**UNITED
      STATES**





**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**




**FORM
      10-Q**




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




For
      the
      quarterly period ended September 30, 2008




OR




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




For
      the
      transition period from to




Commission
                file number 000-51076





**WESTERN
      GOLDFIELDS INC.**


(Exact
      Name of Issuer as Specified in Its Charter)




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




Royal
      Bank Plaza, South Tower, 200 Bay Street, Suite 3120, P.O. Box 167


Toronto,
      Ontario, Canada M5J 2J4


(Address
      of Principal Executive Offices)




416
      324
      6000


(Issuer’s
      Telephone Number, Including Area Code)





2
      Bloor
      Street West, Suite 2102


Toronto,
      Ontario, Canada M4W3E2


(Former
      Address of Principal Executive Offices)





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 large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer
            o
            Accelerated
                filer
            xNon-accelerated
                filer
            o
            Smaller
                reporting company
            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 Shares of no par value – 136,761,919
      shares outstanding as of November 4, 2008.







INDEX




**PART
                I.**
            **FINANCIAL
                INFORMATION**
            3Item
                1.
            **Financial
                Statements (unaudited)**
            3Cautionary
                Note Regarding Forward Looking Statements
            3Consolidated
                Financial Statements: (unaudited)
            4Consolidated
                Balance Sheets
            4Consolidated
                  Statements of Operations and ComprehensiveIncome
                  (Loss)
            5Consolidated
                Statements of Stockholders’ Equity
            6Consolidated
                Statements of Cash Flows
            7Notes
                to the Consolidated Financial Statements
            8Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                3.
            Quantitative
                and Qualitative Disclosure about Market Risk
            35Item
                4.
            Controls
                and Procedures
            35**PART
                II.**
            **OTHER
                INFORMATION**
            36Item
                1.
            Legal
                Proceedings
            36Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            36Item
                3.
            Defaults
                Upon Senior Securities
            36Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            36Item
                5.
            Other
                Information
            36Item
                6.
            Exhibits
            36


2




**PART
      1 – FINANCIAL INFORMATION**





**CAUTIONARY
      NOTE REGARDING FORWARD LOOKING STATEMENTS**





We
      have
      included in this Form 10-Q filing, and from time to time may make in our public
      filings, news releases or other public statements, certain statements that
      may
      include forward-looking statements that reflect our current views with respect
      to future events and financial performance, 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. Additional information
      regarding these factors and others that could cause our actual results to differ
      materially from our expectations is included in our Annual Report on Form 10-KSB
      filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2008.
      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-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, any
      amendments thereto, and in the corresponding documents filed in
      Canada.


3





**PART
      I – FINANCIAL INFORMATION**


**Item
      1.**  **Financial
      Statements (Interim)**




**WESTERN
      GOLDFIELDS INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands U.S. dollars)**


**(Unaudited)**





September 30,
            
            December 31,2008
            
            2007**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            37,914
            
            $
            43,870Restricted
                cash (Note 4)
            
            
            7,500
            
            
            7,500Receivables
            
            
            364
            
            
            298Inventories
                (Note 5)
            
            
            30,305
            
            
            11,201Prepaid
                expenses
            
            
            1,165
            
            
            887Current
                portion of deferred income tax asset (Note 11)
            
            
            1,070
            
            
            755TOTAL
                CURRENT ASSETS
            
            
            78,318
            
            
            64,511Plant
                and equipment, net ofaccumulated
                amortization (Note 6)
            
            
            106,757
            
            
            77,951Construction
                in process (Note 7)
            
            
            4,592
            
            
            21,864Investments
                - reclamation and remediation (Note 8)
            
            
            8,884
            
            
            8,661Long-term
                deposits
            
            
            362
            
            
            348Long-term
                prepaid expenses (Note 9)
            
            
            1,427
            
            
            1,555Deferred
                debt issuance costs, net of accumulated amortization (Note
                10)
            
            
            2,881
            
            
            3,227Deferred
                income tax asset (Note 11)
            
            
            31,285
            
            
            36,379TOTAL
                OTHER ASSETS
            
            
            156,188
            
            
            149,984**TOTAL
                ASSETS**
            
            $
            234,506
            
            $
            214,495**LIABILITIES
                & STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued liabilities
            
            $
            8,315
            
            $
            8,781Current
                portion of mark-to-market loss on gold hedging contracts (Note 12)
            
            
            5,674
            
            
            1,935Current
                portion of loan payable (Note 13)
            
            
            15,109
            
            
            6,882TOTAL
                CURRENT LIABILITIES
            
            
            29,098
            
            
            17,598LONG-TERM
                LIABILITIESMark-to-market
                loss on gold hedging contracts (Note 12)
            
            
            54,633
            
            
            56,966Loan
                payable (Note 13)
            
            
            71,230
            
            
            69,581Reclamation
                and remediation liabilities (Note 14)
            
            
            5,323
            
            
            5,061TOTAL
                LIABILITIES
            
            
            160,284
            
            
            149,206COMMITMENTS
                AND CONTINGENCIES (Note 19)
            
            
            —
            
            
            —STOCKHOLDERS'
                EQUITYCommon
                stock, of no par value, unlimited shares authorized; 136,761,919
                and
                135,049,685 shares issued and outstanding, respectively (Note
                15)
            
            
            135,267
            
            
            133,725Stock
                options and warrants (Note 16)
            
            
            8,109
            
            
            7,551Accumulated
                deficit
            
            
            (69,154
            )
            
            (75,987
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            74,222
            
            
            65,289**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            234,506
            
            $
            214,495




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


4


**WESTERN
      GOLDFIELDS INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**AND
      COMPREHENSIVE INCOME (LOSS)**


**(In
      thousands U.S. dollars)**


**(Unaudited)**




Three Months Ended September 30
            
            Nine Months Ended September 302008
            
            2007
            
            2008
            
            2007REVENUESRevenues
                from gold sales
            
            $
            41,353
            
            $
            1,281
            
            $
            70,955
            
            $
            4,060EXPENSESMine
                operating costs
            
            
            17,591
            
            
            6,067
            
            
            38,800
            
            
            11,741Royalties
            
            
            928
            
            
            50
            
            
            1,533
            
            
            154Cost
                of sales (excludes amortization and accretion)
            
            
            18,519
            
            
            6,117
            
            
            40,333
            
            
            11,895Amortization
                and accretion
            
            
            2,564
            
            
            1,609
            
            
            6,948
            
            
            2,36221,083
            
            
            7,726
            
            
            47,281
            
            
            14,257GROSS
                PROFIT (LOSS)
            
            
            20,270
            
            
            (6,445
            )
            
            23,674
            
            
            (10,197
            )EXPENSESGeneral
                and administrative
            
            
            1,525
            
            
            1,620
            
            
            4,491
            
            
            5,131Exploration
                and business development
            
            
            121
            
            
            (273
            )
            
            936
            
            
            7591,646
            
            
            1,347
            
            
            5,427
            
            
            5,890OPERATING
                INCOME (LOSS)
            
            
            18,624
            
            
            (7,792
            )
            
            18,247
            
            
            (16,087
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            269
            
            
            341
            
            
            942
            
            
            1,383Interest
                expense and commitment fees
            
            
            (1,007
            )
            
            (606
            )
            
            (3,026
            )
            
            (848
            )Amortization
                of deferred debt issuance costs
            
            
            (115
            )
            
            (118
            )
            
            (346
            )
            
            (227
            )Realized
                and unrealized gain (loss) on mark-to-market of gold forward sales
                contracts (Note 12)
            
            
            30,777
            
            
            (28,331
            )
            
            (2,043
            )
            
            (27,573
            )Gain
                on sale of assets
            
            
            —
            
            
            43
            
            
            —
            
            
            43Gain
                (loss) on foreign currency exchange
            
            
            (826
            )
            
            89
            
            
            (1,596
            )
            
            29429,098
            
            
            (28,582
            )
            
            (6,069
            )
            
            (26,928
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            47,722
            
            
            (36,374
            )
            
            12,178
            
            
            (43,015
            )INCOME
                TAX EXPENSE
            
            
            (17,206
            )
            
            —
            
            
            (5,345
            )
            
            —NET
                INCOME (LOSS)
            
            
            30,516
            
            
            (36,374
            )
            
            6,833
            
            
            (43,015
            )OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            —
            
            
            8
            
            
            —
            
            
            —NET
                COMPREHENSIVE INCOME (LOSS)
            
            $
            30,516
            
            $
            (36,366
            )
            $
            6,833
            
            $
            (43,015
            )NET
                INCOME (LOSS) PER SHARE – BASIC
            
            $
            0.22
            
            $
            (0.31
            )
            $
            0.05
            
            $
            (0.39
            )– DILUTED
            
            
            0.21
            
            
            (0.31
            )
            
            0.05
            
            
            (0.39
            )WEIGHTED
                AVERAGE NUMBER OFCOMMON
                STOCK OUSTANDING – BASIC
            
            
            136,739,854
            
            
            118,281,240
            
            
            136,272,266
            
            
            111,628,367–
                DILUTED
            
            
            147,861,514
            
            
            118,281,240
            
            
            149,303,191
            
            
            111,628,367




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


5





**WESTERN
      GOLDFIELDS INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(In
      thousands U.S. dollars)**


**(Nine
      months ended September 30, 2008 and year ended December 31,
      2007)**


**(Unaudited)**




Common Stock
            
            Stock Options
            
            
            
            Accumulated OtherNumber
            
            
            
            and
            
            Accumulated
            
            Comprehensiveof Shares
            
            Amount
            
            Warrants
            
            Deficit
            
            Income (Loss)
            
            TotalBalance,
                December 31, 2006
            
            
            78,452,876
            
            
            32,885
            
            
            7,674
            
            
            (25,678
            )
            
            (2
            )
            
            14,879Common
                stock and warrants issued under prospectus supplement
            
            
            44,646,000
            
            
            92,608
            
            
            —
            
            
            —
            
            
            —
            
            
            92,608Common
                stock issued on exercise of common stock warrants
            
            
            10,248,052
            
            
            4,508
            
            
            —
            
            
            —
            
            
            —
            
            
            4,508Common
                stock issued on exercise of common stock options
            
            
            1,702,757
            
            
            1,040
            
            
            —
            
            
            —
            
            
            —
            
            
            1,040Options
                issued for directors' services
            
            
            —
            
            
            —
            
            
            482
            
            
            —
            
            
            —
            
            
            482Options
                issued for officers' services
            
            
            —
            
            
            —
            
            
            998
            
            
            —
            
            
            —
            
            
            998Options
                issued for employees' services
            
            
            —
            
            
            —
            
            
            1,027
            
            
            —
            
            
            —
            
            
            1,027Options
                issued for consultants' services
            
            
            —
            
            
            —
            
            
            54
            
            
            
            
            
            —
            
            
            54Exercise
                and expiration of warrants & options
            
            
            —
            
            
            2,684
            
            
            (2,684
            )
            
            —
            
            
            —
            
            
            —Net
                loss for the year ended December 31, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            (50,309
            )
            
            —
            
            
            (50,309
            )Other
                comprehensive income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2
            
            
            2Balance,
                December 31, 2007
            
            
            135,049,685
            
            $
            133,725
            
            $
            7,551
            
            $
            (75,987
            )
            $
            —
            
            $
            65,289Common
                stock issued on exercise of common stock warrants
            
            
            750,000
            
            
            338
            
            
            —
            
            
            —
            
            
            —
            
            
            338Common
                stock issued on exercise of common stock options
            
            
            962,234
            
            
            687
            
            
            —
            
            
            —
            
            
            —
            
            
            687Options
                issued for directors’ services
            
            
            —
            
            
            —
            
            
            140
            
            
            —
            
            
            —
            
            
            140Options
                issued for officers’ services
            
            
            —
            
            
            —
            
            
            379
            
            
            —
            
            
            —
            
            
            379Options
                issued for employees’ services
            
            
            —
            
            
            —
            
            
            520
            
            
            —
            
            
            —
            
            
            520Options
                issued for consultants’ services
            
            
            —
            
            
            —
            
            
            36
            
            
            —
            
            
            —
            
            
            36Exercise
                and expiration of warrants & options
            
            
            —
            
            
            517
            
            
            (517
            )
            
            —
            
            
            —
            
            
            —Net
                income for the period ended September 30, 2008
            
            
            —
            
            
            —
            
            
            —
            
            
            6,833
            
            
            —
            
            
            6,833Balance,
                September 30, 2008
            
            
            136,761,919
            
            $
            135,267
            
            $
            8,109
            
            $
            (69,154
            )
            $
            —
            
            $
            74,222




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


6





**WESTERN
      GOLDFIELDS INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands U.S. dollars)**


**(Unaudited)**




Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income (loss)
            
            $
            30,516
            
            $
            (36,374
            )
            $
            6,833
            
            $
            (43,015
            )Adjustments
                to reconcile net income (loss) to net cash provided (used) by operating
                activities:Items
                not affecting cash:Amortization
                of plant and equipment
            
            
            3,710
            
            
            1,531
            
            
            6,740
            
            
            2,123Amortization
                of deferred debt issuance costs
            
            
            115
            
            
            118
            
            
            346
            
            
            227Accretion
                expense (Note 14)
            
            
            88
            
            
            84
            
            
            262
            
            
            253Deferred
                income taxes
            
            
            16,640
            
            
            —
            
            
            4,779
            
            
            —Gain
                on sale of assets
            
            
            —
            
            
            (43
            )
            
            —
            
            
            (43
            )Interest
                net of reimbursed costs - reclamation and remediation
            
            
            (81
            )
            
            (106
            )
            
