from
      ore
      that was placed on the heap leach pads by Newmont and previous owners of the
      property. We completed a positive feasibility study in August 2006 and
      subsequent equity and debt financings which have enabled us to resume mining
      operations at Mesquite. We are fully permitted and fully funded and we plan
      on
      gold production of 160,000 - 170,000 ounces of gold annually. Western Goldfields
      Inc. is listed on the Toronto Stock Exchange and trades under the symbol WGI,
      and is quoted on the OTCBB under the symbol WGDFF.OB.





**Overall
      Performance**





During
      the six months ended June 30, 2007 (“2007 YTD”) we made significant progress
      towards our goal of resuming mining operations and achieving commercial
      production at the Mesquite Mine. We recently announced that commercial
      production at the Mine was being accelerated by three months to January 2008.
      We
      completed an equity financing and arranged a term loan facility to finance
      the
      project; we are executing a major capital expenditure and construction program;
      we have built a strong management team and have hired many of the skilled
      personnel for resumed mining operations, and we have increased the proven and
      probable reserves at Mesquite. These activities have been carried out on time
      and within budget against a background of sustained strength in the mining
      sector, with resultant cost pressures and demands for skilled personnel.





***New
      Term Loan Facility and Hedging Program***





On
      March
      30, 2007 our wholly-owned subsidiary, Western Mesquite Mines, Inc., entered
      into
      a new term loan facility with Investec Bank (UK) Limited for $105.0 million.
      The
      agreement was amended and restated effective May 31, 2007. The facility
      comprises multiple-draw loans maturing December 31, 2014, of which $87.3 million
      will be available to be drawn down as required for the development of the
      Mesquite Mine, and the remainder will be available for up to 12 months after
      completion for other corporate purposes. Achieving completion will require
      the
      satisfaction of financial and technical criteria and is expected to occur in
      the
      second half of 2008. Repayment of the facility will be on a semi-annual basis,
      commencing approximately six months after completion with mandatory prepayments
      being made from excess cash flow. Interest on each advance will be charged
      at
      U.S. LIBOR plus 2.2% up to completion and at U.S. LIBOR plus 1.75% after
      completion. This agreement, in conjunction with the equity financing in January
      and February 2007, completes the financing requirements for
      Mesquite.





In
      connection with the term loan facility, on June 14, 2007 we announced that
      we
      had executed flat forward sales contracts for 429,000 ounces of gold (the
“Hedging Contracts”) at a price of $801 per ounce. The Hedging Contracts
      represent a commitment of 5,500 ounces for 78 months commencing July 2008,
      with
      the last commitment deliverable December 2014. We expect to produce between
      160,000 and 170,000 ounces annually during the term of the Hedging Contracts,
      of
      which 66,000 will be covered by the Hedging Contracts, leaving approximately
      100,000 ounces annually leveraged to the price of gold.





On
      June
      14, 2007 we also announced that we had satisfied or had received a waiver on
      all
      conditions precedent to the availability of the term loan facility, and on
      July
      18, 2007 we received approximately $20.4 million as the first advance under
      the
      $87.3 million portion of the Term Loan Facility available for development of
      Mesquite Mine.




21




***Capital
      Program - Mining Equipment Fleet and Construction
      Activity***





In
      November 2006 the original estimated cost for our pre-production capital program
      was $97.9 million. Since that time we have gone through an exacting evaluation
      of competitive bids, with particular stress on operating costs and compliance
      with California emissions standards in respect of the mining equipment fleet.
      Our latest forecast is for pre-production spending of approximately $108.6
      million. The additional costs primarily reflect our decision to accelerate
      the
      acquisition of three haul trucks valued at $7.8 million that were originally
      included in our 2008 production phase capital program. This step was taken
      to
      accommodate a supplier’s production schedule and to ensure that the three units
      were available in early 2008.





With
      the
      accelerated acquisition of the three haul trucks, total planned spending on
      the
      mining fleet is now $73.3 million, of which approximately $37.6 million had
      been
      spent to June 30, 2007. The major components of the mining fleet and their
      approximate cost, including all relevant taxes, are as follows: 14 haul trucks
      -
      $36.5 million; 2 shovels - $16.5 million; 1 front-end loader - $4.3 million;
      other mobile and ancillary equipment, including drills, bull-dozers, graders
      and
      water trucks - $14.3 million. Payment terms vary; generally, payment is 10
      days
      after commissioning, but in the case of the haul trucks, 80% is due on shipment
      and 20 % on completion of commissioning. We are in on-going contact with our
      suppliers to ensure that production is progressing as planned and that the
      balance of the fleet will be delivered according to schedule with a view to
      our
      placing new ore on the leach pads during the fourth quarter of 2007 and
      achieving commercial production by January 2008.





Orders
      for the majority of the mining equipment fleet were placed in November 2006.
      Two
      45 cubic yard hydraulic shovels and three of the fourteen 205 ton haul trucks
      on
      order were operational at June 30, 2007. We expect delivery of all major items
      to be complete by the end of December 2007.





In
      addition to the mining fleet, we are planning on spending approximately $35.3
      million on other plant and infrastructure upgrades and expansion projects at
      Mesquite, of which approximately $6.3 million has been spent to June 30, 2007.
      We plan on spending a further approximately $25.3 million during 2007 with
      an
      additional $3.7 million carried over into 2008. The major aspects of this
      program are the leach pad expansion, retrofit of the process plant, and
      construction of a truck repair shop, warehouse and mine operations
      administrative office. We have worked closely with several environmental
      agencies and local authorities to ensure that all required building and
      expansion permits were received on a timely basis. During the second quarter
      we
      put in place an enhanced bonding and insurance program in respect of
      reclamation, remediation and pollution exposures arising out of our expanded
      operations.





