**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 March 31, 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 Small Business Issuer as Specified in Its Charter)
  Ontario
              98 –
                  0544546(State
                  of other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)
  2
        Bloor
        Street West, Suite 2102 , P.O. Box 110
 Toronto,
        Ontario, Canada M4W 3E2
 (Address
        of Principal Executive Offices)
  416
        324
        6000
 (Issuer’s
        Telephone Number, Including Area Code)
 
 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
                ýNon-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 – 136,354,162
        shares outstanding as of
        April 30, 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 Comprehensive Income
                  (Loss)
              5Consolidated
                  Statements of Shareholders’ 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
              23Item
                  3
              
              Quantitative
                  and Qualitative Disclosure about Market Risk
              36Item
                  4
              
              Controls
                  and Procedures
              36**PART II.**
              
              **OTHER
                  INFORMATION**
              37Item
                  1.
              
              Legal
                  Proceedings
              37Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              37Item
                  3.
              
              Defaults
                  Upon Senior Securities
              37Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              37Item
                  5.
              
              Other
                  Information
              37Item
                  6.
              
              Exhibits
              37
 
 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, press 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**
  **WESTERN
        GOLDFIELDS INC.**
 **CONSOLIDATED
          BALANCE SHEETS**
 **(In
          thousands U.S. dollars)**
 (Unaudited)
 March
                    31,
                
                December
                    31,2008
                
                2007**ASSETS
                    (Note 13)**CURRENT
                    ASSETSCash
                    and cash equivalent
                
                $
                32,829
                
                $
                43,870Restricted
                    cash (Note 4)
                
                
                7,500
                
                
                7,500Receivables
                
                
                220
                
                
                298Inventories
                    (Notes 2, 5)
                
                
                17,242
                
                
                11,201Prepaid
                    expenses
                
                
                845
                
                
                887Current
                    portion of deferred income tax asset
                
                
                2,458
                
                
                755TOTAL
                    CURRENT ASSETS
                
                
                61,094
                
                
                64,511Property,
                        plant, and equipment, net of accumulated amortization (Note
                        6)
                
                
                94,981
                
                
                77,951Construction
                    in progress (Note 7)
                
                
                12,082
                
                
                21,864Investments
                    - reclamation and remediation (Note 8)
                
                
                8,723
                
                
                8,661Long-term
                    deposits
                
                
                352
                
                
                348Long-term
                    prepaid expenses (Note 9)
                
                
                1,512
                
                
                1,555Deferred
                    debt issuance costs, net of accumulated amortization (Note
                    10)
                
                
                3,112
                
                
                3,226Deferred
                    income tax asset (Notes 2, 11)
                
                
                44,507
                
                
                36,379TOTAL
                    OTHER ASSETS
                
                
                165,269
                
                
                149,984**TOTAL
                    ASSETS**
                
                $
                226,363
                
                $
                214,495**LIABILITIES
                    & STOCKHOLDERS' EQUITY**CURRENT
                    LIABILITIESAccounts
                    payable and accrued liabilities
                
                $
                7,274
                
                $
                8,781Current
                    portion of mark-to-market loss on gold hedging contracts
                    (Notes 2, 17)
                
                
                6,303
                
                
                1,935Current
                    portion of loan payable
                
                
                7,589
                
                
                6,882TOTAL
                    CURRENT LIABILITIES
                
                
                21,166
                
                
                17,598LONG-TERM
                    LIABILITIESMark-to-market
                    loss on gold hedging contracts (Notes 2, 17)
                
                
                76,710
                
                
                56,966Loan
                    payable (Note 13)
                
                
                76,734
                
                
                69,581Reclamation
                    and remediation liabilities (Note 14)
                
                
                5,148
                
                
                5,061TOTAL
                    LIABILITIES
                
                
                179,758
                
                
                149,206COMMITMENTS
                    AND CONTINGENCIES (Note 19)
                
                
                -
                
                
                -STOCKHOLDERS'
                    EQUITYCommon
                    stock, of no par value, unlimited shares authorized;136,234,196
                        and 135,049,685 shares issued and outstanding, respectively
                        (Note
                        15)
                
                
                134,596
                
                
                133,725Stock
                    options and warrants (Note 16)
                
                
                7,620
                
                
                7,551Accumulated
                    deficit
                
                
                (95,611
                )
                
                (75,987
                )Accumulated
                    other comprehensive income
                