            (223
            )
            
            (276
            )Stock
                based compensation
            
            
            417
            
            
            662
            
            
            1,075
            
            
            1,950Mark-to-market
                loss (gain) on gold hedging contracts
            
            
            (31,415
            )
            
            28,331
            
            
            1,405
            
            
            27,572Changes
                in assets and liabilities:Decrease
                (increase) in:Accounts
                receivable
            
            
            576
            
            
            18
            
            
            (66
            )
            
            95Inventories
            
            
            (6,372
            )
            
            (1,827
            )
            
            (19,104
            )
            
            (1,867
            )Prepaid
                expenses and deposits
            
            
            (323
            )
            
            (1,019
            )
            
            (150
            )
            
            (1,566
            )Long
                term deposits
            
            
            (5
            )
            
            (5
            )
            
            (14
            )
            
            (14
            )Increase
                (decrease) in:Accounts
                payable
            
            
            (724
            )
            
            1,286
            
            
            (1,251
            )
            
            337Payroll
                and related taxes payable
            
            
            —
            
            
            —
            
            
            (1,562
            )
            
            —Accrued
                expenses
            
            
            3,409
            
            
            (106
            )
            
            4,173
            
            
            329Accrued
                interest expense
            
            
            (26
            )
            
            292
            
            
            (256
            )
            
            292Net
                cash provided (used) by operating activities
            
            
            16,525
            
            
            (7,158
            )
            
            2,987
            
            
            (13,603
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Restricted
                cash (Note 20)
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,500
            )Purchase
                of plant and equipment, including construction in process
            
            
            (5,175
            )
            
            (43,305
            )
            
            (19,844
            )
            
            (74,681
            )Increase
                in reclamation and remediation investment
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,090
            )Net
                cash used by investing activities
            
            
            (5,175
            )
            
            (43,305
            )
            
            (19,844
            )
            
            (84,271
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Loan
                payable
            
            
            —
            
            
            51,108
            
            
            9,876
            
            
            51,108Deferred
                debt issuance costs
            
            
            —
            
            
            (2,470
            )
            
            —
            
            
            (3,320
            )Common
                stock issued for cash
            
            
            —
            
            
            —
            
            
            —
            
            
            59,191Exercise
                of options to purchase common stock
            
            
            15
            
            
            408
            
            
            687
            
            
            909Exercise
                of warrants to purchase common stock
            
            
            —
            
            
            705
            
            
            338
            
            
            2,521Net
                cash provided by financing activities
            
            
            15
            
            
            49,751
            
            
            10,901
            
            
            110,409Change
                in cash
            
            
            11,365
            
            
            (712
            )
            
            (5,956
            )
            
            12,535Cash
                and cash equivalents, beginning of period
            
            
            26,549
            
            
            18,750
            
            
            43,870
            
            
            5,503Cash
                and cash equivalents, end of period
            
            $
            37,914
            
            $
            18,038
            
            $
            37,914
            
            $
            18,038**SUPPLEMENTAL
                CASH FLOW DISCLOSURES:**Interest
                paid
            
            $
            (693
            )
            $
            (457
            )
            $
            (2,982
            )
            $
            (457
            )**NON-CASH
                FINANCING AND****INVESTING
                ACTIVITIES:**Stock,
                options and warrants issued for services
            
            $
            417
            
            $
            662
            
            $
            1,075
            
            $
            1,950Equipment
                purchases included in accounts payable
            
            $
            (18
            )
            $
            (9,094
            )
            $
            316
            
            $
            2,738Deferred
                debt issuance costs included in accrued expenses
            
            $
            —
            
            $
            (2,329
            )
            $
            —
            
            $
            —Non-cash
                component of inventories
            
            $
            422
            
            $
            —
            
            $
            1,623
            
            $
            —




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





7




**WESTERN
      GOLDFIELDS INC.**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**(all
      tabular data in US$ thousands unless otherwise stated)**





**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 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. (the “Reorganization”). 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 stockholders’ 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. Until June 2007, the Company’s operations
      were restricted to the production of gold from material that was placed on
      heap
      leach pads by previous owners of the mine. In June 2007, the Company commenced
      active mining operations and in December 2007 commenced leaching new
      ore.





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with a syndicate of banks, dated
      March 30, 2007 as amended and restated on May 31, 2007, under which facility
      WMMI can borrow up to $105 million in connection with the development of the
      Mesquite Mine. Of this amount, $87.3 million is available until completion
      of
      the project, as defined by the contract, and $17.7 million is available until
      12
      months after completion has been reached. The agreement, in conjunction with
      the
      equity financings of 2007, completed the financing requirements for Mesquite.
      At
      September 30, 2008, $86.3 million had been drawn under the
      facility.





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





**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
      September 30, 2008 and December 31, 2007 and its results of operations and
      its
      cash flows for the three and nine month periods ended September 30, 2008 and
      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 revised groupings or allocations.
      Comparative figures have been reclassified in the financial statements of the
      prior period to conform to the revised basis.





The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America (“U.S. GAAP”)
      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 heap leach, 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.


8





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 year ended December 31, 2007. These interim statements should be read
      together with Western Goldfields’ audited financial statements for the year
      ended December 31, 2007. In the opinion of management, all adjustments
      considered necessary for fair and consistent presentation of interim statements
      have been made. 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.**  **RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements”. The Statement defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      The Statement does not require any new fair value measurements. The provisions
      of the Statement are effective for statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. In
      February 2008, FASB staff issued FSP No. FAS 157-2 which delays the effective
      date of SFAS No. 157 for nonfinancial assets or liabilities that are not
      required or permitted to be measured at fair value on a recurring basis to
      fiscal years beginning after November 15, 2008, and interim periods within
      those
      years. Effective January 1, 2008, the Company adopted SFAS No. 157 as it relates
      to financial assets and liabilities. The new disclosures are included in Note
      17.





In
      February 2007, 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 Company adopted SFAS No. 159 effective January 1, 2008 but
      this
      has had no impact on the Company’s financial position, financial performance and
      cash flows.





In
      December 2007, FASB issued FAS 141(R), “Business Combinations”, which will
      replace FAS 141 prospectively for business combinations consummated after the
      effective date of December 15, 2008. Under FAS 141(R), business combinations
      will be accounted for under the “acquisition method”, compared to the “purchase
      method” mandated by FAS 141. Significant changes will result from applying the
      acquisition method, including: more acquisitions will be accounted for as
      business combinations rather than as asset acquisitions; acquisition related
      costs of the acquirer will be expensed as incurred, whereas under FAS 141 these
      costs are capitalized as part of the business combination; and the assets
      acquired and liabilities assumed are recorded at 100% of fair value even if
      less
      than 100% is obtained, whereas under FAS 141 only the controlling interest’s
      portion is recorded at fair value. In the event of the Company being involved
      in
      a future business combination, the Company will evaluate the application of
      FAS
      141(R).





In
      December 2007, FASB issued FAS 160, “Non-Controlling Interests in Consolidated
      Financial Statements” which is effective for fiscal years beginning after
      December 15, 2008. Under FAS 160, non-controlling interests will be measured
      at
      100% of the fair value of assets acquired and liabilities assumed. Under current
      standards, the non-controlling interest is measured at book value. For
      presentation and disclosure purposes, non-controlling interests will be
      classified as a separate component of shareholders’ equity. In addition, FAS 160
      will change the manner in which increases and decreases in ownership percentages
      are accounted for. The provisions of FAS 160 are to be applied prospectively
      with the exception of the presentation and disclosure provisions, which are
      to
      be applied for all prior periods presented in the financial statements. In
      the
      event of the Company being required in the future to prepare consolidated
      financial statements including a non-controlling interest in another entity,
      the
      Company will evaluate the application of FAS 160.





In
      March
      2008, FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
      Hedging Activities – an amendment of FASB Statement No. 133”, which is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008, with early application encouraged. The statement
      requires enhanced disclosures about an entity’s derivative and hedging
      activities and thereby improves the transparency of financial reporting. The
      statement changes the disclosure requirements for derivative instruments and
      hedging activities. Entities are required to provide enhanced disclosures about
      (a) how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedging items are accounted for under Statement 133
      and
      its related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance and
      cash flows. The Company is currently evaluating the implications of the enhanced
      disclosure requirements in respect of its forward gold sales
      contracts.





In
      June
      2008, FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted
      in
      Share-Based Payment Transactions Are Participating Securities" which is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those years.  The statement
      addresses whether instruments granted in share-based payment transactions are
      participating securities prior to vesting and, therefore, need to be included
      in
      the earnings allocation in computing earnings per share under the two-class
      method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings
      per
      Share *.* The
      Company is currently evaluating the impact of FSP EITF 03-6-1 and does not
      expect the adoption to have an impact on the Company's consolidated financial
      statements.


9





In
      June
      2008, FASB issued EITF No. 07-5, "Determining Whether an Instrument (or Embedded
      Feature) is Indexed to an Entity's Own Stock" which is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those fiscal years.  The Company is currently
      evaluating the impact of EITF No. 07-5 and does not expect the adoption to
      have
      an impact on the Company's consolidated financial statements.





**4.
      RESTRICTED CASH**





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with a syndicate of banks, dated
      March 30, 2007 as amended and restated on May 31, 2007 (Note 13). Under the
      terms of this facility the Company has set aside $7.5 million (2007 - $7.5
      million) 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. Completion of Mesquite Mine development project, as defined
      in
      the credit agreement has not yet been reached (Note 21).




**5.**  **INVENTORIES**





Inventories
      consist of the following:





**September 30,**
              **2008**
            
            **December 31,**
              **2007**Ore
                on leach pads
            
            $
            25,174
            
            $
            7,724Metal-in-process
            
            
            1,458
            
            
            847Bullion
            
            
            99
            
            
            994Supplies
            
            
            3,574
            
            
            1,636Total
                inventories
            
            $
            30,305
            
            $
            11,201





Inventories
      are valued at the lower of cost or net realizable value (“NRV”).





Since
      June 30, 2008, new ore placed on leach pads has been valued at cost, based
      on
      current mining costs, including depreciation, amortization and depletion, since
      this is lower than NRV. At December 31, 2007, ore on leach pads was valued
      at
      NRV. The estimated 52,812 ounces (2007 – 12,080 ounces) of recoverable gold on
      the leach pads is calculated from the quantities of ore placed (based on
      measured tonnage), the grade of ore (based on assay results), and a recovery
      percentage (based on ore type), less transfers into metal-in-process
      inventory.





Since
      June 30, 2008, metal-in-process inventory has been valued at cost, based on
      the
      average cost of gold-in-solution fed into the process from the leach pads plus
      further processing costs, including depreciation relating to processing
      facilities, since this is lower than NRV. At December 31, 2007, metal-in-process
      inventory was valued at NRV. The estimated 2,855 ounces (2007 – 1,086 ounces) of
      gold-in-solution and in carbon is based on assays and projected recoveries
      from
      the refining circuit.





Bullion
      represents gold held for our account a refiner pending sale. Since June 30,
      2008, bullion has been valued at cost, based on the average cost of the
      in-process inventory plus refining costs, since this is lower than NRV. At
      December 31, 2007, bullion was valued at NRV. At September 30, 2008, 192 gold
      ounces were held at a refiner (2007 – 1,196 ounces).





10


**6.**  **PLANT
      AND EQUIPMENT**





The
      following is a summary of plant and equipment, and accumulated amortization
      and
      depreciation as at September 30, 2008 and December 31, 2007:





**September 30,**
              **2008**
            
            **December 31,**
              **2007**Buildings
            
            $
            4,748
            
            $
            4,215Equipment
            
            
            81,704
            
            
            74,633Leach
                pad expansion and other processing equipment
            
            
            30,662
            
            
            2,684Mine
                development
            
            
            3,480
            
            
            3,517120,594
            
            
            85,049Less
                accumulated amortization and depreciation
            
            
            (13,837
            )
            
            (7,098
            )Net
                plant and equipment
            
            $
            106,757
            
            $
            77,951





Capitalized
      interest expense for the nine month period ended September 30, 2008 was $0.2
      million (September 30, 2007 - $0.1 million), respectively, based on the interest
      attributable to borrowings incurred to finance the construction of assets
      intended for the Company’s own use. For the year ended December 31, 2007
      capitalized interest was $0.5 million. Capitalization of interest ceases when
      an
      asset is ready for its intended use.





Plant
      and
      equipment as at September 30, 2008 and December 31, 2007 includes $1.4 million
      in respect of fauna relocation costs and $2.3 million in respect of capitalized
      development drilling costs.





Amortization
      and depreciation expense for the three month and nine month periods ended
      September 30, 2008 was $2.5 million and $6.7 million, respectively (2007 -
      $1.5
      million and $2.1 million).




**7.**  **CONSTRUCTION
      IN PROCESS**





The
      following is a summary of the major components of construction in process at
      September 30, 2008 and December 31, 2007:





**September 30,**
              **2008**
            
            **December 31,**
              **2007**Leach
                pad expansion
            
            $
            -
            
            $
            12,837Building
                construction and site infrastructure
            
            
            4,592
            
            
            9,027$
            4,592
            
            $
            21,864




Construction
      in process is accumulated and carried forward at cost until completion of
      construction or until the equipment is substantially complete and ready for
      productive use, at which time the cost is transferred to property, plant and
      equipment and is amortized over the asset’s expected useful life.





Cumulative
      spending on the two phases of the leach pad expansion have been capitalized
      and
      depreciated effective January 1, 2008 and May 1, 2008,
      respectively.