On
      the
      basis of progress in the construction program, in June 2007 we announced that
      we
      were accelerating the start of gold production at Mesquite to January 2008,
      three months ahead of the original schedule.





***Increase
      in Reserves***





On
      March
      26, 2007 we announced that we had increased Proven and Probable reserves at
      Mesquite from 2.36 million ounces of gold to 2.77 million ounces and that
      measured and indicated reserves had increased from 3.61 million ounces of gold
      to 3.87 million ounces. Approximately 50% of the increase is attributable to
      assay results from a drilling program of 27 holes at the Brownie Hill area
      of
      the mine which converted inferred oxide resources to Proven and Probable
      reserves, and the remaining 50% is attributable to an increase in the reserve
      gold price assumption from $450 to $500 per ounce. Since that estimate, assay
      results have been received which confirm the estimated grades and thickness
      of
      the Brownie Hill resource estimate and suggest the potential for further
      resource increases.





***Feasibility
      Study***





In
      August, 2006 we announced the completion of the Mesquite feasibility study,
      which estimated proven and probable reserves of 2.36 million ounces of gold.
      On
      the basis of these positive results, we have been aggressively putting in place
      appropriate equity and debt financing to support a major capital spending
      program and the other costs associated with our planned resumption of mining
      operations in January 2008. In January and February of 2007 we completed a
      common share equity financing, including an underwriter’s over-allotment option,
      which provided us with net proceeds of approximately $59.2 million.





Over
      the
      past year and a half, we have built a strong management team to resume active
      mining operations at Mesquite. We have made significant progress in recruiting,
      hiring and training the skilled workforce required for our expanded operations;
      these efforts will continue over the next several months as we move towards
      full
      production.




22




***Corporate
      Reorganization***





On
      June
      19, 2007 the shareholders of the Company’s predecessor, Western Goldfields,
      Inc.. an Idaho corporation (“WGI Idaho”), approved an agreement and plan of
      merger which became effective June 29, 2007 whereby the Company’s place of
      incorporation was changed from Idaho, USA to Ontario, Canada, and its name
      was
      changed from Western Goldfields, Inc. to Western Goldfields Inc. (or “WGI
      Ontario”) The reorganization allows us to take advantage of financial and other
      business opportunities that would not be available under our previous corporate
      structure, including: being able to complete transactions requiring shareholder
      approval more quickly, which would facilitate our corporate strategy of growth
      through acquisition; as a Canadian mining company, having a higher profile
      in
      the Canadian markets, as we will now be considered a “mid-cap” company and, as a
      Canadian mining company, we may be a more attractive investment to a wider
      range
      of Canadian investors, while still being able to access U.S. capital markets.
      In
      this Management Discussion and Analysis the term “the Company” refers to WGI
      Ontario and its predecessor WGI Idaho





On
      completion of the reorganization, the common shares in Western Goldfields,
      Inc.
      (the predecessor Idaho corporation) automatically became an equal number of
      common shares of no par value in Western Goldfields Inc. (the successor Ontario
      corporation) and the economic ownership of shareholders in the new company
      remained unchanged. The accounting for the reorganization has been treated
      as a
      reorganization of entities under common control which has not resulted in any
      changes in the consolidated carrying amounts of assets, liabilities and
      shareholders’ equity.





The
      Company’s four wholly owned subsidiaries are now: Western Goldfields USA Inc. (a
      holding company), Western Goldfields (Canada) Inc. (a management company),
      Western Mesquite Mines, Inc. (an operating company), and Calumet Mining Company
      (an exploration company).




23




**Selected
      Financial Information** *(all
      tabular information in $000s unless otherwise stated)*





Three
                months ended June 30,
            
            Six
                months ended June 30,**2007**
            
            **2006**
            
            **2007**
            
            **2006**Cash
                flows from financing activities
            
            
            (960
            )
            
            3,599
            
            
            60,658
            
            
            7,394Cash
                flows for investing activities
            
            
            (27,752
            )
            
            (146
            )
            
            (33,467
            )
            
            (388
            )




**June
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006**Cash
              
              
              18,750
              
              
              5,503Restricted
                  cash
              
              
              7,500
              
              
              -Working
                  capital
              
              
              11,527
              
              
              4,549Property,
                  plant and equipment, net of depreciation
              
              
              41,862
              
              
              4,328Construction
                  in progress
              
              
              7,963
              
              
              2,881Shareholders’
                  equity
              
              
              71,026
              
              
              14,879




Three
                  months ended June 30,
              
              
              Six
                  months ended June 30,**2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues
                  from gold sales
              
              
              1,547
              
              
              2,104
              
              
              2,779
              
              
              4,879Gross
                  profit (loss)
              
              
              (2,355
              )
              
              (569
              )
              
              (3,752
              )
              
              (829
              )Mark-to-market
                  of forward sales
              
              
              759
              
              
              -
              
              
              759
              
              
              -Net
                  loss
              
              
              (4,006
              )
              
              (2,609
              )
              
              (6,641
              )
              
              (6,428
              )Net
                  loss to common shareholders
              
              
              (4,006
              )
              
              (2,614
              )
              
              (6,641
              )
              
              (6,445
              )Net
                  loss per common share, basic and diluted
              
              $
              0.04
              
              $
              0.04
              
              $
              0.06
              
              $
              0.11Gold
                  ounces produced
              
              
              2,304
              
              
              3,412
              
              
              4,240
              
              
              7,864Gold
                  ounces sold
              
              
              2,350
              
              
              2,275
              
              
              4,225
              
              
              8,375Average
                  price received per ounce
              
              $
              658
              
              $
              624
              
              $
              658
              
              $
              583Cost
                  of sales per ounce(i)
              
              $
              1,500
              
              $
              693
              
              $
              1,368
              
              $
              604





(i)
            Cost
                of sales include mine cost of sales less non-cash depreciation,
                amortization and accretion.