                
                -
                
                
                -TOTAL
                    STOCKHOLDERS' EQUITY
                
                
                46,605
                
                
                65,289**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                $
                226,363
                
                $
                214,495
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 4
  **WESTERN
          GOLDFIELDS INC.**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **AND
          COMPREHENSIVE LOSS**
 **(In
          thousands U.S. dollars)**
 **(Unaudited)**
  Three Months Ended March 31,2008
                
                2007REVENUESRevenues
                    from gold sales
                
                $
                9,256
                
                $
                1,233COST
                    OF GOODS SOLDMine
                    operating costs
                
                
                9,087
                
                
                2,209Amortization
                    and accretion
                
                
                2,094
                
                
                375Royalties
                
                
                265
                
                
                4511,446
                
                
                2,629GROSS
                    PROFIT (LOSS)
                
                
                (2,190
                )
                
                (1,396
                )EXPENSESGeneral
                    and administrative
                
                
                1,111
                
                
                1,085Stock
                    based compensation
                
                
                370
                
                
                468Exploration
                
                
                224
                
                
                2831,705
                
                
                1,836OPERATING
                    LOSS
                
                
                (3,895
                )
                
                (3,232
                )OTHER
                    INCOME (EXPENSE)Interest
                    income
                
                
                384
                
                
                518Interest
                    expense and commitment fees
                
                
                (699
                )
                
                -Amortization
                    of deferred debt issuance costs
                
                
                (115
                )
                
                -Unrealized
                    loss on mark-to-market of gold forward sales contracts
                    (Note 12)
                
                
                (24,111
                )
                
                -Loss
                    on foreign currency exchange
                
                
                (1,020
                )
                
                80(25,561
                )
                
                598LOSS
                    BEFORE INCOME TAXES
                
                
                (29,456
                )
                
                (2,634
                )INCOME
                    TAX RECOVERY
                
                
                (9,832
                )
                
                -NET
                    LOSS TO COMMON STOCKHOLDERS
                
                
                (19,624
                )
                
                (2,634
                )OTHER
                    COMPREHENSIVE INCOMEForeign
                    currency translation adjustment
                
                
                -
                
                
                (5,257
                )NET
                    COMPREHENSIVE LOSS
                
                $
                (19,624
                )
                $
                (7,891
                )BASIC
                    AND DILUTED NET LOSS PER SHARE
                
                $
                (0.14)
                
                $
                (0.03)WEIGHTED
                        AVERAGE NUMBER OF COMMON SHARES
                        OUTSTANDING
                
                
                135,659,101
                
                
                102,882,801
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  5
 **CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS' EQUITY**
 **(In
          thousands U.S. dollars)**
 **(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
                        shares issued on conversion of common stock
                        warrants
                
                
                10,248,052
                
                
                4,508
                
                
                -
                
                
                -
                
                
                -
                
                
                4,508Common
                        shares issued on exersice 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
                          shares issued on conversion of common stock
                          warrants
                
                
                750,001
                
                
                338
                
                
                -
                
                
                -
                
                
                -
                
                
                338Common
                        shares issued on exersice of common stock
                        options
                
                
                434,510
                
                
                233
                
                
                -
                
                
                -
                
                
                -
                
                
                233Options
                    issued for directors' services
                
                
                -
                
                
                -
                
                
                64
                
                
                -
                
                
                -
                
                
                64Options
                    issued for officers' services
                
                
                -
                
                
                -
                
                
                145
                
                
                -
                
                
                -
                
                
                145Options
                    issued for employees' services
                
                
                -
                
                
                -
                
                
                160
                
                
                -
                
                
                -
                
                
                160Options
                    issued for consultants' services
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                -Exercise
                    and expiration of warrants & options
                
                
                -
                
                
                301
                
                
                (301
                )
                
                -
                
                
                -
                
                
                -Net
                    loss for the period ended March 31, 2008
                
                
                -
                
                
                -
                
                
                -
                
                
                (19,624
                )
                
                -
                
                
                (19,624
                )Balance,
                    March 31, 2008
                
                
                136,234,196
                
                $
                134,596
                
                $
                7,620
                
                $
                (95,611
                )
                $
                -
                
                $
                46,605
 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 March 31,2008
                  
                  2007**CASH
                      FLOWS FROM OPERATING ACTIVITIES**Net
                      loss
                  
                  $
                  (19,624
                  )
                  $
                  (2,634
                  )Adjustments
                      to reconcile net loss to net cash provided (used) by operating
                      activities:Items
                      not affecting cash:Amortization
                      of property, plant and equipment
                  