**8.**  **INVESTMENTS
      – RECLAMATION AND REMEDIATION**





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 $6.0 million into a reimbursement account with AIG,
      representing the net present value of expected reclamation costs. As a result
      of
      increases in proven and probable reserves in August 2006 and March 2007, which
      increased the estimated life of the mine by two years, the Company 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 $8.7 million to approximately $11.3 million and the Company was
      required to place an additional $2.1 million in the reimbursement account with
      AIG. In addition, changes were made to the insurance program as described in
      Note 9.


11





During
      the second half of 2006 and first quarter of 2007, the Company carried out
      closure procedures in respect of the Vista heap leach pad. Related costs of
      $0.3
      million were reimbursed by AIG.





The
      following is a summary of cumulative activity in the reimbursement account
      as at
      September 30, 2008 and December 31, 2007:





**September 30,**
              **2008**
            
            **December 31,******
              **2007**Original
                deposit to reimbursement account
            
            $
            5,999
            
            $
            5,999Additional
                deposit to reimbursement account
            
            
            2,091
            
            
            2,091Interest
                earned from inception
            
            
            1,143
            
            
            9209,233
            
            
            9,010Reclamation
                costs reimbursed
            
            
            (349
            )
            
            (349
            )Closing
                balance
            
            $
            8,884
            
            $
            8,661





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
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315361
            
            
            11/7/2003
            
            $
            1,468
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315362
            
            
            11/7/2003
            
            $
            62
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementESD
                7315363
            
            
            11/7/2003
            
            $
            550
            
            
            California
                Water Quality Control BoardESD
                7315358
            
            
            11/7/2003
            
            $
            6,978
            
            
            U.S.
                Bureau of Land ManagementESD
                7315359
            
            
            11/7/2003
            
            $
            50
            
            
            California
                State Lands CommissionESD
                7315533
            
            
            5/30/2007
            
            $
            977
            
            
            Imperial
                County, CaliforniaCalifornia
                Department of ConservationU.S.
                Bureau of Land ManagementCalifornia
                State Lands Commission





**9.**  **LONG-TERM
      PREPAID EXPENSES**




The
      Company has paid advance premiums in respect of insurance policies to cover
      environmental risks at the Mesquite Mine. In late 2007, the insurance program
      was 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
      on
      deposit in the Investment - Remediation and Reclamation account ($8.8 million
      at
      September 30, 2008), to an aggregate limit of $17.5 million (December 31, 2007
      -
      $17.5 million), and expires November 7, 2020.





The
      program also covers pollution and remediation risk up to $10.0 million and
      includes coverage for pre-existing conditions and new conditions. The terms
      for
      pre-existing conditions and new conditions coverage expire on November 7, 2013
      and November 7, 2008, respectively.


12


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




**September 30,**
              **2008**
            
            **December 31,******
              **2007**Original
                Policy Premiums
            
            $
            1,643
            
            $
            1,643Additional
                Policy Premium
            
            
            724
            
            
            724Amortization
                to date
            
            
            (769
            )
            
            (641
            )Unamortized
                Premium Cost
            
            
            1,598
            
            
            1,726Current
                Portion
            
            
            (171
            )
            
            (171
            )Long-Term
                Prepaid Expenses
            
            $
            1,427
            
            $
            1,555





**10.**  **DEFERRED
      DEBT ISSUANCE COSTS**





Debt
      issuance costs, primarily bank fees and professional fees and costs associated
      with the term loan facility (Note 13) incurred to September 30, 2008 and
      December 31, 2007, were $3.6 million. These costs are being amortized on a
      straight-line basis over the term of the facility to December 31, 2014.
      Amortization for the three month and nine month periods ended September 30,
      2008
      was $0.1 million and $0.3 respectively (2007 – $0.1 and $0.2).




**September 30,**
              **2008**
            
            **December 31,******
              **2007**Debt
                issuance costs incurred
            
            $
            3,570
            
            $
            3,570Cumulative
                amortization
            
            
            (689
            )
            
            (343
            )Closing
                balance
            
            $
            2,881
            
            $
            3,227




**11.**  **INCOME
      TAXES**





**Income
      Taxes Recoverable**





**September 30,**
              **2008**
            
            **December 31,******
              **2007**Current
            
            $
            1,070
            
            $
            755Deferred
            
            
            31,285
            
            
            36,379Income
                taxes recoverable
            
            $
            32,355
            
            $
            37,134




**Deferred
      Taxes**





The
      Company records deferred income tax assets and liabilities where temporary
      differences exist between the carrying amounts of assets and liabilities in
      the
      balance sheet and their tax bases.


13





The
      significant components of the deferred tax asset at September 30, 2008 and
      December 31, 2007 are as follows:





**September 30,**
              **2008**
            
            **December 31,**
              **2007****Current
                deferred tax assets**
            
            $
            1,070
            
            $
            755**Long-term
                deferred tax assets**Unrealized
                loss on mark-to-market ofgold
                forward sales contracts
            
            
            24,220
            
            
            22,217Net
                operating losses
            
            
            17,945
            
            
            19,131Mining
                property
            
            
            1,265
            
            
            1,265Reclamation
                cost
            
            
            1,811
            
            
            1,948Exploration
                cost
            
            
            553
            
            
            453Stock-based
                compensation
            
            
            1,507
            
            
            1,335Minimum
                tax
            
            
            380
            
            
            -Other
            
            
            155
            
            
            -Total
                long-term deferred tax assets
            
            
            47,836
            
            
            46,349**Long-term
                deferred tax liabilities**Fixed
                assets
            
            
            (9,048
            )
            
            (2,370
            )Total
                long-term deferred tax liabilities
            
            
            (9,048
            )
            
            (2,370
            )**Net
                long-term deferred tax asset**
            
            
            39,858
            
            
            43,979**Valuation
                allowance**
            
            
            (7,503
            )
            
            (7,600
            )**Net
                deferred tax assets**
            
            $
            32,355
            
            $
            37,134





At
      September 30, 2008 the Company had income tax loss carry-forwards of
      approximately $47.5 million. These losses expire from 2022 to 2028. The ability
      to utilize these loss carry-forwards is dependent upon a number of factors,
      including the future profitability of operations and other tax limitations.
      The
      future tax benefit of $17.9 million less a valuation allowance of $5.7 million,
      resulting in a future tax benefit of $12.2 million, has been recognized in
      the
      consolidated financial statements with respect to these income tax loss
      carry-forwards.




**12.**  **LOSSES
      ON GOLD FORWARD SALES CONTRACTS**





Under
      the
      terms of the term loan facility dated March 30, 2007 and amended and restated
      on
      May 31, 2007 (Note 13), Western Mesquite Mines, Inc. was required, as a
      condition precedent to drawdown of the loan, to enter into a gold hedging
      program acceptable to the banking syndicate. 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.





During
      the third quarter of 2008, the Company began settling these contracts, at the
      Company’s option, by physical delivery of gold or on a net financial settlement
      basis. Realized losses of $0.6 million were recognized for the three and nine
      months ended September 30, 2008 ($nil – September 30, 2007). The remaining
      contracts were marked-to-market as at September 30, 2008 using a spot price
      of
      gold of $885 per ounce. The cumulative unrealized pre-tax loss of $60.3 million
      (2007 - $58.9 million) has been disclosed as a liability as at September 30,
      2008 and the Company has recorded an unrealized gain of $31.4 million and an
      unrealized loss of $1.4 million for the three month and nine month periods
      ended
      September 30, 2008, respectively (2007 unrealized loss – $28.3 million and $27.6
      million, respectively).





The
      Company has not designated these contracts as cash flow hedges. Accordingly,
      the
      hedge accounting rules of SFAS No. 133 are not being applied and the period-end
      mark-to-market adjustment related to these contracts is immediately reflected
      on
      the income statement of the Company as unrealized losses on gold forward sales
      contracts and the cumulative effect is reflected as an asset or liability on
      the
      balance sheet.


14


**13.**  **LOAN
      PAYABLE**





**Term
      Loan Facility**





The
      Company, through its wholly-owned subsidiary, Western Mesquite Mines, Inc.
      (“WMMI”), entered into a term loan facility with a syndicate of banks, dated
      March 30, 2007 as amended and restated on May 31, 2007, under which WMMI can
      borrow up to $105 million in connection with the development of the Mesquite
      Mine. The facility expires December 31, 2014 and comprises a multiple-draw
      term
      loan of which $87.3 million is available as required for the development of
      the
      Mesquite Mine; the remainder is available for up to 12 months after completion,
      as defined within the contract, 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 is guaranteed by the
      Company. The date to reach completion has been extended to March 31, 2009 to
      take into consideration the Company’s new life of mine plan (Note
      21).





Interest
      on the term loan is charged at U.S. dollar LIBOR plus 2.2% prior to completion
      and U.S. dollar LIBOR plus 1.75% after completion.  Completion occurs upon
      the satisfaction of certain technical and financial criteria as defined in
      the
      credit agreement. As at September 30, 2008, WMMI had drawn $86.3 million under
      the facility at a rate of approximately 4.7%, which includes the one-month
      LIBOR
      rate at time of loan renewal.  As at December 31, 2007, WMMI had drawn
      $76.5 million under the facility and incurred interest at a rate of
      approximately 7.25%. Repayment of the project facility will be on a semi-annual
      basis, commencing December 31, 2008 through December 31, 2014 according to
      an
      agreed schedule of percentages of the loan outstanding on the final day of
      the
      availability period. On the basis of the loan outstanding at September 30,
      2008,
      the initial repayment on December 31, 2008 would be $9.9 million or 11.5% of
      the
      loan, and the second repayment on June 30, 2009 would be $5.2 million or 6.0%
      of
      the loan, of which the combined amount has been recorded as a current
      liability.





In
      addition to the scheduled repayments, mandatory prepayments are required
      semi-annually based on 50% of the excess cash flow from the Mesquite Mine.
      An
      estimate of the timing and amount of prepayments has not been included in these
      financial statements, as these payments are based on the amount by which the
      Mesquite Mine’s cash balance after repayments and interest payments, at the date
      of repayment, exceeds $4.0 million.




**14.**  **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 provision
      for reclamation and remediation liabilities is 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 as at September 30, 2008 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.





In
      May
      2007, the Company announced an increase in its mineral reserves which is
      reflected in an increase of $0.1 million in the provision for reclamation and
      remediation as at December 31, 2007.





The
      following table sets out the activity for the Company’s reclamation and
      remediation liabilities for the nine month period ended September 30, 2008
      and
      the year ended December 31, 2007:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**Opening
                Balance
            
            $
            5,061
            
            $
            4,805Accretion
            
            
            262
            
            
            337Reclamation
                costs incurred
            
            
            -
            
            
            (148
            )Increase
                (reduction) in the present value of obligations
            
            
            -
            
            
            67Ending
                Balance
            
            $
            5,323
            
            $
            5,061





The
      estimated amount payable within the next 12 months included in the above balance
      as at September 30, 2008 is $0.2 million (2007 - $0.1 million).


15





**15.**  **COMMON
      STOCK**





**Reclassification
      of Additional Paid-In Capital**





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





**Public
      Offerings of Common Stock**





In
      January 2007, the Company issued 33,330,000 common stock at a price of $1.91
      per
      share (Cdn. $2.25 per share) under a prospectus supplement to the Company’s
      shelf prospectus dated October 27, 2006. Net proceeds to the Company, after
      expenses of $4.5 million, were $59.2 million.





In
      October 2007, the Company issued 11,316,000 common stock at a price of $3.13
      per
      share (Cdn. $3.05 per share) under a Short Form Prospectus dated October 2,
      2007. Net proceeds to the Company, after expenses of $2.0 million, were $33.4
      million.





**Other
      Issuances of Common Stock**





During
      the nine month period ended September 30, 2008, 962,234 options were exercised
      for cash consideration of $0.7 million.





During
      the nine month period ended September 30, 2008, 750,000 shares of common stock
      were issued for cash consideration of $0.3 million upon the exercise of 750,000
      warrants to purchase common shares.





During
      the year ended December 31, 2007, the Company issued 1,702,757 shares of common
      stock for cash consideration of $1.0 million upon the exercise of options to
      purchase common stock. Of the stock issued, 103,125 shares were issued under
      the
      cashless method under which option holders receive that number of stock
      calculated by dividing the amount by which their options are “in the money” by
      the stock price at date of exercise.





During
      the year ended December 31, 2007, the Company issued 10,248,052 shares of common
      stock for cash consideration of $4.5 million upon the exercise of 10,248,052
      warrants to purchase common stock.





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





**Options**





The
      Company has a stock incentive plan which is intended to provide an incentive
      to
      officers, employees, directors and consultants of the Company. The option price
      is determined by the Compensation Committee of the Board of Directors at its
      sole discretion but shall not be less than the closing price of the Company’s
      common stock on The Toronto Stock Exchange two trading days after the date
      of
      the grant. The term of each option granted shall be for a period not exceeding
      ten years from the date of the grant. Except as expressly provided for in the
      option holder’s employment, consulting or termination contract, the option
      holder may exercise the option to the extent exercisable on the date of such
      termination at any time within three months after the date of
      termination.





The
      plan
      is a non-qualifying stock option plan for U.S. income tax purposes. For awards
      made before and after the reorganization of the Company effective June 29,
      2007,
      the price of options granted is expressed in terms of U.S. and Canadian dollars,
      respectively. The aggregate number of shares of the Company’s common stock for
      which option awards may be granted under the plan shall not exceed 5,000,000.
      At
      September 30, 2008, 2,245,000 option awards were available for issuance under
      the plan.





Prior
      to
      inception of the Western Goldfields’ stock option plan, of the awards issued,
      10,174,118 option awards remain outstanding as at September 30, 2008.