**Consolidated
      Financial Results / Overall Performance (in $000s)**





The
      Company’s net loss to common shareholders for the six months ended June 30, 2007
      (“2007 YTD”) was $6.6 million, or $0.06 per share, compared with $6.4 million,
      or $0.11 per share, for the six months ended June 30, 2006 (“2006
      YTD”).





Results
      for 2007 YTD, as compared with 2006 YTD, were negatively impacted by the 50%
      reduction in gold ounces sold from 8,375 ounces to 4,225 ounces. With no new
      material being placed on the leach pads, it has become increasingly difficult
      to
      extract the residual gold and maintain the solution grades coming from the
      leach
      pads. This lower production was partially offset by the 13% increase in the
      average selling price per ounce from $583 to $658, reflecting the continuation
      of relatively strong pricing in world markets. Cost of sales per ounce for
      2007
      YTD, adjusted for non-cash expenses, was $1,368, as compared with $604 per
      ounce
      in 2006 YTD. This reflects the high fixed cost component in cost of goods sold
      and the increase in mine staffing as we prepare to go back into
      production.




24




Other
      operating expenses for 2007 YTD were $4.5 million compared with $4.7 million
      in
      2006 YTD. General and administrative expenses of $2.2 million were virtually
      unchanged from the previous year and non-cash stock based compensation for
      2007
      YTD of $1.2 million was significantly lower than the $1.8 million expense the
      previous year. The higher expense in 2006 YTD primarily reflects grants of
      options to our new management team in early 2006.





Other
      income (expense) for 2007 YTD compared with 2006 YTD was favourably impacted
      by
      an increase in interest income from $0.2 million to $1.0 million. The equity
      financing in January - February 2007 generated net proceeds of approximately
      $59.3 million; much of this cash was still available into June 2007 before
      large
      payments were required under our capital expenditure program. In
      addition, at June 30, 2007, we recorded a gain of $0.8 million relating to
      the
      mark-to-market of the forward gold sales contracts which
      are required under the hedging conditions of our term loan facility. Since
      we
      have not designated these contracts as cash flow hedges, the hedge accounting
      rules of SFAS No.133 are not being applied and the period-end mark-to-market
      of
      these contracts is being immediately reflected on our income statement. In
      June
      2007, we executed flat forward sales contracts for 429,000 ounces of gold (the
      “Hedging Contracts”) at a price of $801 per ounce. The Hedging Contracts
      represent a commitment of 5,500 ounces for 78 months commencing July 2008,
      with
      the last commitment deliverable December 2014. We expect to produce between
      160,000 and 170,000 ounces annually during the term of the Hedging Contracts,
      of
      which 66,000 will be covered by the Hedging Contracts, leaving approximately
      100,000 ounces annually leveraged to the price of gold.





Results
      for 2006 YTD were impacted by “one time” costs of $1.2 million relating to
      termination of a proposed merger agreement with Romarco Minerals
      Inc.





For
      the
      past several quarters we have been implementing various strategies to extend
      the
      productive life of the leach pads. However, with no new material having been
      placed on the leach pads for the past several years, we are seeing a steady
      reduction in the gold ounces produced. In 2007 YTD production was 4,240 compared
      with 7,864 in 2006 YTD. During the third quarter of 2006 we concluded that
      it
      was no longer economic to continue leaching the Vista pad. Closure operations
      for this location were completed in February 2007; formal approval of closure
      of
      the site and reclassification of the waste material was recently received from
      the California Regional Water Quality Board. Under the terms of our bonding
      arrangement with AIG, costs of closure are reimbursable. We have recovered
      costs
      of $0.3 million in respect of closure expenditures.


Three
                  months ended June 30,
              
              Six
                  months ended June 30,**2007**
              
              **2006**
              
              **2007**
              
              **2006**Gold
                  sales revenue
              
              
              1,547
              
              
              2,104
              
              
              2,779
              
              
              4,879Average
                  price realized per ounce
              
              $
              658
              
              $
              624
              
              $
              658
              
              $
              583Increase
                  (Decrease) in revenues
              
              
              (558
              )
              
              (1,036
              )
              
              (2,100
              )
              
              (819
              )Change
                  in revenues attributable to ounces sold
              
              
              (639
              )
              
              (1,771
              )
              
              (2,417
              )
              
              (2,311
              )Change
                  attributable to average selling price
              
              
              80
              
              
              736
              
              
              318
              
              
              1,492




Revenues
      from gold sales for 2007 YTD decreased by $2.1 million or 43% compared to 2006
      YTD as the effect of lower ounces sold significantly outweighed the positive
      impact of higher selling prices.