                  
                  2,013
                  
                  
                  295Amortization
                      of deferred debt issuance costs
                  
                  
                  115
                  
                  
                  -Accretion
                      expense (Note 14)
                  
                  
                  87
                  
                  
                  84Deferred
                      income taxes
                  
                  
                  (9,832
                  )
                  
                  -Interest
                      net of reimbursed costs - reclamation and remediation
                  
                  
                  (63
                  )
                  
                  (84
                  )Stock
                      based compensation
                  
                  
                  370
                  
                  
                  468Mark-to-market
                      loss on gold hedging contracts
                  
                  
                  24,112
                  
                  
                  -Changes
                      in assets and liabilities:Decrease
                      (increase) in:Accounts
                      receivable
                  
                  
                  78
                  
                  
                  (98
                  )Inventories
                  
                  
                  (6,041
                  )
                  
                  (71
                  )Prepaid
                      expenses and deposits
                  
                  
                  86
                  
                  
                  (178
                  )Long
                      term deposits
                  
                  
                  (3
                  )
                  
                  (3
                  )Increase
                      (decrease) in:Accounts
                      payable
                  
                  
                  (1,337
                  )
                  
                  (800
                  )Payroll
                      and related taxes payable
                  
                  
                  (1,563
                  )
                  
                  -Accrued
                      expenses
                  
                  
                  1,051
                  
                  
                  683Accrued
                      interest expense
                  
                  
                  (171
                  )
                  
                  -Net
                      cash provided (used) by operating activities
                  
                  
                  (10,722
                  )
                  
                  (2,338
                  )**CASH
                      FLOWS FROM INVESTING ACTIVITIES**Purchase
                      of property & equipment, including construction in
                      progress
                  
                  
                  (8,749
                  )
                  
                  (5,715
                  )Net
                      cash provided (used) by investing activities
                  
                  
                  (8,749
                  )
                  
                  (5,715
                  )**CASH
                      FLOWS FROM FINANCING ACTIVITIES**Term
                      loan advances
                  
                  
                  7,860
                  
                  
                  -Deferred
                      debt issuance costs
                  
                  
                  -
                  
                  
                  (17
                  )Common
                      stock issued for cash
                  
                  
                  -
                  
                  
                  59,190Exercise
                      of options to purchase common stock
                  
                  
                  233
                  
                  
                  145Exercise
                      of warrants to purchase common stock
                  
                  
                  337
                  
                  
                  379Net
                      cash provided by financing activities
                  
                  
                  8,430
                  
                  
                  59,697Change
                      in cash
                  
                  
                  (11,041
                  )
                  
                  51,644Cash
                      and cash equivalents, beginning of period
                  
                  
                  43,870
                  
                  
                  5,503Cash
                      and cash equivalents, end of period
                  
                  $
                  32,829
                  
                  $
                  57,147**SUPPLEMENTAL
                      CASH FLOW DISCLOSURES:**Interest
                      paid (received), net
                  
                  $
                  413
                  
                  $
                  -**NON-CASH
                          FINANCING AND****INVESTING
                          ACTIVITIES:**Stock,
                      options and warrants issued for services
                  
                  $
                  370
                  
                  $
                  468Equipment
                      purchases included in accounts payable
                  
                  $
                  513
                  
                  $
                  -Deferred
                      debt issuance costs included in accrued expenses
                  
                  $
                  -
                  
                  $
                  312
  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 and $17.7 million is available until 12 months after Completion.
        The
        agreement, in conjunction with the equity financing in January and February
        of
        2007, completes the financing requirements for Mesquite.
 
 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
        March
        31, 2008 and December 31, 2007 and its results of operations and its cash
        flows
        for the three month periods ended March 31, 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.
  8
 
 The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Significant areas requiring the use
        of
        management estimates relate to the determination of mineral reserves,
        reclamation and remediation obligations, impairment of assets, useful lives
        for
        depreciation and amortization, measurement of 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.
 
 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 the Company’s fiscal year ending December 31, 2008.
        In February 2008, the FASB amended SFAS No. 157 to exclude leasing transactions
        and to delay the effective date by one year for non-financial assets and
        liabilities that are recognized or disclosed at fair value in the financial
        statements on a non-recurring basis. Effective January 1, 2008, the Company
        adopted SFAS No. 157 as it relates to financial assets and liabilities. The
        new
        disclosure are included in Note 17.
 