16





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 “cashless 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.





During
      the nine month period ended September 30, 2008, 962,234 options were exercised
      for cash proceeds of $0.7 million and 36,666 options were
      forfeited.





On
      August
      8, 2008, the Company issued 400,000 options to employees and an officer, and
      100,000 options to a consultant for services rendered, with an exercise price
      of
      Cdn. $2.00 per share. The options vest in three equal annual installments
      beginning on August 8, 2008, and were fair valued at $0.5 million.





During
      the year ended December 31, 2007, 1,749,632 options were exercised for cash
      proceeds of $1.0 million, and 10,000 options expired. Of the options exercised,
      150,000 were exercised in exchange for 103,125 shares of common stock under
      the
      cashless method under which option holders receive that number of shares
      calculated by dividing the amount by which their options are “in the money” by
      the stock price at date of exercise.





On
      December 10, 2007, the Company issued 300,000 options to an employee with an
      exercise price of Cdn. $3.74 per share. The options vest in three equal annual
      installments beginning on December 10, 2007, and were fair valued at $0.7
      million.





On
      August
      2, 2007, the Company issued 395,000 options to employees and to a director
      with
      an exercise price of Cdn. $2.80 per share. The options vest in three equal
      annual installments beginning on August 2, 2007, and were fair valued at $0.9
      million.





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 $0.1 million.





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 $1.1 million.





The
      value
      of each option award is estimated on the date of the grant using the
      Black-Scholes option-pricing model. The model requires the input of subjective
      assumptions, including the weighted-average risk-free rate of return, expected
      term of the option award, and stock price volatility. During 2007, these
      assumptions were adjusted to reflect prevailing interest rates, plan experience
      and stock market performance of the Company’s shares, respectively. These
      estimates involve inherent uncertainties and the application of management
      judgment. In addition, we are required to estimate the expected forfeiture
      rate
      and only recognize expense for options expected to vest. As a result, if other
      assumptions had been used, our recorded stock-based compensation expense may
      have been different from that reported. The Black-Scholes option pricing model
      used the following assumptions:





**September 30,**
              **2008**
            
            **December 31,**
              **2007**Weighted-average risk-free
                rate of return (%)
            3.0%
            
            3.9%
                - 5.0%Dividend
                yield
            -%
            
            -
                %Expected
                life in years
            4
            
            4
                and 7Volatility
            62%
            
            91%
                - 98%


17





The
      following is a summary of stock option activity for the nine month period ended
      September 30, 2008 and the year ended December 31, 2007:





**Weighted
                Average****Shares**
            
            **Exercise**
              **Price**
            
            **Fair**
              **Value**Balance
                January 1, 2007(1)
            
            
            13,661,250
            
            $
            0.61Granted
            
            
            1,400,000
            
            
            2.60Exercised
                / Expired
            
            
            (1,759,632
            )
            
            0.65Outstanding
                December 31, 2007
            
            
            13,301,618
            
            
            0.82Exercisable
                at December 31, 2007
            
            
            9,403,291
            
            $
            0.72Fair
                value of options as at December 31, 2007
            
            
            
            
            
            
            
            $
            0.55Balance
                January 1, 2008
            
            
            13,301,618
            
            $
            0.82Granted
            
            
            500,000
            
            
            1.88Exercised
            
            
            (962,234
            )
            
            0.71Expired
                / Forfeited
            
            
            (36,666
            )
            
            1.96Outstanding
                September 30, 2008(1)
            
            
            12,802,718
            
            
            0.85Exercisable
                at September 30, 2008
            
            
            11,939,388
            
            $
            0.73Fair
                value of options as at September 30, 2008
            
            
            
            
            
            
            
            $
            0.56




(1)
      Includes options granted under predecessor plan.





The
      following table summarizes information about the stock options outstanding
      at
      September 30, 2008:





**Awards
                Outstanding by Range****Exercise
                Price**
              **$**
            
            **Awards
                Outstanding**
            
            **Awards
                Exercisable****Low**
            
            **High**
            
            **Quantity**
            
            **Weighted**
              **Average**
              **Outstanding**
              **Contractual**
              **Life**
            
            **Weighted**
              **Average
                Exercise Price**
            
            **Quantity**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted**
              **Average**
              **Exercise Price**0.01
            
            
            0.50
            
            
            7,754,117
            
            
            4.24
            
            $
            0.34
            
            
            7,754,117
            
            
            4.24
            
            $
            0.340.51
            
            
            1.00
            
            
            2,420,000
            
            
            3.60
            
            
            0.88
            
            
            2,420,000
            
            
            3.60
            
            
            0.881.01
            
            
            1.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —1.51
            
            
            2.00
            
            
            1,008,601
            
            
            6.17
            
            
            1.92
            
            
            493,603
            
            
            5.96
            
            
            1.932.01
            
            
            2.50
            
            
            925,000
            
            
            4.84
            
            
            2.18
            
            
            908,334
            
            
            4.82
            
            
            2.182.51
            
            
            3.00
            
            
            395,000
            
            
            5.83
            
            
            2.63
            
            
            263,334
            
            
            5.83
            
            
            2.633.01
            
            
            3.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —3.51
            
            
            4.00
            
            
            300,000
            
            
            6.19
            
            
            3.51
            
            
            100,000
            
            
            6.19
            
            
            3.5112,802,718
            
            
            4.41
            
            $
            0.85
            
            
            11,939,388
            
            
            4.28
            
            $
            0.73





As
      of
      September 30, 2008, there was $1.0 million (2007 - $1.7 million) of total
      unrecognized compensation cost related to nonvested stock based compensation
      arrangements granted under the plan. The cost is expected to be recognized
      over
      a weighted-average period of 1.0 year (2007 – 1.1 years).





Stock
      based compensation expenses are included within general and administrative
      expenses.




18




**Warrants**





The
      following is a summary of warrant activity for the nine months ended September
      30, 2008 and the year ended December 31, 2007:





**Nine months ended**
              **September 30,**
              **2008**
            
            **Year ended**
              **December 31,**
              **2007**Balance,
                start of period
            
            
            6,806,180
            
            
            17,054,232Issued
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Exercised
            
            
            (750,000
            )
            
            (10,248,052
            )Balance,
                end of period
            
            
            6,056,180
            
            
            6,806,180





Warrants
      outstanding to acquire common shares of the Company at September 30, 2008 are
      as
      follows:





**Warrants Outstanding**
            
            **Exercise****Price**
            
            **Expiry Date**6,056,180
            
            $
            0.76
            
            
            Note
                1





(1)
            Newmont
                Mining Corporation (“Newmont”) received warrants as part of the purchase
                price for Mesquite in November 2003. Under the anti-dilution provisions
                of
                the warrant, the exercise price was reduced from $1.00 to $0.76 upon
                the
                issuance of common shares and warrants by way of private placement
                on
                February 13, 2006. The warrants expire between June 9, 2011 and June
                9,
                2012.





**17.**  **FAIR
      VALUE OF FINANCIAL INSTRUMENTS**




As
      discussed in Note 3, effective January 1, 2008, the Company adopted SFAS 157
      as
      it relates to financial assets and liabilities that are being measured at fair
      value on a recurring basis. Although the adoption of SFAS 157 did not materially
      impact its financial condition, results of operations, or cash flows, the
      Company is now required to provide additional disclosures as part of its
      financial statements. In accordance with FSP 157-2, the Company deferred
      adoption of SFAS 157 as it relates to nonfinancial assets and liabilities
      measured at fair value on a non-recurring basis.




SFAS
      157
      defines fair value, establishes a framework for measuring fair value in
      accordance with U.S. GAAP, and expands disclosure about fair value measurements.
      The statement is intended to enable the reader of the financial statements
      to
      assess the inputs used to develop those measurements by establishing the
      hierarchy for ranking the quality and reliability of the information used to
      determine fair values. The statement requires that assets and liabilities
      carried at fair value be classified and disclosed in a three-tier fair value
      hierarchy. These tiers include: Level 1, defined as quoted market prices in
      active markets for identical assets and liabilities; Level 2, defined as inputs
      other than Level 1 that are observable, either directly or indirectly, such
      as
      quoted prices for similar assets or liabilities; quoted prices in markets that
      are not active; model-based valuation techniques for which all significant
      assumptions are observable in the market; or inputs that are observable or
      can
      be corroborated by observable market data for substantially the full term of
      the
      assets or liabilities; and Level 3, defined as unobservable inputs that are
      not
      corroborated by market data.




The
      following table sets out the Company’s financial assets and liabilities at
      September 30, 2008 at fair value by level within the fair value hierarchy.
      As
      required by FAS 157, liabilities are classified in their entirety based on
      the
      lowest level of input that is significant to the fair value
      measurement.




19




**Fair
                Value at September 30, 2008****Total**
            
            **Level
                1**
            
            **Level
                2****Assets******Cash and cash equivalents and restricted cash
            
            $
            45,414
            
            $
            45,414
            
            $
            -**Liabilities**Bank
                debt
            
            $
            86,339
            
            $
            86,339
            
            $
            -Derivative instruments – forward gold sales
            
            $
            60,307
            
            $
            -
            
            $
            60,307




The
      Company’s cash and restricted cash is represented by account balances and
      short-term deposits with major Canadian and U.S. banks. Canadian account
      balances and deposits are converted to U.S. dollars at the closing exchange
      rate
      on September 30, 2008 and accordingly are classified within Level 1 of the
      fair
      value hierarchy.




The
      Company’s bank debt represents the current and long-term portions of advances
      under the Company’s term-loan facility. This indebtedness is a financial
      liability and as such its fair value equals its historic cost. Accordingly
      it is
      classified within Level 1 of the fair value hierarchy.




The
      Company’s forward gold sales contracts are valued using pricing models which
      require a variety of inputs, including contractual terms and yield curves,
      and
      correlation of such inputs. The Company utilizes the market approach to
      measurement of fair value for these derivative instruments. This approach uses
      prices and other relevant information generated by market transactions involving
      comparable liabilities. Such derivative contracts trade in liquid markets and,
      as such, model inputs can generally be verified and do not involve significant
      management judgment. Such instruments are typically classified within Level
      2 of
      the fair value hierarchy.





**18. 
        RELATED PARTY TRANSACTIONS**





In
      March
      2006, the Company concluded a cost sharing agreement with Silver Bear Resources
      Inc. (“Silver Bear”) under which half of certain of Silver Bear’s office
      overhead costs is charged to the Company. The Company is related to Silver
      Bear
      because certain senior executives and a director of Silver Bear also serve
      as
      senior executives and as a director of the Company. During the three months
      and
      nine months ended September 30, 2008 overhead costs of $nil and $0.2 million,
      respectively, were charged to the Company under this agreement (2007 - $nil
      and
      $0.2 million). At September 30, 2008 and December 31, 2007, $19,000 and $31,000,
      respectively, was payable to Silver Bear. The Company anticipates renewing
      the
      agreement in November 2008 with the result that the Company will pay for costs,
      including office rental, in the first instance and will then charge Silver
      Bear
      for its proportionate share.





**19.**  **COMMITMENTS
      AND CONTINGENCIES**





**Mining
      Industry**




Although
      the mineral 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 Resource Company, 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.





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.


20





**Mesquite
      Expansion**





The
      Company is in the final stages of completion of the mine expansion program
      at
      Mesquite. As at September 30, 2008, planned and committed capital spending
      on
      the program is approximately $1.8 million.





**Lease
      Agreement**





The
      Company has entered into a lease for head office premises for the ten-year
      period commencing June 1, 2008. Estimated rental and operating costs over the
      first year of the lease are approximately $530,000 and over the ten-year term
      are approximately $5.4 million. The Company anticipates that Silver Bear will
      initially share 50% of these costs (see Note 18).





**Congrove
      Construction Matter**





The
      Company, through its subsidiary, Western Mesquite Mines, Inc. (“WMMI”), entered
      into a Management Representative Agreement dated August 7, 2007 (the
“Agreement”) with Congrove Construction (“Congrove”) of Yuma, Arizona, in
      respect of certain construction activities associated with the Mesquite
      expansion project. WMMI terminated the Agreement on the grounds of bad faith
      demonstrated by Congrove in the carrying out of its contractual duties. On
      July
      3, 2008, legal counsel acting for Congrove filed a complaint and demand for
      jury
      trial with the United States District Court, Southern District of California,
      asserting that WMMI materially breached the Agreement by failing to provide
      complete plans in a timely manner, by wrongfully terminating Congrove’s services
      on the construction project, and by failing to pay monies owing to Congrove
      under the Agreement. Congrove is seeking relief in the amount of $0.6 million
      plus interest thereon. Congrove filed and recorded a notice of litigation in
      September 2008.





The
      Company believes these claims are without merit and will vigorously defend
      against such claims.





**20.** **COMPARATIVE
      INFORMATION**





The
      Company has reclassified the cash used by restricted cash of $7,500,000 from
      the
      initial classification as an operating activity to investing activity in these
      financial statements to conform to the year-end December 31, 2007
      classification.





**21.** **SUBSEQUENT
      EVENT**





On
      October 6, 2008, the Company announced a revised mine plan which includes
      sequential mining of the various pits at the site. As a result of this change,
      it was agreed with the lenders to extend the date at which completion would
      be
      reached to March 31, 2009. The Company is currently in discussions with the
      lenders to amend other terms of the loan facility.