Three
                  months ended June 30,
              
              
              Six
                  months ended June 30,**2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Cost
                  of sales
              
              
              3,902
              
              
              2,673
              
              
              6,531
              
              
              5,708Increase
                  (Decrease)
              
              
              1,229
              
              
              (542
              )
              
              823
              
              
              (208
              )Gross
                  loss %
              
              
              152
              %
              
              35
              %
              
              135
              %
              
              27
              %Increase
                  (decrease) in gross loss %
              
              
              117
              %
              
              
              
              
              108
              %




25





Cost
      of
      sales for 2007 YTD increased by $0.8 million or 14% compared to 2006 YTD. The
      incease results primarily from higher mine operating costs, reflecting increases
      in fuel, chemicals, power and payroll costs. Mine site administration cost
      have
      also increased as we build up staff to handle the construction program and
      resumed production. 2007 YTD was little impacted by costs relating to changes
      in
      gold in-process inventory levels, whereas this had a significant impact in
      2006
      YTD. ****





A
      comparison of the major components of cost of sales is as
      follows:




Three
                  months ended June 30,
              
              
              Six
                  months ended June 30,**2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Mine
                  operating costs
              
              
              2,662
              
              
              1,892
              
              
              4,569
              
              
              3,872Mine
                  site administration
              
              
              682
              
              
              349
              
              
              1,113
              
              
              677Amortization
                  and accretion
              
              
              377
              
              
              335
              
              
              752
              
              
              647Royalties
              
              
              59
              
              
              80
              
              
              104
              
              
              183Inventory
                  adjustment
              
              
              115
              
              
              9
              
              
              (19
              )
              
              312





Other
      operating expenses for 2007 YTD decreased by $0.1 million or 3% compared to
      2006
      YTD. A decrease in non-cash stock based compensation was offset by an increase
      in exploration spending relating to the Brownie Hill drilling program at
      Mesquite.




Three
                  months ended June 30,
              
              
              Six
                  months ended June 30,**2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**General
                  and administrative
              
              
              1,138
              
              
              1,106
              
              
              2,222
              
              
              2,176Stock
                  based compensation
              
              
              820
              
              
              730
              
              
              1,289
              
              
              1,770Exploration
                  - Mesquite
              
              
              749
              
              
              272
              
              
              1,032
              
              
              711




Other
      income (expense) for 2007 YTD was positive $1.7 million compared with negative
      $0.9 million the previous year. Interest income for 2007 YTD was $1.0 million
      compared with $0.2 million the previous year. The increase relates primarily
      to
      cash on deposit after the equity issue in January - February 2007. In addition,
      in 2007 YTD we recorded a gain of $0.8 million relating to the mark-to-market
      of
      our forward gold sales contracts, and a gain on foreign exchange of $0.2
      million, primarily relating to our holding part of the proceeds of the equity
      issue in Canadian dollars during a period when that currency was appreciating
      in
      terms of US dollars. During 2007 YTD, we provided for agency and commitment
      fees
      of $0.2 million and amortized deferred debt issuance costs of $0.1 million
      in
      connection with the term credit facility that became effective March 30, 2007.
      The most significant item of cost in Q1/06 was the $1.2 million required to
      terminate the Romarco merger proposal.





A
      comparison of the major items included in other income (expense) is as
      follows:


Three
                  months ended June 30,
              
              
              Six
                  months ended June 30,**2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Interest
                  income
              
              
              525
              
              
              86
              
              
              1,042
              
              
              179Agency
                  and commitment fees
              
              
              (241
              )
              
              -
              
              
              (241
              )
              
              -Amortization
                  of deferred debt issuance costs
              
              
              (110
              )
              
              -
              
              
              (110
              )
              
              -Gain
                  on mark-to-market of gold hedging contracts
              
              
              759
              
              
              -
              
              
              759
              
              
              -Gain
                  on foreign exchange
              
              
              124
              
              
              -
              
              
              205
              
              
              -Expenses
                  of Romarco merger termination
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,225
              )




26




**Results
      of Operations**





**Six
      Months Ended June 30, 2007 (“2007 YTD”) Compared to Six Months Ended March 31,
      2006 (“Q1/06”).**




As
      anticipated in view of the declining productive capacity of the leach pads,
      poured gold production for 2007 YTD was 4,240 ounces compared with 7,864 ounces
      in 2006 YTD. Gold sales for the period were 4,225 ounces at an average selling
      price of $658 per ounce for revenues of $2.8 million compared with 8,375 ounces
      at an average selling price of $582 per ounce for revenues of $4.9 million
      in
      the previous year.





Mine
      operating costs for 2007 YTD were $4.6 million compared to $3.9 million for
      2006
      YTD. Although we have implemented various cost reduction strategies to offset
      the impact of the diminishing productive capacity of the leach pads, cost
      savings have been largely offset by higher power rates, increased costs of
      chemicals and increases in engineering department labour and use of consultants.
      Mine site administration costs for 2007 YTD were $1.1 million compared with
      $0.7
      million in 2006 YTD, reflecting increases in staffing and relocation costs
      as we
      prepare for resumption of mining operations. Lower royalty expenses in 2007
      YTD
      compared with 2006 YTD reflect lower gold ounces sold. A small cost recovery
      associated with the change in metal-in-process inventories was recorded in
      2007
      YTD, compared with a charge of $0.3 million in 2006 YTD. Work in process
      inventories increased only slightly to 460 ounces at June, 2007 from 441 ounces
      at December 31, 2006. The foregoing factors resulted in a gross loss of $3.7
      million for 2007 YTD compared with $0.8 million in 2006 YTD.