 In
        February 2007, the 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, the 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).
  9
 
 In
        December 2007, the 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,
        the
        Company will evaluate the application of FAS 160.
 
 In
        March
        2008, the 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.
 
 **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.
 
 **5.**  **INVENTORIES**
 
 Inventories
        consist of the following:
 
 **March
                   31,**
                **2008**
              
              **December 31,**
                **2007**Ore
                  on leach pads
              
              $
              14,125
              
              $
              7,724Metal-in-process
              
              
              903
              
              
              847Bullion
              
              
              318
              
              
              994Supplies
              
              
              1,896
              
              
              1,636Total
                  inventories
              
              $
              17,242
              
              $
              11,201
 
 To
        date,
        new ore placed on leach pads has been valued at net realizable value since
        this
        value is lower than the average cost of production which is based on current
        mining costs, including depreciation, amortization and depletion. The estimated
        18,676 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.
 
 10


To
      date,
      metal-in-process inventories have been valued at net realizable value since
      this
      value is lower than the average cost of production which is 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.
      The
      estimated 978 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 by refiners pending sale. To date, bullion
      has been valued at net realizable value less gold tax and other selling costs
      since this is lower than the average cost of the in-process inventory plus
      refining costs. At March 31, 2008, 382 gold ounces were held at a refiner (2007
      – 1,196 ounces).




**6.** **PROPERTY,
      PLANT AND EQUIPMENT**





The
      following is a summary of property, equipment, and accumulated amortization
      and
      depreciation as at March 31, 2008 and December 31, 2007:





**March 31,**
              **2008**
            
            **December 31,**
              **2007**Buildings
            
            $
            4,214
            
            $
            4,215Equipment
            
            
            96,361
            
            
            77,317Mine
                development
            
            
            3,517
            
            
            3,517104,092
            
            
            85,049Less
                accumulated amortization and depreciation
            
            
            (9,111
            )
            
            (7,098
            )Net
                property and equipment
            
            $
            94,981
            
            $
            77,951





Capitalized
      interest expense for the three month periods ended March 31, 2008 and March
      31,
      2007 was $0.4 million and $nil, 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.





Mine
      development as at March 31, 2008 and December 31, 2007 includes $1.4 million
      in
      respect of fauna relocation costs and $1.9 million in respect of capitalized
      development drilling costs.





Amortization
      and depreciation expense for the three month periods ended March 31, 2008 and
      March 31, 2007 was $2.0 million and $0.3 million respectively.





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





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





**March 31,**
              **2008**
            
            **December 31,**
              **2007**Leach
                pad expansion
            
            $
            -
            
            $
            12,837Building
                construction and site infrastructure
            
            
            12,082
            
            
            9,027$
            12,082
            
            $
            21,864





Construction
      in process is accumulated and carried forward at cost until completion of
      construction or until the equipment is placed into service, 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 leach pad expansion was capitalized and has been depreciated
      effective January 1, 2008.




11




**8.**  **RECLAMATION
      AND REMEDIATION INVESTMENTS AND BONDS**





The
      Company has a bonding and insurance program, primarily with American
      International Specialty Lines Insurance Company (“AIG”), in respect of the
      operations and closure liabilities of the Mesquite Mine. Under the program,
      the
      Company initially paid $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.





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
      March 31, 2008 and December 31, 2007:




**March 31,**
              **2008**
            
            **December 31,**
              **2007**Original
                deposit to reimbursement account
            
            $
            5,999
            
            $
            5,999Additional
                deposit to reimbursement account
            
            
            2,090
            
            
            2,091Interest
                earned from inception
            
            
            983
            
            
            9209,072
            
            
            9,010Reclamation
                costs reimbursed
            
            
            (349
            )
            
            (349
            )Closing
                balance
            
            $
            8,723
            
            $
            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




12




**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 ($8.7 million
      at
      March 31, 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
      these two aspects of coverage expire on November 7, 2013 and November 7, 2008,
      respectively.





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





**March 31,**
              **2008**
            
            **December 31,**
              **2007**Original
                Policy Premiums
            
            $
            1,643
            
            $
            1,643Additional
                Policy Premium
            
            
            724
            
            
            724Amortization
                to date
            
            
            (684
            )
            
            (641
            )Unamortized
                Premium Cost
            
            
            1,683
            
            
            1,726Current
                Portion
            
            
            (171
            )
            
            (171
            )Long-Term
                Prepaid Expenses
            
            $
            1,512
            
            $
            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 March 31, 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 periods ended March 31, 2008 and March 31, 2007 was $0.1 million
      and
      $nil respectively.