21




**Item
      2.**  **Management’s
      Discussion and Analysis of Consolidated Financial Condition and Results of
      Operations**




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 for the three and nine month periods ended September 30, 2008 and
      the
      notes thereto. The information is presented as of November 4, 2008. All amounts
      in this discussion are expressed in U.S. dollars, unless otherwise
      specified.**





The
      following discussion contains forward-looking statements that involve numerous
      risks and uncertainties. Actual results of the Company could differ materially
      from those discussed in such forward-looking statements as a result of these
      risks and uncertainties, including those set forth in our Annual Report filed
      with the SEC on March 28, 2008 under Item 1. Description of Business - “Risk
      Factors.”




**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. Until late 2007, Mesquite provided residual gold production
      from
      ore that was placed on the heap leach pads by Newmont and previous owners of
      the
      property. A positive feasibility study was completed in August 2006. Subsequent
      equity and debt financings have enabled us to undertake a capital expansion
      program and resume mining operations at Mesquite. We started to place new ore
      on
      the new heap leach pad during the second half of 2007 and this started to be
      reflected in gold production and inventories by late 2007. We attained “steady
      state” production from the new leach pad during the second quarter of 2008
      (“Q2/08”). We have obtained all necessary permits and are sufficiently funded to
      complete the capital expansion program. We have revised our expectations to
      selling 117,000 ounces of gold in 2008. Western Goldfields Inc. is listed on
      the
      Toronto Stock Exchange and trades under the symbol WGI, and is listed on the
      NYSE Alternext under the symbol WGW.





**Overall
      Performance**





Our
      first
      gold pour from new production occurred on January 15, 2008. During the first
      half of 2008, we were focused on achieving “steady state” production from the
      new ore being placed on the leach pad that was constructed in the previous
      fiscal year. By late May, solution flow to the leach pad had become saturated,
      steady state pregnant solution flow had been achieved, and production rates
      had
      stabilized. During the third quarter of 2008, ounces produced and sold were
      42,358 and 48,535, respectively. Production for the third quarter was lower
      than
      expectations and was mainly a result of a delay in the availability of
      replacement parts for one shovel in the mining fleet. Year-to-date, we have
      produced and sold 79,946 ounces and 80,255 ounces of gold, respectively. Of
      the
      ounces sold, 16,500 were delivered into a hedge program as a condition of the
      debt facility, at a fixed price of $801 per ounce. During the year, the Mine
      incurred escalating production costs, most notably for fuel and haulage truck
      tires. The selling price for gold in world markets continued to be strong and
      offsets the full impact of input cost increases.





**Term
      Loan Facility and Related Hedging**





Our
      wholly-owned subsidiary, Western Mesquite Mines, Inc., has a term loan facility
      with a syndicate of banks for $105.0 million. The facility comprises
      multiple-draw loans maturing December 31, 2012, of which $87.3 million is
      available for the development of the Mesquite Mine, and the remainder is
      available for up to 12 months after completion for other corporate purposes.
      Achieving completion will require the satisfaction of financial, production
      and
      technical criteria, and based on the new mine plan, is now expected to occur
      by
      March 31, 2009. Repayment of the facility will be on a semi-annual basis
      commencing December 31, 2008, with mandatory prepayments being made from 50%
      of
      excess cash flow. An estimate of the timing and amount of prepayments cannot
      be
      objectively determined, as these payments are based on the amount by which
      the
      Mesquite Mine’s cash balance after scheduled repayments and interest payments,
      at the date of repayment, exceeds $4.0 million. Interest on each advance is
      charged at U.S. dollar LIBOR plus 2.2% up to completion and at U.S. dollar
      LIBOR
      plus 1.75% after completion.





As
      at
      September 30, 2008 we had drawn approximately $86.3 million. Based on our
      current plans, we do not anticipate making further draws.





22





On
      June
      7, 2007, we executed forward sales contracts for 429,000 ounces of gold (the
      “Hedging Contracts”) at a price of $801 per ounce. These Hedging Contracts were
      a requirement under the term loan facility. The Hedging Contracts represent
      a
      commitment of 5,500 ounces per month for 78 months commencing July 2008, with
      the last commitment deliverable December 2014. We expect to produce on average
      approximately 166,000 ounces annually during the term of the Hedging Contracts,
      of which 66,000 annually will be covered by the Hedging Contracts, leaving
      approximately 100,000 ounces leveraged to the price of gold. Since we have
      not
      designated these forward sales contracts as cash flow hedges, they are being
      marked-to-market at the end of each quarterly period for financial reporting
      purposes. We have recorded an unrealized pre-tax gain of $31.4 million and
      loss
      of $1.4 million for the three and nine month periods ended September 30, 2008,
      respectively, and a pre-tax loss of $58.9 million for the year ended December
      31, 2007. The cumulative unrealized pre-tax loss of $60.3 million has been
      disclosed as a liability as at September 30, 2008. The first deliveries into
      the
      hedge occurred during the third quarter of 2008. As a result of gold prices
      during the quarter being higher than the settled amount of $801, we realized
      pre-tax losses of $0.6 million for the three and nine month period ended
      September 30, 2008.





As
      a
      result of the change in life of mine plan, we have negotiated with the lenders
      to extend the date by which completion would be reached to March 31,
      2009.





**Capital
      Program - Construction Activity**





During
      the first three quarters of 2008, the remaining aspects of our capital program,
      launched in late 2006, were substantially completed. In the first quarter of
      2008, the expanded leach pad became operational and the retrofit of the process
      plant was completed. During the second quarter, new carbon columns for the
      processing circuit were brought on stream and construction of the new truck
      repair shop, warehouse and mine administrative office was substantially
      completed. Our latest forecast for spending on the expansion capital program
      is
      $110.0 million, of which $95.4 million was incurred in 2006 and 2007 and $14.6
      million estimated for 2008. Spending on the expansion program in 2008
      year-to-date was $13.0 million. The remaining planned expenditures of the
      capital program in 2008 are to complete the truck repair shop.





**Selected
      Financial Information**  *(all
      tabular data in US$ thousands unless otherwise stated)*





Cash
      flows provided (used) by:





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Operating
                activities
            
            
            16,525
            
            
            (7,158
            )
            
            2,987
            
            
            (13,603
            )Investing
                activities
            
            
            (5,175
            )
            
            (43,305
            )
            
            (19,844
            )
            
            (84,271
            )Financing
                activities
            
            
            15
            
            
            49,751
            
            
            10,901
            
            
            110,409





Balance
      sheet items:




**September 30,**
              **2008**
            
            **December 31,**
              **2007**Cash
                and cash equivalents
            
            
            37,914
            
            
            43,870Restricted
                cash
            
            
            7,500
            
            
            7,500Working
                capital
            
            
            49,220
            
            
            46,913Plant
                and equipment, net of accumulated amortization
            
            
            106,757
            
            
            77,951Construction
                in process
            
            
            4,592
            
            
            21,864Stockholders’
                equity
            
            
            74,222
            
            
            65,289





23





Statement
      of operations items:


Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenues
                from gold sales (i)
            
            
            41,353
            
            
            1,281
            
            
            70,955
            
            
            4,060Gross
                profit (loss)
            
            
            20,270
            
            
            (6,445
            )
            
            23,674
            
            
            (10,197
            )Realized
                and unrealized gain (loss) on mark-to-market of gold forward sales
                contracts
            
            
            30,777
            
            
            (28,331
            )
            
            (2,043
            )
            
            (27,573
            )Net
                income (loss)
            
            
            30,516
            
            
            (36,366
            )
            
            6,833
            
            
            (43,015
            )Net
                income (loss) per share - Basic
            
            $
            0.22
            
            $
            (0.31
            )
            $
            0.05
            
            $
            (0.39
            )- Diluted
            
            $
            0.21
            
            $
            (0.31
            )
            $
            0.05
            
            $
            (0.39
            )Gold
                ounces produced
            
            
            42,357
            
            
            1,843
            
            
            79,947
            
            
            6,083Gold
                ounces sold
            
            
            47,535
            
            
            1,876
            
            
            80,255
            
            
            6,101Average
                revenue per ounce (i)
            
            $
            870
            
            $
            683
            
            $
            884
            
            $
            665Cost
                of sales per ounce (ii)
            
            $
            390
            
            $
            3,261
            
            $
            503
            
            $
            1,950





(i)
            Excludes
                $0.6 million in realized losses on gold forward contracts recognized
                during the third quarter of 2008.(ii)
            Cost
                of sales per ounce is defined as cost of sales per Western Goldfields’
                financial statements divided by the number of ounces
                sold.





**Consolidated
      Financial Results / Overall Performance**





Western
      Goldfields’ net income to common shareholders for the nine month period ended
      September 30, 2008 (“2008 YTD”) was $6.8 million, or $0.05 per share (basic and
      diluted), compared with a net loss of $43.0 million, or $0.39 per share, for
      the
      nine month period ended June 30, 2007 (“2007 YTD”).




The
      net
      income for 2008 YTD includes $1.4 million non-cash, unrealized pre-tax loss
      arising from the mark-to-market of contracts for the forward sale of gold which
      were taken out as a requirement of our term loan facility. The loss reflects
      the
      increase in spot gold price from $836 to $885, decreases in gold lease rates,
      and decreases in interest rates during the nine month period ended September
      30,
      2008. During the third quarter of 2008 we settled, either financially or
      physically into the first hedge contracts, a total of 16,500 ounces. These
      ounces were each delivered at a time when gold prices were higher than the
      forward price of $801. As a result, realized losses of $0.6 million were
      recognized during the quarter and 2008 YTD for financially settled hedge
      contracts. The remaining contracts consist of 412,500 ounces of gold to be
      delivered in tranches of 5,500 ounces per month up to December
      2014.





Results
      for 2008 YTD reflect our first three quarters with Mesquite as a producing
      mine,
      and as such are not comparable with results for 2007 YTD when Mesquite was
      leaching residual ounces from operations that ceased in previous years. Net
      revenues for 2008 YTD have increased by $66.9 million over the previous year.
      Of
      this total, $49.3 million related to increased gold ounces sold and $17.5
      million was a result of higher gold prices. Although ounces sold increased
      from
      6,101 in 2007 YTD to 80,255 in 2008 YTD, sales in the early months of 2008
      were
      below the range that was initially forecast. There are numerous variables and
      unknowns in commissioning a new leach pad operation. It took us several weeks
      longer than anticipated to reach “steady state” solution flow and planned
      performance. Cost of sales per ounce for 2008 YTD, based on mine cost of sales
      less non-cash depreciation, amortization and depletion, was $503 per ounce,
      compared with $1,950 per ounce in the 2007 YTD period. Unit costs for 2008
      YTD
      were higher than the previously projected estimate of $470 - $490 per ounce
      for
      the full year, due partially to the preparation towards a new mine plan and
      the
      decline of shovel availability in the third quarter. Higher fuel prices have
      also negatively affected mining costs. Higher fuel costs are also being
      reflected in the cost of other items with high energy content, such as
      explosives and chemicals. Tire costs also continue to run higher than originally
      forecast. In common with many mining companies, the mining operations were
      adversely affected by a world-wide shortage of radial-ply truck tires. We have
      mitigated the impact of this shortage by sourcing improved quality bias-ply
      tires, but usage is up and haulage trucks are operating at less than planned
      speed. To compensate for this, during March 2008 an additional crew was hired
      and mining operations were carried out on a 24/7 basis commencing in the second
      quarter of 2008.





Other
      operating expenses for 2008 YTD were $5.4 million compared with $5.9 million
      in
      2007 YTD. General and administrative expenses of $4.5 million were lower than
      the $5.1 million of the previous year. Non-cash stock based compensation for
      2008 YTD, included within general and administrative expenses, of $1.1 million
      was significantly lower than the $2.0 million expense in the previous year.
      The
      higher expense in 2007 primarily reflects the amortizing of grants of options
      to
      Western Goldfields’ new management team in early 2006. Exploration and business
      development expense in 2008 YTD of $0.9 million related to a drilling program
      to
      explore for oxide resources to the south of the Brownie Hill area at Mesquite
      and costs of our continuing efforts in assessing complementary business
      opportunities.





24





Other
      expense for 2008 YTD was $6.1 million compared with $26.9 million in 2007 YTD.
      The largest contributing factor was the realized loss from settlement of gold
      forward sales contracts and non-cash unrealized losses relating to the
      mark-to-market of the remaining contracts. The spot price of gold at the time
      the hedging contracts were entered into was $660-675 per ounce, compared with
      a
      price of $885 at September 30, 2008 and $836 at December 31, 2007. An unrealized
      loss of $1.4 million for the nine month period ended September 30, 2008 and
      $58.9 million for the year ended December 31, 2007 has been recognized. The
      cumulative unrealized pre-tax loss of $60.3 million has been disclosed as a
      liability as at September 30, 2008. Other expense for 2008 YTD also included
      $0.9 million of interest income as compared with $1.4 million in 2007 YTD,
      reflecting the higher cash balances in 2007 immediately after the January 2007
      equity issue, which generated cash of $59.2 million. Interest expense and
      commitment fees for 2008 YTD was $3.0 million reflecting advances under the
      term
      loan facility in the range of $76.5 - $86.3 million. The loss on foreign
      currency exchange of $1.6 million for 2008 YTD relates to us holding Canadian
      dollars during periods when that currency generally weakened in relation to
      the
      U.S. dollar.





Prior
      to
      2007, we did not recognize the recoverability of any part of the deferred tax
      assets, including operating losses carried forward. At year-end 2007, it was
      determined that it was more likely than not that we would realize the benefit
      of
      a substantial amount of the deferred tax asset that was accumulated.
      Accordingly, at December 31, 2007 a tax recovery of $37.1 million was recorded,
      principally arising from net operating loss carry forwards for income tax
      purposes and timing differences arising from the recording of the accounting
      loss in respect of the mark-to-market of gold forward sales contracts. For
      the
      period ended September 30, 2008, the deferred tax balance was reduced to $32.4
      million as a result of mark-to-market gains and a reconciliation from the 2007
      filed tax returns.