General
      and administrative expense of $2.2 million in 2007 YTD was consistent with
      expense in 2006 YTD. However, costs in early 2006 included significant one-time
      expenses such as costs associated with the proposed Romarco merger, severance
      costs and costs of transitioning to the new management team. Costs in 2007
      YTD
      reflect the increasing scope of corporate activities with emphasis on financing
      initiatives, investor relations, technical support for Mesquite operations
      and
      other strategic initiatives.




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 decrease in expense to $1.3 million in 2007 YTD from $1.8 million
      in 2006 YTD relates to the high initial amortization of options granted to
      the
      new management team in February of 2006 and their ongoing amortization
      thereafter.





Exploration
      activities at Mesquite during 2007 YTD were $1.0 million and relate primarily
      to
      a drilling program to delineate a deep sulphide ore deposit not previously
      included in the calculation of our reserves and resources at Mesquite. Costs
      of
      $0.7 million in 2006 YTD relate primarily to the completion of the Mesquite
      feasibility study. In addition to the drilling costs expensed in 2007 YTD,
      we
      have capitalized development drilling costs of $1.6 million at the Brownie
      Hill
      zone. The Brownie Hill program resulted in proven and probable reserves being
      increased from 2.36 million gold ounces to 2.77 million ounces, and measured
      and
      indicated resources (inclusive of mineral reserves) being increased from 3.61
      million ounces to 3.87 million ounces.





Other
      income for 2007 YTD was $1.7 million compared to $0.9 million of other expense
      in 2006 YTD. We earned $1.0 million on our surplus cash in 2007 YTD which was
      increased significantly by the equity issue in January and February. The term
      credit facility that was put in place effective March 30, 2007 gave rise to
      agency and commitment fees of $0.2 million, that have been expensed in 2007
      YTD,
      and deferred debt issuance costs of $3.1 million, of which $0.1 million has
      been
      amortized in 2007 YTD. In addition, at June 30, 2007, we recorded a gain of
      $0.8
      million relating to the mark-to-market of our forward gold sales contracts,
      and
      recorded an exchange gain of $0.2 million through retaining a portion of the
      proceeds of our equity issue in Canadian dollars. The most significant item
      of
      cost in Q1/06 was our payment of a termination fee of $1.0 million and expense
      reimbursement costs of $0.2 million on termination of the proposed merger
      agreement between us and Romarco.





The
      above
      were the major factors in our reporting a net loss to common shareholders for
      2007 YTD of $6.6 million or $0.06 per share, compared with a net loss of $6.4
      million or $0.11 per share in 2006 YTD.





27




**Three
      Months Ended June 30, 2007 (“Q2/07”) Compared to Three Months Ended June 30,
      2006 (“Q2/06”).**




Poured
      gold production for Q2/07 was 2,304 ounces compared with 3,412 ounces in Q2/06.
      Gold sales for Q2/07 were 2,350 ounces at an average selling price of $658
      per
      ounce for revenues of $1.5 million compared with 3,375 ounces at an average
      selling price of $624 per ounce for revenues of $2.1 million in Q2/06.





Mine
      operating costs for Q2/07 were $2.7 million compared to $1.9 million for Q2/06.
      The same cost pressures as referred to in 2007 YTD impact this cost segment
      in
      Q2/07. Mine site administration costs for Q2/07 were $0.7 million compared
      with
      $0.3 million in Q2/06 as a result of staff increases and relocation costs.
      A
      charge of $0.1 million associated with the change in metal-in-process
      inventories was recorded in Q2/07. Work in process inventories decreased from
      630 ounces at March 31, 2007 to 460 ounces at June 30, 2007. The foregoing
      factors resulted in a gross loss of $2.4 million for Q2/07 compared with $0.6
      million in Q2/06.





In
      other
      operating expenses for Q2/07, general and administrative expense of $1.1 million
      in Q2/07 was consistent with expense in Q1/06 although the components were
      different as discussed above. Stock-based compensation for Q2/07 was $0.8
      million compared with $0.7 million in Q2/06. The current year charge includes
      high front-end amortization of options granted to management hires during the
      quarter. Exploration activities at Mesquite during Q2/07 were $0.7 million
      and
      relate to the sulphide drilling program. Costs in Q2/06 relate primarily to
      the
      completion of the Mesquite feasibility study. In addition to the drilling costs
      expensed in Q2/07, we capitalized development drilling costs of $0.3 million
      at
      the Brownie Hill zone.





Other
      income (expense) for Q2/07 was $1.1 million compared to $0.1 million in Q2/06.
      We earned $0.5 million on the significant cash balances on hand early in the
      quarter before we started making heavy payments in respect of the capital
      spending program. In addition, at June 30, 2007, we recorded a gain of $0.8
      million relating to the mark-to-market of the forward gold sales contract.
      We
      also recorded an exchange gain of $0.1 million through maintaining some of
      our
      cash reserves in Canadian dollars.





The
      above
      were the major factors in our reporting a net loss to common shareholders for
      Q2/07 of $4.0 million or $0.04 per share, compared with a net loss of $2.6
      million or $0.04 per share in Q2/06.




**Liquidity
      and Capital Resources**





Based
      on
      our feasibility study and subsequent projections, we require significant funding
      to sustain our operations and complete our capital program until we start to
      generate free cash flow in April 2008. For the past several months we have
      been
      addressing these capital needs and have been successful in raising fresh equity
      of approximately $59.2 million and establishing a credit facility of $105.0
      million.