**March 31,**
              **2008**
            
            **December 31,**
              **2007**Debt
                issuance costs incurred
            
            $
            3,570
            
            $
            3,570Cumulative
                amortization
            
            
            (458
            )
            
            (343
            )Closing
                balance
            
            $
            3,112
            
            $
            3,227




13




**11.****DEFERRED
      INCOME TAX ASSETS**





**Income
      Taxes Recoverable**





**March 31,**
              **2008**
            
            **December 31,**
              **2007**Current
            
            $
            2,458
            
            $
            755Deferred
            
            
            44,507
            
            
            36,379Income
                taxes recoverable
            
            $
            46,965
            
            $
            37,134




**Deferred
      Taxes**





The
      Company records future 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.





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





**March 31,**
              **2008**
            
            **December 31,**
              **2007****Current
                deferred tax assets**
            
            $
            2,458
            
            $
            755**Long-term
                deferred tax assets**Unrealized
                loss on mark-to-market ofgold
                forward sales contracts
            
            
            29,917
            
            
            22,217Net
                operating losses
            
            
            23,037
            
            
            19,131Mining
                property
            
            
            1,265
            
            
            1,265Reclamation
                cost
            
            
            1,948
            
            
            1,948Exploration
                cost
            
            
            453
            
            
            453Stock-based
                compensation
            
            
            1,421
            
            
            1,335Total
                long-term deferred tax assets
            
            
            58,041
            
            
            46,349**Long-term
                deferred tax liabilities**Fixed
                assets
            
            
            (5,934
            )
            
            (2,370
            )Total
                long-term deferred tax liabilities
            
            
            (5,934
            )
            
            (2,370
            )**Net
                long-term deferred tax asset**
            
            
            52,107
            
            
            43,979**Valuation
                allowance**
            
            
            (7,600
            )
            
            (7,600
            )**Net
                deferred tax assets**
            
            $
            46,965
            
            $
            37,134





At
      March
      31, 2008 the Company had income tax loss carry-forwards of approximately $58.1
      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. A tax benefit of $23.0
      million less a valuation allowance of $5.9 million resulting in a net loss
      of
      $17.1 million has been recognized in the consolidated financial statements
      with
      respect to income tax loss carry-forwards.




14




**12.**  **MARK-TO-MARKET
      LOSS ON GOLD HEDGING 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.





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.





The
      contracts were marked-to-market as at March 31, 2008. The cumulative unrealized
      pre-tax loss of $83.0 million (2007 - $58.9 million) has been disclosed as
      a
      liability as at March 31, 2008 and the Company has recorded an unrealized loss
      of $24.1 million for the three month period ended March 31, 2008 (2007 – $nil).





**13.**  **LOANS
      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 will be available as required for the development
      of
      the Mesquite Mine; the remainder will be available for up to 12 months after
      completion for corporate purposes.  The facility is secured by all of the
      assets of WMMI and a pledge of the shares of WMMI owned by the Company. In
      addition, until completion, the facility is guaranteed by the
      Company.





Interest
      on the term loan is charged at U.S. LIBOR plus 2.2% prior to completion and
      U.S.
      LIBOR plus 1.75% after completion.  Completion occurs upon the satisfaction
      of certain technical and financial criteria as defined in the credit agreement.
      As at March 31, 2008, WMMI had drawn $84.3 million under the facility at a
      rate
      of approximately 5.3%.  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 March 31, 2008,
      the
      initial repayment on December 31, 2008 would be $7.6 million or 9% of the loan,
      which has been recorded as a current liability.  In addition to the
      scheduled repayments, mandatory prepayments are required semi-annually based
      on
      excess cash flow from the Mesquite Mine.




15




**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 March 31, 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 $66,910 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 three month period ended March 31, 2008 and
      the
      year ended December 31, 2007:


**March 31,**
                **2008**
              
              **December 31,**
                **2007**Opening
                  Balance
              
              $
              5,061
              
              $
              4,805Accretion
              
              
              87
              
              
              337Reclamation
                  costs incurred
              
              
              -
              
              
              (148
              )Increase
                  (reduction) in the present value of obligations
              
              
              -
              
              
              67Ending
                  Balance
              
              $
              5,148
              
              $
              5,061


The
      estimated amounts payable within the next 12 months included in the above
      balance as at March 31, 2008 is $0.2 million (2007 - $0.1 million).