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenues
                from gold sales
            
            
            41,353
            
            
            1,281
            
            
            70,955
            
            
            4,060Average
                revenue per ounce
            
            $
            870
            
            $
            683
            
            $
            884
            
            $
            665Increase
                (decrease) in revenues
            
            
            40,072
            
            
            (616
            )
            
            66,895
            
            
            (2,716
            )Change
                in revenues attributable to ounces sold
            
            
            31,184
            
            
            (738
            )
            
            49,348
            
            
            (3,164
            )Change
                attributable to average selling price
            
            
            8,888
            
            
            122
            
            
            17,547
            
            
            448





Revenues
      from gold sales for the three and nine months ended September 30, 2008 have
      increased by $40.1 million and $66.9 million, respectively, compared to the
      same
      period in 2007, reflecting attainment of steady state production from the new
      leach pad during the second quarter of 2008 and higher average selling prices
      per ounce sold. The revenue in the third quarter of 2008 does not include losses
      of $0.6 million realized on the settlement of forward contracts at $801 per
      ounce while the average market price for gold during the quarter was $870 per
      ounce.





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Cost
                of goods sold
            
            
            21,083
            
            
            7,726
            
            
            47,281
            
            
            14,257Increase
                (Decrease)
            
            
            13,357
            
            
            6,532
            
            
            33,024
            
            
            7,356Gross
                profit %
            
            
            49
            %
            
            (503)
            %
            
            33
            %
            
            (251)
            %




Cost
      of
      goods sold for the three and nine months ended September 30, 2008 increased
      by
      $13.4 million and $33.0 million, respectively, compared to the same period
      in
      2007. Prior to the second quarter of 2008, cost of goods sold exceeded revenues.
      Gross profit percentage for the third quarter of 2008 was 49%, reflecting the
      ramp up of mining production, the attainment of steady state ounce flow from
      the
      leach pad and progression towards normal costs reflecting ongoing operations.
      Gross profit percentage for the nine months ended September 30, 2008 was 33%,
      reflecting the higher costs of the previous quarters when the new leach pad
      was
      in start-up mode and when a relatively high volume of waste material was moved
      to access the ore body. The higher costs in 2008 as compared with 2007 also
      reflect increases in several cost inputs, most notably fuel, tires, blasting
      and
      mining fleet maintenance. Mine site administration costs have also increased
      as
      the Mesquite Mine now has a full management and administration team in place.
      Costs also reflect substantially higher amortization charges for the new plant
      and equipment that was placed in service throughout 2007 and 2008
      year-to-date.




25





A
      comparison of the major components of cost of goods sold is as
      follows:





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Mine
                operating costs
            
            
            17,591
            
            
            6,067
            
            
            38,800
            
            
            11,741Amortization
                and accretion
            
            
            2,564
            
            
            1,609
            
            
            6,948
            
            
            2,362Royalties
            
            
            928
            
            
            50
            
            
            1,533
            
            
            154





Other
      operating expenses for Q3/08 were $1.6 million, compared with $1.3 million
      in
      Q3/07. Although general and administrative expenses overall were marginally
      lower at $1.5 million in Q3/08, the components were different; audit fees were
      higher, reflecting our engagement in late 2007 of a major international
      accounting firm as auditors and recruitment fees were incurred to fill senior
      management positions in head-office. This increase was offset by lower legal
      and
      regulatory filing fees, which were relatively high in Q3/07 as a result of
      reorganization activities at that time. Stock based compensation in Q3/08 was
      $0.2 million lower than the prior year primarily because of higher initial
      amortization relating to options awarded to the new management team in 2006.
      Other operating expenses for the nine months ended September 30, 2008 were
      $5.4
      million, compared with $5.9 million for the same period in 2007. General and
      administrative costs were $0.6 million lower, reflecting increased audit fees
      offset by lower legal fees. In addition, salaries, travel and recruiting costs
      were higher than in the previous year. Stock based compensation was $0.9 million
      lower than the previous year because of the higher initial amortization of
      options awarded to the new management team in the previous year.





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**General
                and administrative
            
            
            1,525
            
            
            1,620
            
            
            4,491
            
            
            5,131Exploration
                and business development
            
            
            121
            
            
            (273
            )
            
            936
            
            
            759





Other
      income for Q3/08 was $29.1 million compared with expense of $28.6 million in
      the
      previous year. The major contributor to this increase in income was the $31.4
      million recognized in respect of the unrealized mark-to-market gain on gold
      forward sales contracts. The gain reflects the fact that the spot price of
      gold
      decreased from $930 per ounce to $885 per ounce during Q3/08. In Q3/07 the
      spot
      price of gold increased from $651 per ounce to $743 per ounce resulting in
      a
      $28.3 million mark-to-market loss. Interest income was fairly consistent at
      $0.3
      million for the third quarter in both fiscal years. Although average cash and
      cash equivalent balances were lower in Q3/07 compared to Q3/08, interest rates
      were lower in Q3/08. Interest expense and commitment fees of $1.0 million in
      Q3/08 reflect term loans outstanding of $86.3 million. In Q3/07, $51.1 million
      in loans were outstanding resulting in interest and commitment fees of $0.6
      million. The loss on foreign currency exchange of $0.8 million for Q3/08 relates
      to us holding Canadian dollars during periods when that currency generally
      weakened in relation to the U.S. dollar.





Other
      expense for the nine months ended September 30, 2008 was $6.1 million compared
      with $26.9 million in the previous year. The unrealized mark-to-market loss
      on
      gold forward sales contracts during the period was $1.4 million. The loss
      reflects the fact that the spot price for gold increased from $836 to $885
      during the period and there was a decrease in gold forward lease rates. Interest
      income for the nine months ended September 30, 2008 was $0.9 million compared
      with $1.4 million the previous year. The decline was a result of cash balances
      being relatively high during 2007 after the equity issue in January of that
      year
      and declining interest rates during 2008. Interest expense and commitment fees
      of $3.0 million during the nine months ended September 30, 2008 reflects term
      loan advances in the range of $76.5 - $86.3 million during the period. The
      loss
      on foreign currency exchange of $1.6 million for 2008 YTD relates to us holding
      Canadian dollars during periods when that currency generally weakened in
      relation to the U.S. dollar.





26





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





Three months ended September 30,
            
            Nine months ended September 30,**2008**
            
            **2007**
            
            **2008**
            
            **2007**Interest
                income
            
            
            269
            
            
            341
            
            
            942
            
            
            1,383Interest
                expense and commitment fees
            
            
            (1,007
            )
            
            (606
            )
            
            (3,026
            )
            
            (848
            )Amortization
                of deferred debt issuance costs
            
            
            (115
            )
            
            (118
            )
            
            (346
            )
            
            (227
            )Realized
                and unrealized gain (loss) on mark-to-market of gold forward sales
                contracts
            
            
            30,777
            
            
            (28,331
            )
            
            (2,043
            )
            
            (27,573
            )Gain
                (loss) on foreign exchange
            
            
            (826
            )
            
            89
            
            
            (1,596
            )
            
            294




**Results
      of Operations**





**Nine
      Months Ended September 30, 2008 (“2008 YTD”) compared to Nine Months Ended
      September 30, 2007 (“2007 YTD”).**




Gold
      production for 2008 YTD was 79,947 ounces compared with 6,083 ounces for 2007
      YTD. During 2007, production at Mesquite was derived from residual gold leaching
      of ore placed on the leach pads several years previously. Mining of new ore
      at
      Mesquite started in July 2007 and the first pour of gold from new ore occurred
      in January 2008. Ore production has been building up steadily since that time
      but production during the third quarter fell below expectations as a result
      of
      production difficulties which included most significantly the decline in mine
      equipment availability. Approximately 34.2 million tons of waste and 6.3 million
      tons of ore were mined in 2008 YTD at an average grade of 0.026 ounces per
      ton.
      The low production in 2007 YTD reflects the nearly complete depletion of
      recoverable gold ounces from ore placed on the leach pads prior to Western
      Goldfields acquisition of the Mesquite Mine. Gold sales for 2008 YTD were 80,255
      ounces at an average selling price of $884 for revenues of $71.0 million,
      compared with 6,101 ounces at an average selling price of $665 for revenues
      of
      $4.1 million for 2007 YTD. The 2008 YTD figures exclude $0.6 million in realized
      losses from the settlement of the first gold hedge contracts as per the
      requirement of the loan advanced to us.





Mine
      operating costs were $38.8 million in 2008 YTD, compared to $11.7 million in
      2007 YTD. 2008 costs represented the first three quarters of full mining
      operations. The most significant components of mine operating costs included:
      labor, contracted services, fuel and tire costs. Mine site administration costs
      for 2008 YTD were $3.9 million compared with $2.0 million in 2007 YTD,
      reflecting the increase in staff and associated costs to support full mining
      operations. Amortization and accretion expense for 2008 YTD was $6.9 million
      compared with $2.4 million in 2007 YTD, reflecting mining fleet additions from
      May 2007 onwards and the new leach pad addition in 2008.





During
      2008 YTD we have increased our gold inventory in the leach pad and in-process
      to
      52,812 ounces to 2,855 ounces, respectively. Inventoried costs associated with
      respect to the leach pad and metal-in-process build-up were $25.1 million and
      $1.5 million, respectively, compared with $1.8 million and $0.2 million in
      2007
      YTD, respectively. In the first quarter of 2008, the new leach pad was in
      start-up mode. The steady state of solution flow and planned gold production
      was
      not reached until late May 2008. As a result, unit production costs in the
      first
      half of the year were abnormally skewed and not representative of anticipated
      future costs. The high costs resulted in gold inventories being initially
      carried at realizable value. It was not until the second quarter of 2008 that
      net realizable value exceeded the cost of the inventory. In the third quarter
      of
      2007, we had just resumed mining operations and began placing new ore on the
      leach pads. Reflecting the start-up phase of the operation, production levels
      in
      the period ended September 30, 2007 were low relative to mining costs incurred.
      Accordingly, the estimated 2,469 ounces contained in ore on leach pads at
      September 30, 2007 was valued at net realizable value.





The
      foregoing factors resulted in a gross profit of $23.7 million for 2008 YTD
      compared with a gross loss of $10.2 million for 2007 YTD.





General
      and administrative expense of $4.5 million for 2008 YTD decreased from the
      2007
      expense of $5.1 million. Listing expenses and legal fees were substantially
      higher in 2007 as a result of corporate financing and reorganization activities.
      In 2008 YTD, we incurred higher audit and taxation services fees, reflecting
      the
      engagement of a major accounting firm. This was also the first year that our
      U.S. Sarbanes-Oxley program requires auditor attestation resulting in
      incremental consulting fees. We have also incurred $0.2 million in recruitment
      fees to fill senior management positions. Stock based compensation, included
      within general and administrative expenses, represents the non-cash costs of
      options, as calculated under the Black-Scholes option pricing model, and was
      granted to directors, officers, employees and consultants. The lower cost of
      $1.1 million in 2008 YTD reflects the fact that options granted to the new
      management team in 2006 were fully expensed. There were 500,000 options granted
      in 2008 YTD compared to 1,100,000 options granted in the same period in 2007.





27





Exploration
      activities at Mesquite during 2008 YTD totaled $0.6 million and relate primarily
      to a drilling program to explore for oxide resources south of the Brownie Hill
      area at the mine site. Costs of $0.8 million in 2007 relate to a similar
      drilling program. The 2007 program resulted in an increase in proven and
      probable reserves resources of 0.4 million ounces and an increase in the mine
      life of approximately two years. During 2008, we also incurred costs of $0.3
      million in assessing complementary business opportunities.





Other
      expense for 2008 YTD was $6.1 million compared to $26.9 million in 2007 YTD.
      The
      decrease in expenses primarily reflects the 2007 charge of $27.6 million in
      respect of the unrealized mark-to-market loss on gold forward sales contracts
      as
      a result of the increasing spot price of gold during the period and the downward
      movement in gold forward lease rates. In 2008, a mark-to-market unrealized
      loss
      of $1.4 million was recognized, reflecting an increase in the spot price of
      gold
      and decrease in gold forward lease rates. This was combined with a realized
      loss
      of $0.6 million on the settlement of the first hedge contracts. Interest income
      for 2008 YTD was $0.9 million compared with $1.4 million in the previous year
      as
      a result of cash balances being relatively high during 2007 YTD after the equity
      issue in January of that year and declining interest rates throughout 2008.
      Interest expense and commitment fees of $3.0 million in 2008 YTD reflect the
      term loan advances in the range of $76.5 - $86.3 million during the period.
      At
      September 30, 2007, only $51.1 million had been withdrawn under the loan
      facility. In 2008 YTD, a foreign exchange loss of $1.6 million was recognized
      due to holding Canadian dollar bank deposits at a time when that currency was
      weakening in relation to the U.S. dollar.





At
      year-end 2007, we determined that it was more likely than not that we would
      realize the benefit of a substantial amount of the accumulated deferred tax
      asset. Accordingly, at December 31, 2007 a tax recovery of $37.1 million was
      recognized, principally arising from net operating loss carry forwards for
      income tax purposes and timing differences arising from the recording of the
      accounting loss in respect of the mark-to-market of gold forward sales
      contracts. For 2008 YTD the deferred tax asset was adjusted down to $30.7
      million reflecting the unrealized mark-to-market gain and a reconciliation
      of
      the 2007 filed corporate tax returns.