At
      June
      30, 2007 our available cash balance was $18.8 million, we had $7.5 million
      in
      restricted cash, and our working capital was $11.5 million. In addition, we
      had
      unutilized credit facilities of $105.0 million of which $87.3 million is
      available for the Mesquite Expansion project and $17.7 million is available
      for
      general corporate purposes. This represents a significant improvement in our
      financial position since December 31, 2006 when we reported cash of $5.5 million
      and working capital of $4.6 million.





The
      improved liquidity reflects the issue during the first quarter of 2007 of
      33,330,000 common shares under a prospectus supplement to our shelf prospectus
      dated October 27, 2006 for net proceeds of $59.2 million.





On
      March
      30, 2007 WMMI entered into a new term loan facility with Investec Bank (UK)
      Limited for $105.0 million. The facility comprises multiple-draw loans maturing
      December 31, 2014, of which $87.3 million will be available to be drawn down
      as
      required for the development of the Mesquite Mine, and the remainder will be
      available for up to 12 months after completion for other corporate purposes.
      Achieving completion will require the satisfaction of financial and technical
      criteria and is expected to occur in the second half of 2008. Repayment of
      the
      facility will be on a semi-annual basis, commencing approximately six months
      after completion with mandatory prepayments being made from excess cash flow.
      Interest on each advance will be charged at U.S. LIBOR plus 2.2% up to
      completion and at U.S. LIBOR plus 1.75% after completion. Initial availability
      of funds was subject to certain conditions, including WMMI entering into an
      acceptable gold hedging program with certain lenders under the term loan
      facility, the resolution of certain ancillary agreements and the delivery of
      usual and customary closing documents, opinions and certificates. This
      agreement, in conjunction with the earlier equity financing, completes the
      financing requirements for Mesquite.




28





In
      connection with the term loan facility, on June 14, 2007 we announced that
      we
      had executed flat forward sales contracts for 429,000 ounces of gold (the
“Hedging Contracts”) at a price of $801 per ounce. The Hedging Contracts
      represent a commitment of 5,500 ounces for 78 months commencing July 2008,
      with
      the last commitment deliverable December 2014. We expect to produce between
      160,000 and 170,000 ounces annually during the term of the Hedging Contracts,
      of
      which 66,000 will be covered by the Hedging Contracts, leaving approximately
      100,000 ounces annually leveraged to the price of gold.





On
      June
      14, 2007 we also announced that we had satisfied or had received a waiver on
      all
      conditions precedent to the availability of the term loan facility, and on
      July
      18, 2007 we received $20.4 million, representing the first advance under the
      $87.3 million portion of the Term Loan Facility available for development of
      Mesquite Mine.





During
      2007 YTD our liquidity was also improved through the conversion of warrants
      and
      the exercise of stock options, for proceeds of $2.3 million.





Cash
      required for operating activities in 2007 YTD was $13.9 million compared with
      $3.3 million in 2006 YTD. The cash requirement was significantly impacted by
      the
      net loss of $6.6 million but this was partially offset by non-cash expense
      items
      such as: depreciation and accretion expense of $0.8 million, amortization of
      deferred debt issuance costs of $0.1 million and stock-based compensation of
      $1.3 million. The mark-to-market of contracts for forward sale of gold, being
      a
      non-cash item, gave rise to a negative adjustment of $0.8 million to cash flow
      from operating activities in 2007 YTD. A change in the composition of non-cash
      working capital items during 2007 YTD gave rise to a $1.0 million requirement
      for cash flow. Accounts payable decreased by $0.9 million and accrued expenses
      increased by $0.2 million. In addition, available cash was reduced by a $7.5
      million transfer to a Cost Overrun Account as required under the term credit
      facility, classified as restricted cash, and by an increase in prepaid expenses
      of $0.5 million primarily relating to advance premiums under the updated
      environmental risk insurance program. In 2006 YTD, our net loss was $6.4
      million. This cash requirement was reduced by non-cash depreciation and
      accretion of $0.6 million and stock-based compensation of $2.0 million. In
      addition, a reduction in cash for working capital items generated $0.5 million.





Cash
      required for investing activities in 2007 YTD was $33.5 million compared with
      $0.4 million in 2006 YTD. This includes $25.8 million for shovels, haul trucks
      and other ancillary equipment under our mining fleet acquisition program, $1.9
      million for leach pad expansion, $1.6 million for development drilling at the
      Brownie Hill zone at Mesquite and $2.1 million as additional deposit to our
      reclamation and remediation account with AIG. Investing activities in 2006
      YTD
      were $0.4 million.




The
      foregoing factors resulted in an increase in our cash position of $13.2 million
      in 2007 YTD compared with $3.7 million in 2006 YTD. For Q2/07 the decrease
      in
      cash was $38.4 million compared with an increase of $1.8 million in Q2/06.





Our
      projections indicate that for the balance of 2007 our cash requirements to
      fund
      operations and the capital program will be approximately $67.2 million. This
      will be funded initially by way of our existing cash balances and thereafter
      by
      advances under the term loan facility. We anticipate that by year-end 2007
      we
      will have drawn down approximately $85.7 million under the loan facility before
      we start to generate positive free cash flow in the first quarter of 2008.
      We
      therefore believe that we have adequate financial resources in place to finance
      the Mesquite expansion.





**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.





*Derivative
      Instruments*





The
      Company accounts for its forward sales of gold in conformity with the following
      statements issued by the Financial Accounting Standards Board (“FASB”):
      Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137,
“Accounting for Derivative Instruments and Hedging Activities - Deferral of
      the
      Effective Date of FASB No. 133,” SFAS No. 138, “Accounting for Certain
      Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.
      These standards establish accounting and reporting standards for derivative
      instruments, including certain derivative instruments embedded in other
      contracts, and for hedging activities. They require that an entity recognize
      all
      derivatives as either assets or liabilities in the balance sheet and measure
      those instruments at fair value.