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





**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 shares of no par
      value. Prior to the Reorganization, the Company’s authorized common stock, as an
      Idaho corporation, was 500 million common shares of $0.01 par value. The impact
      of the conversion from shares of $0.01 stated value to shares of no par value
      has been reflected in the financial statements on a retroactive basis.
      Accordingly, amounts 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 Shares**





In
      January 2007, the Company issued 33,330,000 common shares 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 announced that it had completed a public share
      offering of 9,840,000 common shares at a price of Cdn.$3.05 per share under
      a
      Short Form Prospectus dated October 2, 2007. Gross proceeds to the Company
      were
      Cdn.$30.0 million. In addition, the underwriters exercised their over-allotment
      option in respect of 1,476,000 common shares for gross proceeds of $4.5 million.
      Net proceeds, after underwriter’s commission at 5% and other expenses of the
      issue, were US$33.4 million.




16




**Other
      Issuances of Common Shares**





During
      the three month period ended March 31, 2008, 434,510 options were exercised
      for
      cash consideration of $0.2 million.





During
      the three month period ended March 31, 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 shares. Of the shares issued, 103,125 were issued 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 share 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 shares.




**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 of 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 Cdn. 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.





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





During
      the three month period ended March 31, 2008, 434,510 options were exercised
      for
      cash proceeds of $0.2 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 common shares 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 share 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.




17




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 could
      have been different from that reported. The Black-Scholes option pricing model
      used the following assumptions:





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




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




**Weighted Average****Shares**
            
            **Exercise**
              **Price**
            
            **Fair**
              **Value**Balance
                January 1, 2007
            
            
            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
            
            
            -
            
            
            -Exercised
            
            
            (434,510
            )
            
            0.54Outstanding
                March 31, 2008
            
            
            12,867,107
            
            
            0.82Exercisable
                at March 31, 2008
            
            
            11,502,111Fair
                value of options as at March 31, 2008
            
            
            
            
            
            
            
            $
            0.56




18




The
      following table summarizes information about the stock options outstanding
      at
      March 31, 2008:





**Awards Outstanding by Range****Awards Outstanding**
            
            **Awards Exercisable****Exercise Price**
              **$**
            
            
            
            **Weighted**
              **Average**
              **Outstanding**
              **Contractual**
            
            **Weighted**
              **Average**
              **Exercise Price**
            
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
            
            **Weighted**
              **Average****Low**
            
            **High**
            
            **Quantity**
            
            **Life**
            
            **$**
            
            **Quantity**
            
            **Life**
            
            **Exercise Price**0.01
            
            
            0.50
            
            
            7,793,507
            
            
            4.72
            
            
            0.34
            
            
            7,793,507
            
            
            4.72
            
            
            0.350.51
            
            
            1.00
            
            
            2,855,000
            
            
            4.11
            
            
            0.86
            
            
            2,748,334
            
            
            4.08
            
            
            0.861.01
            
            
            1.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —1.51
            
            
            2.00
            
            
            598,600
            
            
            6.00
            
            
            1.96
            
            
            161,935
            
            
            6.01
            
            
            1.962.01
            
            
            2.50
            
            
            925,000
            
            
            5.34
            
            
            2.18
            
            
            566,668
            
            
            5.32
            
            
            2.182.51
            
            
            3.00
            
            
            395,000
            
            
            6.34
            
            
            2.73
            
            
            131,667
            
            
            6.34
            
            
            2.733.01
            
            
            3.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —3.51
            
            
            4.00
            
            
            300,000
            
            
            6.69
            
            
            3.64
            
            
            100,000
            
            
            6.69
            
            
            3.6412,867,107
            
            
            4.79
            
            
            0.82
            
            
            11,502,111
            
            
            4.65
            
            
            0.
                64




**Warrants**





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





**Three months**
              **ended March 31,**
              **2008**
            
            **Year ended**
              **December 31,**
              **2007**Balance,
                start of period
            
            
            6,806,180
            
            
            17,054,232Issued
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Exercised
            
            
            (750,001
            )
            
            (10,248,052
            )Balance,
                end of period
            
            
            6,056,179
            
            
            6,806,180





Warrants
      outstanding to acquire common shares of the Company at March 31, 2008 are as
      follows:





**Warrants Outstanding**
            
            **Exercise**   **Price**
            
            **Expiry Date**6,056,179
            
            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




19




**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 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 March
      31, 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.