The
      factors discussed above resulted in the net income to common stockholders for
      2008 YTD of $6.8 million or $0.05 per share, compared with a net loss of $43.0
      million or $0.39 per share in 2007 YTD.





**Three
      Months Ended September 30, 2008 (“Q3/08”) compared to Three Months Ended
      September 30, 2007 (“Q3/07”).**




Gold
      production for Q3/08 was 42,357 ounces compared with 1,843 ounces in Q3/07.
      Ore
      production continues to build, but was negatively impacted during the third
      quarter from lower than anticipated equipment availability. Approximately 11.3
      million tons of waste and 3.0 million tons of ore were mined in Q3/08 at an
      average grade of 0.023 ounces per ton. The achieved grade during the quarter
      relates to the shift of mining activities to the Rainbow 1 pit from the Big
      Chief pit as called for in the original mine plan. Gold sales for Q3/08 were
      47,535 ounces at an average selling price of $870 for revenues of $41.4 million,
      compared with 1,876 ounces at an average selling price of $683 for revenues
      of
      $1.3 million for Q3/07. The gold revenues in Q3/08 exclude 5,500 ounces
      financially settled into gold hedging contracts for $801 per ounce, resulting
      in
      a realized loss of $0.6 million.





Mine
      operating costs were $17.6 million in Q3/08, compared to $6.1 million in Q3/07.
      The mining cost component continues to be adversely affected by escalating
      fuel
      costs and tire usage. Additionally, we experienced decreased availabilities
      in
      mine equipment which required repairs and maintenance. This increased costs
      negatively while also decreasing ounces mined in the quarter. Mine site
      administration costs for Q3/08 were $1.7 million compared with $0.9 million
      in
      Q3/07, reflecting the increase in staff and associated costs to support full
      mining operations. Amortization and accretion expense for Q3/08 was $2.6 million
      compared with $1.6 million in Q3/07, reflecting the substantial completion
      of
      the expansion program.





During
      Q3/08 we increased gold inventory in the leach pad from 44,120 ounces to 52,812
      ounces. Inventoried costs associated with this build up were $25.1 million
      compared with $19.9 million in Q2/08 and $1.8 million in Q3/07. Mesquite
      attained the steady state of solution flow and planned gold production rates
      in
      late May 2008 and continues to buildup leach pad gold ounces, which is inline
      with projections based on leach curve modeling. As a result of equipment
      availability problems, fewer ounces were mined and placed onto the leach pad
      thereby affecting gold production in current and future periods. Inventories
      are
      valued at the lower of cost or net realizable value, with the cost basis of
      accounting being applicable since June 30, 2008.





The
      above
      factors resulted in a gross profit of $20.3 million in Q3/08 compared with
      a
      gross loss of $6.4 million in Q3/07.





28





General
      and administrative expenses decreased marginally from $1.6 million in Q3/07
      to
      $1.5 million in Q3/08. Increases in expenses were largely attributable to:
      recruitment fees relating to senior management, salary and benefits from the
      increased headcount, higher audit and tax services fees reflecting the
      engagement of a major accounting firm, and the increasing complexity of our
      activities. These costs were partially offset from decreases in legal fees
      which
      were substantially higher in 2007 as a result of the activities leading up
      the
      reorganization in late June 2007. Stock based compensation expense, included
      within general and administrative expense, for Q3/08 was $0.4 million compared
      with $0.7 million in Q3/07. The lower cost in Q3/08 reflects the fact that
      amortization relating to the grant of options to the new management team in
      2006
      was substantially complete. We granted 500,000 stock options to employees,
      an
      officer and a consultant on August 8, 2008, of which, the majority of the
      expense will be recognized in future periods. These variances resulted in the
      overall decrease in general and administrative expenses.





In
      Q3/08,
      exploration and business development incurred expenses of $0.1 million and
      consisted mainly of our ongoing evaluation of business opportunities. Recoveries
      of $0.3 million in Q3/07 related to over-accruals in the drilling program at
      the
      Mesquite Mine site.





Other
      income for Q3/08 was $29.1 million compared to expense of $28.6 million in
      Q3/07. The increase was attributable to the $30.8 million in realized gain
      and
      unrealized loss on mark-to-market of gold forward sales contracts. The net
      gain
      was primarily a result of the decline in the spot price of gold from $930 to
      $885 per ounce. The loss in mark-to-market adjustment in Q3/07 was from the
      increase in the spot price of gold from $651 to $743 per ounce.





Interest
      income for Q3/08 was relatively unchanged from the $0.3 million recognized
      in
      Q3/07. Although average cash balances were higher in Q3/08 than Q3/07, the
      impact of lower interest rates decreased interest income for the quarter.
      Interest expense and commitment fees of $1.0 million in Q3/08 reflect term
      loan
      advances of $86.3 million during the quarter. The expense of $0.6 million in
      Q3/07 represents interest and commitment fees from initial draws totaling $51.1
      million under the credit facility. The loss on foreign currency exchange of
      $0.8
      million for Q3/08 related to us holding Canadian dollars during periods when
      that currency generally weakened in relation to the U.S. dollar.




During
      Q3/08 a tax provision of $17.2 million was recognized, principally arising
      from
      the operating timing differences from the recording of the accounting gain
      in
      respect of the mark-to-market of gold forward sales contracts and differences
      from the original 2007 tax provision and the corporate tax return filed.





The
      above
      factors resulted in net income to common stockholders for Q3/08 of $30.5 million
      or $0.22 per share, compared with a net loss of $36.4 million or $0.31 per
      share
      in Q3/07.





**Liquidity
      and Capital Resources**




The
      securing and subsequent draw-downs on the loan facility in 2007 and into 2008
      enabled us to fund the completion of the expansion program at Mesquite and
      the
      inventory buildup associated with the ramp-up of production until the generation
      of operating cash flow was achieved during the second quarter of 2008. We
      started 2008 with available cash balances of $43.9 million, restricted cash
      of
      $7.5 million, and working capital of $46.2 million. In addition, we had
      unutilized credit facilities of $28.6 million of which $10.9 million was
      available for the Mesquite Expansion project and $17.7 million was available
      for
      general corporate purposes.




During
      2008 YTD we were advanced a further $9.9 million under the term loan facility
      and received $1.0 million through the exercise of warrants and stock options.
      On
      November 3, 2008, the lenders agreed with us to extend the date at which
      completion would be reached to March 31, 2009 as a result of changes in our
      life
      of mine plan.





In
      2008
      YTD, operating activities generated cash of $3.0 million compared to using
      $13.6
      million in the comparative period in 2007. The net income for 2008 YTD was
      $5.3
      million, including the non-cash impact of the $1.4 million mark-to-market
      unrealized loss on forward sales contracts and deferred income taxes of $6.4
      million. Other non-cash expense items were: amortization and accretion expense
      of $7.0 million, amortization of deferred debt issuance costs of $0.3 million,
      and stock-based compensation of $1.1 million. Changes in the composition of
      non-cash working capital items during 2008 YTD used $18.4 million. The largest
      single item was the increase in inventories of $19.1 million, reflecting an
      increase of approximately 40,732 ounces in recoverable gold on the leach pads
      during the period. A reduction in accrued payroll of $1.6 million was also
      a
      contributing factor.




Cash
      required for investing activities in 2008 YTD was $19.8 million compared with
      $84.3 million in 2007 YTD. The spending in 2008 was on several process related
      projects forming part of the Mesquite Expansion project, most notably being
      the
      new leach pad, new carbon columns, retrofit of the process plant, and a truck
      repair facility. The project is now nearly complete and future capital
      expenditures will be of a sustaining nature. We have reclassified the cash
      used
      by restricted cash of $7.5 million in the comparative 2007 YTD period from
      the
      original presentation as an operating activity to an investing activity to
      conform to the year-end December 31, 2007 presentation.




The
      above
      factors resulted in a decrease in our cash position by $6.0 million in 2008
      YTD.





29





At
      September 30, 2008, we had available cash balances of $37.9 million, restricted
      cash of $7.5 million, and working capital of $49.2 million. In addition, we
      currently have unutilized credit facilities of $18.7 million of which $1.0
      million is available for the Mesquite Expansion project and $17.7 million was
      available for general corporate purposes. At present it is not anticipated
      there
      will be further draws under the credit facility. We expect to spend an
      additional $1.8 million in completing the expansion related projects during
      the
      fourth quarter of 2008.





With
      these moderate capital expenditures, and having reached steady state production
      in Q2/08, we expect consistent generation of operating cash flows in coming
      quarters.





We
      are
      sufficiently financed and earning free cash flows which we believe to be
      sufficient to: fund ongoing operations, including discharging our current
      obligations in the normal course of operations, repay our loan facility, and
      realize potential business opportunities. Our most liquid investments are held
      in the form of cash and short-term government treasury bills which management
      believes have minimal exposure to the prevailing uncertain and volatile market
      conditions.





**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*





We
      account for our 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 may
      be
      accounted for in other comprehensive income based upon our 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, we have not designated 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 Western Goldfields’ income statement.




*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
      expensed all mine development costs prior to our establishing proven and
      probable reserves upon completion of the feasibility study in August 2006.
      Development costs incurred subsequent to that date are capitalized and deferred
      and are amortized on a units-of-production basis. Development costs relating
      to
      the relocation of fauna, which bear no relation to mineral production are being
      amortized on a straight line basis over the expected life of the mineral
      property.




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.





30





*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.





*Deferred
      Taxes*





We
      account for income taxes using the liability method, recognizing certain
      temporary differences between the financial reporting basis of our assets and
      liabilities and the related income tax basis for such assets and liabilities.
      This method generates either a net deferred income tax asset or liability for
      Western Goldfields, as measured by the statutory tax rates in effect. We derive
      our deferred income tax benefit or charge by recording the change in either
      the
      net deferred income tax asset or liability balance in the year.





Our
      deferred income tax assets include certain future income tax benefits. A
      valuation allowance is recorded against deferred tax assets if management does
      not believe the Company has met the “more likely than not” standard imposed by
      SFAS No. 109 to allow recognition of such an asset.





*Ore
      on Heap Leach Pads and Metal-in-Process Inventories*





*Ore
      on Heap Leach Pads*




Prior
      to
      July 2007, we placed no value on the mineralized material that had been placed
      on the leach pads at the Mesquite Mine prior to the acquisition of the property
      by us on November 7, 2003. The reserve estimates reported by us in August 2006
      and March 2007 support the recoverability of inventoried production costs.
      Accordingly, since resumption of mining operations in July 2007, new ore placed
      on the leach pads has been valued at the lower of average cost or net realizable
      value. Costs are added to ore on leach pads based on current mining costs,
      including applicable depreciation, amortization and depletion relating to mining
      operations. Costs are removed from ore on leach pads as ounces are recovered
      based on the average cost per estimated recoverable ounce of gold on the leach
      pad. The estimates of recoverable gold on the leach pads are calculated from
      the
      quantities of ore placed on the leach pads (based on measured tonnage), the
      grade of ore placed on the leach pads (based on assay results), and a recovery
      percentage (based on ore type).





*Metal-in-Process
      Inventories*




Under
      the
      heap leaching process, ore on leach pads is treated with a chemical solution
      which dissolves the gold contained in the ore. The solution is further processed
      in a plant where the gold is recovered. Metal-in-process inventories represent
      metal in solution or in subsequent stages of the refining process. In-process
      inventories are measured based on assays of the solution and projected
      recoveries from the refining circuit and are valued at average production cost
      or net realizable value. Average production cost is based on the average cost
      of
      material fed into the process from the leach pads plus the in-process conversion
      costs, including applicable depreciation relating to the process
      facilities.





Although
      the amount of recoverable gold ounces placed on the leach pads, based on tonnage
      and grade of ore, is reconciled to the gold ounces actually recovered, the
      nature of the leaching process inherently limits the ability to precisely
      monitor inventory levels. As a result, the metallurgical balancing process
      is
      constantly monitored and estimates are refined based on actual results over
      time. The determination of both the ultimate recovery percentage and the
      quantity of metal expected over time requires the use of estimates, which are
      subject to revision since they are based upon metallurgical test work. We expect
      to continue to process and recover metal from the leach pads until no longer
      considered economically feasible.





*Reclamation
      and Remediation Liabilities*




Our
      mining and exploration activities are subject to various laws and regulations
      governing the protection of the environment. In August 2001, 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.





31





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*





We
      account 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, we measure 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**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements”. The Statement defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      The Statement does not require any new fair value measurements. The provisions
      of the Statement are effective for statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. In
      February 2008, FASB staff issued FSP No. FAS 157-2 which delays the effective
      date of SFAS No. 157 for nonfinancial assets or liabilities that are not
      required or permitted to be measured at fair value on a recurring basis to
      fiscal years beginning after November 15, 2008, and interim periods within
      those
      years. Effective January 1, 2008, we adopted SFAS No. 157 as it relates to
      financial assets and liabilities. The new disclosures are included in Note
      17 to
      the Company’s financial statements.





In
      February 2007, 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. We adopted SFAS No. 159 effective January 1, 2008 but this has
      had
      no impact the Company’s financial position, financial performance and cash
      flows.





In
      December 2007, FASB issued FAS 141(R), “Business Combinations”, which will
      replace FAS 141 prospectively for business combinations consummated after the
      effective date of December 15, 2008. Under FAS 141(R), business combinations
      will be accounted for under the “acquisition method”, compared to the “purchase
      method” mandated by FAS 141. Significant changes will result from applying the
      acquisition method, including: more acquisitions will be accounted for as
      business combinations rather than as asset acquisitions; acquisition related
      costs of the acquirer will be expensed as incurred, whereas under FAS 141 these
      costs are capitalized as part of the business combination; and the assets
      acquired and liabilities assumed are recorded at 100% of fair value even if
      less
      than 100% is obtained, whereas under FAS 141 only the controlling interest’s
      portion is recorded at fair value. In the event of the Company being involved
      in
      a future business combination, we will evaluate the application of FAS
      141(R).