29





A
      derivative may be specifically designated as a hedge of financial risk exposures
      of anticipated transactions if, both at the inception of the hedge and
      throughout the hedge period, the changes in fair value of the contract
      substantially offset the effect of commodity price changes on the anticipated
      transactions and if it is probable that the transactions will occur. Pursuant
      to
      such a designation, the income effect of the change in derivative values may
      be
      accounted for in other comprehensive income based upon the Company's valuation
      of the associated financial gain or loss. Any change arising from the
      determination of the derivative's effectiveness is accounted for as a charge
      to
      current operations.





In
      applying SFAS No. 133, the Company has not designated its contracts for the
      forward sales of gold as cash flow hedges. Accordingly the hedge accounting
      rules of SFAS No.133 are not being applied and the period-end mark-to-market
      of
      these contracts is immediately reflected on the income statement of the Company.





*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
      expensed all mine development costs prior to our establishing proven and
      probable reserves upon completion of the feasibility study in August 2006.
      In
      the event that we have deferred development costs in the future, these will
      be
      amortized on a 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 not be
      recoverable. Our long-lived assets comprise the fair values allocated to the
      plant and equipment acquired upon completion of the Mesquite acquisition and
      subsequent additions. Annually, we review the present value of future cash
      flows
      to determine if the amounts carried under plant and equipment are
      recoverable.




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




*Metal
      on Leach Pad Inventory*




The
      Company carries no value in its financial statements for metal on the leach
      pads
      as the initial value assigned to mineral properties for this asset was included
      in exploration expense in 2003.





When
      the
      Company acquired Mesquite on November 7, 2003, management determined that,
      in
      the absence of a reserve study, 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 value that was allocated to
      mineral properties under the purchase accounting equation at that time was
      expensed as exploration expense.




*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, the Financial
      Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
      Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” which
      established a uniform 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. Our estimates of reclamation and remediation
      liabilities are reviewed and adjusted from time to time to reflect changes
      in
      the estimated present value resulting from the passage of time and revisions
      to
      the estimates of either timing or amount of reclamation and abandonment
      costs.




30




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.





*Stock
      Options and Warrants Granted to Employees and Non-employees*





The
      Company accounts for grants of stock options and warrants in terms of SFAS
      No.
      123 (R), “Share Based Payment”, which revises SFAS No.123, “Accounting for
      Stock-Based Compensation”. Accordingly, the Company measures all employee
      stock-based compensation awards and awards to non-employees in exchange for
      goods and services, using a fair value method and records such expense in its
      financial statements over the service period. In its application of the
      Black-Scholes model for valuation of stock options and warrants, management
      is
      required to make estimates based on several assumptions, including: risk-free
      interest rate, volatility rate, and the expected life of the options and
      warrants. Actual results could differ from these estimates.





**Recent
      Accounting Pronouncements**





The
      Company adopted the provisions of FASB Interpretation No.48, “Accounting for
      Uncertainty in Income Taxes” (“FIN No.48”) effective January 1, 2007. The
      purpose of FIN No.48 is to clarify and set forth consistent rules for accounting
      for uncertain tax positions in accordance with Statement of Financial Accounting
      Standards No. 109, “Accounting for Income Taxes”. The cumulative effect of
      applying the provisions of this interpretation are required to be reported
      separately as an adjustment to the opening balance of retained earnings of
      the
      year of adoption. The adoption of this standard did not have an impact on the
      financial condition or the results of the Company’s operations.,





In
      February 2007 the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an amendment of FASB Statement No.115”. The Statement permits entities
      to choose to measure many financial instruments and certain other items at
      fair
      value. The objective is to improve financial reporting by providing entities
      with the opportunity to mitigate volatility in reporting earnings caused by
      measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. The Statement is expected to expand the
      use
      of fair value measurement, The Statement is effective as of the start of the
      Company’s first fiscal year that commences after November 15, 2007. The Company
      is currently evaluating the impact of adoption of SFAS No.159 on its overall
      results of operations or financial position.




**Contractual
      Obligations**





The
      following table presents the contractual obligations outstanding as at June
      30,
      2007:




**Total**
              
              
              **Less
                  than**
                **1
                  Year**
              
              
              **2-
                  3 Years**
              
              
              **4-
                  5 Years**
              
              
              **More
                  than **5
                  Years****Mining
                  equipment fleet
              
              
              33,131
              
              
              33,131
              
              
              -
              
              
              -
              
              
              -Reclamation
                  and remediation obligations (1)
              
              
              8,005
              
              
              -
              
              
              802
              
              
              -
              
              
              7,203Other
                  purchase commitments
              
              
              25,422
              
              
              25,422
              
              
              -
              
              
              -
              
              
              -Share
                  of office lease
              
              
              70
              
              
              70
              
              
              -
              
              
              -
              
              
              -Total
              
              
              66,628
              
              
              58,623
              
              
              802
              
              $
              -
              
              
              7,203




(1)
      In
      current dollars.




31




Off-Balance
      Sheet Arrangements




We
      had no
      off-balance sheet arrangements at June 30, 2007 and December 31, 2006 or at
      the
      date of this report.





**Outlook
      - balance of 2007**





Our
      latest forecast is for production of approximately 6,000 ounces of gold for
      the
      full year 2007 from residual production from the existing leach pads.