**Fair Value at March 31, 2008****Total**
            
            **Level 1**
            
            **Level 2****Assets**Cash
                and restricted cash
            
            $
            40,329
            
            $
            40,329
            
            $
            -**Liabilities**Derivative
                instruments – forward gold sales
            
            $
            83,013
            
            $
            -
            
            $
            83,013




The
      Company’s cash and restricted cash is represented by account balances and short
      dated 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 March
      31,
      2008 and accordingly are classified within Level 1 of the fair value
      hierarchy




The
      Company’s forward gold sales contracts account 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 directors of Silver Bear also serve as
      senior executives and directors of the Company. During the three months ended
      March 31, 2008 and 2007 overhead costs of $0.1 million and $0.1 million,
      respectively, were charged to the Company under this agreement. At March 31,
      2008 and December 31, 2007, $18,306 and $31,150, respectively, was payable
      to
      Silver Bear.




20




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





**Mining
      Industry**




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





**Contract
      with the County Sanitation District of Los Angeles**





During
      its ownership of the Mesquite Mine, Hanson Natural Resources, a prior operator
      of the mine, entered into an agreement with the County Sanitation District
      of
      Los Angeles County, which then developed and permitted a plan to create a 100
      year landfill at the Mesquite Mine.





Under
      the
      agreement with the County Sanitation District of Los Angeles County, the Company
      has the right to explore, mine, extract, process, market and sell ore, and
      otherwise conduct mining and processing activities, anywhere on the property
      for
      an initial period through 2024 with automatic extensions until 2078. Much of
      the
      infrastructure at the property is likely to be retained by the landfill after
      mining operations are completed and the Company has met certain reclamation
      standards. Construction operations are now underway and landfill operations
      are
      expected to begin in 2008.





**Mesquite
      Expansion**





The
      Company expects to complete the mine expansion program at Mesquite during the
      second fiscal quarter of 2008. As at March 31, 2008, planned and committed
      capital spending on the program is approximately $7.9 million. In addition,
      the
      Company has committed capital spending of $3.4 million for an additional loading
      unit.





**Lease
      Agreement**





The
      Company is a party to a cost sharing agreement with Silver Bear under which
      half
      of certain of Silver Bear’s office overhead costs, including office rental, is
      charged to the Company (Note 18). Under this agreement the Company anticipates
      paying approximately $14,000 in respect of the lease of head office premises
      for
      the two month period ending May 31, 2008.




In
      addition, 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.





**Congrove
      Construction Matter**





The
      Company, through its subsidiary, Western Mesquite Mines Inc. (“WMMI”), entered
      into a Management Representative Agreement dated August 7, 2007 with Congrove
      Construction (“Congrove”) of Yuma, Arizona, in respect of certain construction
      activities associated with the Mesquite expansion project. WMMI terminated
      the
      contract on the grounds of bad faith demonstrated by Congrove in the carrying
      out of its contractual duties. Legal counsel acting for Congrove has asserted
      that WMMI owes Congrove money in respect of management costs, fees expressed
      as
      a percentage of the value of the overall construction project, mobilization
      costs and a share of cost savings.





The
      Company is not in a position to reasonably estimate the possible loss or range
      of loss that might apply in the unlikely event that Congrove were to obtain
      judgment against WMMI.





The
      Company does not believe these claims have merit. No legal proceedings have
      been
      commenced in regard to this matter but, in such event, the Company intends
      to
      vigorously defend against such claims.




21




**20.**    ****  **SUBSEQUENT
      EVENTS**





**Drawdown
      Under Term Loan Facility**





On
      April
      22, 2008 the Company received an additional advance of $2.0 million under the
      term loan facility, bringing total advances to $86.3 million. The Company can
      borrow an additional $18.7 million under the facility of which $17.7 million
      is
      available for general corporate purposes and $1.0 million is available for
      the
      Mesquite Mine expansion project.




22





**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 month period ended March 31, 2008 and the notes
      thereto. The information is presented as of May 6, 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 us with residual gold
      production from ore that was placed on the heap leach pads by Newmont and
      previous owners of the property. We completed a positive feasibility study
      in
      August 2006 and subsequent equity and debt financings have enabled us to resume
      mining operations at Mesquite. We are fully permitted and fully funded and
      we
      expect gold production of 135,000 – 145,000 ounces of gold in 2008. We
      started to place new ore on the heap leach pads during the second half of 2007
      and this started to be reflected in our gold production and inventories by
      late
      2007. Western Goldfields Inc. is listed on the Toronto Stock Exchange and trades
      under the symbol WGI, and is listed on the American Stock Exchange under the
      symbol WGW.