In
      December 2007, FASB issued FAS 160, “Non-Controlling Interests in Consolidated
      Financial Statements” which is effective for fiscal years beginning after
      December 15, 2008. Under FAS 160, non-controlling interests will be measured
      at
      100% of the fair value of assets acquired and liabilities assumed. Under current
      standards, the non-controlling interest is measured at book value. For
      presentation and disclosure purposes, non-controlling interests will be
      classified as a separate component of shareholders’ equity. In addition, FAS 160
      will change the manner in which increases/decreases in ownership percentages
      are
      accounted for. The provisions of FAS 160 are to be applied prospectively with
      the exception of the presentation and disclosure provisions, which are to be
      applied for all prior periods presented in the financial statements. In the
      event of the Company being required in the future to prepare consolidated
      financial statements including a non-controlling interest in another entity,
      we
      will evaluate the application of FAS 160.





32





In
      March
      2008, FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
      Hedging Activities – an amendment of FASB Statement No. 133”, which is
      effective for financial statements issued for fiscal years and interim periods
      beginning after November 15, 2008, with early application encouraged. The
      statement requires enhanced disclosures about an entity’s derivative and hedging
      activities and thereby improves the transparency of financial reporting. The
      statement changes the disclosure requirements for derivative instruments and
      hedging activities. Entities are required to provide enhanced disclosures about
      (a) how and why an entity uses derivative instruments, (b) how derivative
      instruments and related hedging items are accounted for under Statement 133
      and
      its related interpretations, and (c) how derivative instruments and related
      hedged items affect an entity’s financial position, financial performance and
      cash flows. We are currently evaluating the implications of the enhanced
      disclosure requirements in respect of our forward gold sales
      contracts.





In
      June
      2008, FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted
      in
      Share-Based Payment Transactions Are Participating Securities" which is
      effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those years.  The statement
      addresses whether instruments granted in share-based payment transactions are
      participating securities prior to vesting and, therefore, need to be included
      in
      the earnings allocation in computing earnings per share under the two-class
      method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings
      per
      Share *.* We
      are
      currently evaluating the impact of FSP EITF 03-6-1 and do not expect the
      adoption to have an impact on the Company's consolidated financial
      statements.





In
      June
      2008, FASB issued EITF No. 07-5, "Determining Whether an Instrument (or Embedded
      Feature) is Indexed to an Entity's Own Stock" which is effective for financial
      statements issued for fiscal years beginning after December 15, 2008, and
      interim periods within those fiscal years.  We are currently evaluating the
      impact of EITF No. 07-5 and do not expect the adoption to have an impact on
      the
      Company's consolidated financial statements.





**Contractual
      Obligations**





The
      following table presents the contractual obligations outstanding as at September
      30, 2008:





**Total**
            
            **Less than**
              **1 Year**
            
            **2- 3**
              **Years**
            
            **4- 5**
              **Years**
            
            **More than**
              **5 Years**Loan
                payable1
            
            $
            86,340
            
            $
            15,109
            
            $
            25,254
            
            $
            20,722
            
            $
            25,254Mesquite
                expansion project
            
            
            1,836
            
            
            1,836
            
            
            —
            
            
            —
            
            
            —Reclamation
                and remediation obligations2
            
            
            11,888
            
            
            248
            
            
            499
            
            
            43
            
            
            11,098Share
                of office lease
            
            
            2,612
            
            
            252
            
            
            542
            
            
            452
            
            
            1,366Total3
            
            $
            102,676
            
            $
            17,445
            
            $
            26,295
            
            $
            21,217
            
            $
            37,718





(1)
            In
                addition to the scheduled repayments, mandatory prepayments are required
                semi-annually based on excess cash flow from the Mesquite Mine. An
                estimate of the timing and amount of prepayments has not been included
                in
                the chart above, as these payments are based on the amount by which
                the
                Mesquite Mine’s cash balance, at date of repayment, exceeds $4.0
                million.


(2)
            In
                current dollars (undiscounted).


(3)
            This
                chart does not include obligations that can be settled by physical
                delivery of gold.





**Off-Balance
      Sheet Arrangements**





We
      had no
      off-balance sheet arrangements at September 30, 2008 and December 31, 2007
      or at
      the date of this report.





**Outlook**





*Balance
      of 2008*




The
      Mesquite Mine is now expected to produce approximately 37,000 ounces of gold
      during the fourth quarter of 2008 as we commence execution of the new mine
      plan.
      Cost of sales (1) is now
      forecast at approximately $465 - $480 per ounce of gold for the fourth quarter
      of 2008. The downward revision in fourth quarter estimates are a direct result
      of shifting to the new mine plan as increased stripping activity at the Rainbow
      pit is required to prepare for 2009 – 2012 mining activities contemplated in the
      new mine plan. Total gold sales for 2008 is projected to be approximately
      117,000 ounces of gold at an average cost of sales (1) of
      approximately $500 per ounce of gold. This is in contrast to previous estimates
      of 135,000 – 145,000 ounces of gold sold at cost of sales (1) of $470
      - $490 per ounce. The unfavorable variance was a result of: higher costs with
      respect to fuel and tires, a decline in shovel availability in the third
      quarter, and a revision in planned activities for the fourth quarter of
      2008.





33





*New
      Mine Plan*





On
      October 6, 2008, we announced details of our new mine plan for the Mesquite
      Mine. The improved mine plan is expected to boost production to approximately
      700,000 ounces of gold, at an average cost of sales (1) of $420
      per ounce, over the four year period from 2009 – 2012. This compares to a
      previously planned 635,000 ounces at an average cost of sales (1) of $425
      - $435 per ounce during the period.





The
      new
      mine plan for Mesquite anticipates increased efficiencies while minimizing
      haul
      distances and thereby producing more ounces of gold and increasing annual cash
      flow generation over the four-year period. The impact will also include reduced
      gold production in the short term as we commence sequential mining of the pits.





We
      will
      focus on mining ore from the Rainbow pit starting in 2009. This compares to
      the
      previous plan in which mining moved between the Rainbow and Big Chief pits.
      We
      expect to achieve increased efficiency by consolidating equipment in one
      location, including reduced mining costs due to short haulage distances, no
      wasted time moving between pits, as well as operator efficiency. The estimated
      mine life remains unchanged at 14 years and we plan to mine our three pits
      sequentially through the duration of the mine life to continue to maximize
      these
      efficiencies.





*Other
      Activities*





Beginning
      in 2009, we expect to achieve higher production and cash flow under our new
      mine
      plan. Additionally, we continue to investigate the viability of other activities
      which could be beneficial in adding value or decreasing costs. These
      opportunities include:





1)
            Sulfide
                Resources: Mesquite contains meaningful sulfide resources and we
                continue
                to explore cost-effective alternatives to enhance recovery and
                economically justify the mining of these sulfide ores.2)
            Continuous
                Improvement:  A continuous improvement program throughout the
                Mesquite operation continues in an effort to further increase
                productivity. One of the options considered was conveyor haulage,
                however,
                after completing a conveyor haulage study, we have determined that
                the
                option would not achieve sufficient annual cost efficiencies to warrant
                the significant capital expenditure.3)
            Fleet
                Enhancement: We are currently negotiating and anticipate deliveries
                of
                lower cost tires for its mining fleet in the early part of
                2009.4)
            Increased
                Mining Rate: Mesquite is continuing to negotiate with the local county
                to
                increase its mining permit above the current ceiling of 60 million
                tons
                per year.





We
      are
      well-positioned to utilize Mesquite’s cash flow as a strategic platform for
      disciplined growth, through the acquisition of undervalued assets in politically
      stable North America.





(1)
            Cost
                of sales per ounce is defined as cost of sales as per the Western
                Goldfields’ financial statements divided by the number of ounces
                sold.





34





**Item
      3.**  **Quantitative
      and Qualitative Disclosures About Market Risk**





In
      the
      normal course of business, we are exposed to market risk, including changes
      in
      interest rates and prices of certain commodities, notably gold and fuel. A
      change in the market price of these commodities significantly affects our
      profitability and cash flow.





Gold
      prices can fluctuate widely due to numerous factors, such as: demand, forward
      selling by producers, central bank activities, the strength of the U.S. dollar
      and global mine production levels. We use forward gold sales contracts to manage
      a portion of our exposure to risk arising through changes in the price of gold.
      While we are exposed to credit risk in the event of non-performance by
      counterparties to these agreements, in all cases the counterparties are highly
      rated financial institutions and we do not anticipate non-performance. We do
      not
      hold or issue derivative financial instruments for trading
      purposes.





At
      September 30, 2008, our forward gold sales contracts consisted of a series
      of
      contracts to sell 5,500 ounces per month at a price of $801 per ounce over
      a
      remaining 75-month period to December 2014. The fair value of the remaining
      contracts as at September 30, 2008 was $(60.3) million and at December 31,
      2007
      was $(58.9) million.





We
      monitor our hedge positions and perform sensitivity analyses on our forward
      contracts to determine the mark-to-market gain/loss at current gold prices.
      We
      estimate that a 10% change in the spot price of gold from the level of $885
      per
      ounce at September 30, 2008 translates into a mark-to-market fluctuation of
      approximately $35.1 million.





Gold
      sales covered by the forward sales contracts represent approximately 45% and
      44%
      of our forecast annual shipments for the remainder of 2008 and 2009,
      respectively. The balance of our shipments will be sold in the spot market.
      We
      estimate that a 10% change in the price of gold from the level of $885 per
      ounce
      at September 30, 2008 translates into a $1.8 million increase/decrease in
      revenues from un-hedged, remaining production in 2008 and $7.3 million of full
      production in 2009.





Fuel
      costs are a significant cost element at Mesquite. For the nine months ended
      September 30, 2008, fuel costs represented approximately 41% of our mine
      operating costs. The market price of diesel and gasoline is unpredictable and
      can fluctuate significantly. During the first nine months of 2009, world oil
      prices were at very high levels and were being reflected in the price paid
      for
      fuel. We estimate that a 10% change in the price of diesel fuel from the level
      of approximately $3.20 per gallon experienced during Q3/08 translates into
      a
      $1.6 million  increase/decrease
      in mining costs.





At
      September 30, 2008 we had $86.3 million of bank debt outstanding of which an
      estimated $15.1 million is current. This debt currently bears interest based
      on
      short-term U.S. dollar LIBOR rates, generally for one-month periods, plus 2.2%.
      A 1% fluctuation in U.S. dollar LIBOR rates at current levels of indebtedness
      would translate into a $0.9 million change in reported pre-tax
      income.





We
      have a
      bonding and insurance program, primarily with American International Specialty
      Lines Insurance Company (“AIG Insurance”) in respect of the operations and
      closure liabilities of the Mesquite Mine. At September 30, 2008, we had $8.9
      million in the account. On September 16, 2008, AIG Insurance’s parent company,
      American International Group, Inc. (“AIG”), suffered a liquidity crisis
      following the downgrade of its credit rating. The United States Federal Reserve
      has since loaned money to AIG in order for the company to meet its obligations
      to post additional collateral to trading partners. As a result of Federal and
      State laws governing the operation of AIG Insurance, it is not believed that
      our
      funds are at risk.




**Item
      4.**  **Controls
      and Procedures**




As
      of the
      end of the period covered by this report, our management, with the participation
      of our chief executive officer and of our chief financial officer, evaluated
      the
      effectiveness of our “disclosure controls and procedures,” as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.
      Based on that evaluation, these officers concluded that, as of the end of such
      period, our disclosure controls and procedures were effective. 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.





35





**PART
      II. OTHER INFORMATION**





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




**Congrove
      Construction Matter**





The
      Company, through its subsidiary, Western Mesquite Mines, Inc. (“WMMI”), entered
      into a Management Representative Agreement dated August 7, 2007 (the
“Agreement”) with Congrove Construction (“Congrove”) of Yuma, Arizona, in
      respect of certain construction activities associated with the Mesquite
      expansion project. WMMI terminated the Agreement on the grounds of bad faith
      demonstrated by Congrove in the carrying out of its contractual duties. On
      July
      3, 2008, legal counsel acting for Congrove filed a complaint and demand for
      jury
      trial with the United States District Court, Southern District of California,
      asserting that WMMI materially breached the Agreement by failing to provide
      complete plans in a timely manner, by wrongfully terminating Congrove’s services
      on the construction project and, by failing to pay monies owing to Congrove
      under the Agreement. Congrove is seeking relief in the amount of $0.6 million
      plus interest thereon. Congrove filed and recorded a notice of litigation in
      September 2008.





We
      believe these claims are without merit and will vigorously defend against such
      claims.




**Item
                1A.**
            **Risk
                Factors**





There
      have been no material changes to the risk factors disclosed in our 2007 Annual
      Report on Form 10-KSB filed with the Securities and Exchange Commission on
      March
      28, 2008.





**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**





None.




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





None.




**Item
      6. Exhibits**





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




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




32.1
        Section 1350 Certification of Principal Executive Officer*




32.2
        Section 1350 Certification of Principal Financial Officer*




*
      Filed
      herewith





36





**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:
                November 4, 2008WESTERN
                GOLDFIELDS INC.By:
            /s/
                Raymond
                ThrelkeldRaymond
                ThrelkeldPresident
                and Chief Executive Officer




37