Management’s
      primary focus is now on delivery and commissioning of the mining equipment
      fleet, the successful completion of the various other capital projects
      associated with the return of Mesquite to full mining operations, and the
      successful recruiting and training of the necessary salaried and hourly
      personnel.





Total
      planned spending on the mining fleet is now $73.3 million. As at June 30, 2007
      equipment valued at $37.6 million had been delivered and orders valued at $33.1
      million were outstanding.





In
      addition to the mining fleet, we are planning on spending an additional
      approximately $25.3 million during 2007 on other plant and infrastructure
      upgrades and expansion projects at Mesquite. The major aspects of this program
      are the leach pad expansion, retrofit of the process plant, and construction
      of
      a truck repair shop, warehouse and mine operations administrative office. We
      are
      working closely with several environmental agencies and local authorities to
      ensure that all required building and expansion permits are in place and that
      we
      have the necessary surety bonds posted to cover our latest reclamation cost
      estimates.





During
      2006 we started to build the management team for the re-activated operations
      at
      Mesquite and made several key hires, including a General Manager, Mining Manager
      and Chief Geologist, to complement existing financial, human resources and
      environmental affairs staff. In 2007, to date, we have added further managerial
      and supervisory personnel in the areas of mine operations, safety and
      maintenance to our team and we plan on hiring additional key operators and
      maintenance personnel during the third quarter. We expect to have a full
      complement of approximately 160 employees, excluding outside contractors for
      our
      fleet maintenance function, at Mesquite by mid-August 2007.





Pre-production
      stripping operations started in June 2007 and will continue through January
      2008. Initial movement of fresh material to the leach pads will be underway
      by
      October 2007. Commercial production is planned for January 2008.




**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 Exchange Act 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.




32




**PART
      II. OTHER INFORMATION**




**Item
      1.**  **Legal Proceedings.**




None.




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




None.





**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 29, 2007, our
      stockholders:





1.  Approved
      the Agreement and Plan of Merger among Western Goldfields, Inc. (“WG Idaho”),
      Western Goldfields (USA) Inc. (“Mergeco”) and Western Goldfields Inc. (“WG
      Ontario”), an Ontario company, whereby the company effectively changed its place
      of incorporation from Idaho to Ontario by merging Mergeco with WG Idaho, with
      the surviving entity being a Nevada corporation that is a wholly owned
      subsidiary of WG Ontario, and pursuant to which each share of WG Idaho
      automatically became a share of WG Ontario and all current stockholders of
      WG
      Idaho became shareholders of WG Ontario. The following are the votes cast for
      and against and the number of abstentions (there were no broker
      non-votes):





Votes
                For
            
            Votes
                Against
            
            Abstain52,220,566
            
            7,729,612
            
            83,400




2.  Approved
      the Shareholder Rights Plan under which share purchase rights were issued to
      holders of our common stock and which become exercisable when a person or group
      acquires 20% or more of our outstanding common shares or an offer to purchase
      20% or more of our common shares is announced or commenced, unless such
      acquisition or offer is approved by our board of directors or otherwise meets
      certain criteria. After any such event, our shareholders (other than the
      acquiror or offeror, as the case may be) will be entitled to purchase additional
      common shares at 50% of the then-current market price. The
      following are the votes cast for and against and the number of abstentions
      (there were no broker non-votes):





Votes
                For
            
            Votes
                Against
            
            Abstain52,198,549
            
            7,768,262
            
            86,367








3.  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 .
      The
      following are the votes cast for and against and the number of abstentions
      (there were no broker non-votes):





Name
            
            Votes
                For
            
            WithheldRandall
                Oliphant
            
            
            70,065,610
            
            
            142,262Raymond
                Threlkeld
            
            
            70,074,010
            
            
            133,862Vahan
                Kololian
            
            
            70,076,442
            
            
            131,430Martyn
                Konig
            
            
            70,079,510
            
            
            128,362Gerald
                Ruth
            
            
            69,432,290
            
            
            775,582





33





4.  Ratified
      the appointment of HJ & Associates, LLC as our independent registered public
      accounting firm for the fiscal year ending December 31, 2007. The
      following are the votes cast for and against and the number of abstentions
      (there were no broker non-votes):





Votes
                For
            
            Votes
                Against
            
            Abstain69,463,493
            
            639,196
            
            104,183




**Item
      5.**  **Other Information.**





None.





**Item
      6. Exhibits**





10.1
            Rights
                Agreement between Western Goldfields, Inc. and Computershare Investor
                Services Inc., dated as of June 29, 2007
                *




10.2
            Amendment
                and Restatement Agreement, including Amended and Restated Credit
                Agreement, between Western Goldfields, Inc., Investec Bank (UK) Limited
                and the financial institutions party thereto dated May 31,
                2007*





10.3
            Development
                Plan Amendment relating to the credit facility agreement, between
                Western
                Goldfields, Inc., Investec Bank (UK) Limited and Commonwealth Bank
                of
                Australia dated June 29, 2007*





31.1
            Rule
                13a - 14(a) Certification of Principal Executive Officer*




31.2
            Rule
                13a - 14(a) Certification of Principal Financial*




32.1
            Section
                1350 Certification of Principal Executive Officer
                *





32.2
            Section
                1350 Certification of Principal Financial Officer
                *




*
      Filed
      herewith




34




**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 3, 2007




WESTERN
                GOLDFIELDS INC.By:
            /s/
                Raymond ThrelkeldName:Raymond
                ThrelkeldTitle:President
                and Chief Executive Officer




35