**Overall
      Performance**





During
      the year ended December 31, 2007 (“2007”) we attained our goal of resuming
      mining operations and achieving initial production at the Mesquite Mine. Our
      first gold pour from new production occurred on January 15, 2008. Our goal
      now
      is to achieve “steady state” production from the new ore that we are placing on
      the leach pads that we have constructed over the past year. Although tonnage
      of
      ore mined and ounces of gold placed on the leach pad during the first quarter
      of
      2008 (“Q1/08”) was in line with our projections, gold sales of 9,960 ounces of
      gold was below the low end of our projected range of 10,000 – 13,000
      ounces. The start up of leach pad operations involves numerous assumptions that can
      only
      be validated over time. Based on our review of the leach kinetics, we believe
      that the current ore reacts no differently from the ore mined over many years
      at
      Mesquite Mine. However, the current recovery curve is slower than expected;
      we
      believe that the delayed gold recovery relates primarily to gold being tied
      up
      in solution inside the heap. As gold inventory is created and the leach pad
      is
      saturated, steady state pregnant solution flow is expected to be achieved and
      production rates are expected to stabilize. We expect to achieve steady state
      production during the third quarter of 2008 as the inventory levels rise.
      Production for the second quarter of 2008 is expected to be between 20,000
      and
      30,000 ounces. The
      selling price for gold in world markets continues to be strong and more than
      offsets the escalation in production costs, notably for fuel and haul truck
      tires.


23





**Term
      Loan Facility and Related Hedging**





During
      2007, our wholly-owned subsidiary, Western Mesquite Mines, Inc., entered into
      a
      term loan facility with a syndicate of banks for $105.0 million. The facility
      comprises multiple-draw loans maturing December 31, 2014, 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 and technical
      criteria and is expected to occur in the second half of 2008. Repayment of
      the
      facility will be on a semi-annual basis commencing December 31, 2008, with
      mandatory prepayments being made from excess cash flow. Interest on each advance
      is charged at U.S. LIBOR plus 2.2% up to completion and at U.S. LIBOR plus
      1.75%
      after completion. This agreement, in conjunction with the equity financings
      in
      January 2007, completed the financing requirements for Mesquite.





As
      at
      March 31, 2008 we had drawn approximately $84.3 million and a further $2.0
      million was drawn on April 22, 2008.





In
      connection with the term loan facility which required us to sell certain
      quantities of gold forward, on June 7, 2007 we executed flat forward sales
      contracts for 429,000 ounces of gold (the “Hedging Contracts”) at a price of
      $801 per ounce. The Hedging Contracts represent a commitment of 5,500 ounces
      for
      78 months commencing July 2008, with the last commitment deliverable December
      2014. We expect to produce between 160,000 and 170,000 ounces annually during
      the term of the Hedging Contracts, of which 66,000 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 loss
      of
      $24.1 million for the three month period ended March 31, 2008 and $58.9 million
      for the year ended December 31, 2007. The cumulative unrealized pre-tax loss
      of
      $83.0 million has been disclosed as a liability as at March 31, 2008.





**Capital
      Program - Construction Activity**





During
      Q1/08, the remaining aspects of our capital program, launched in late 2006,
      were
      substantially competed. The expanded leach pad was activated in late 2007 and
      is
      now fully operational. The retrofit of the process plant was completed during
      the quarter; new carbon columns for the processing circuit were also installed
      during the quarter and were brought on line April 25, 2008. Good progress was
      also made in construction of the new truck repair shop, warehouse and mine
      administrative office, which will be completed during the second quarter. Our
      latest forecast for spending on the expansion capital program is $110.1 million,
      of which $95.9 million was incurred in 2006 and 2007 and $14.2 million will
      be
      incurred in 2008. During Q1/08, $7.8 million of spending was incurred on the
      expansion capital program. During Q1/08, a purchase order for $3.4 million
      was
      placed for an extra front-end loader to be delivered during the third quarter
      of
      2008. This third loader will provide flexibility in haul truck loading so that
      mine production is maintained at the required level.


24


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




**Three months ended**
              **March 31,****2008**
            
            **2007**Cash
              outflows for operating activities
            
            
            (10,722
            )
            
            (2,338
            )Cash
                outflows from investing activities
            
            
            (8,749
            )
            
            (5,715
            )Cash
                inflows from financing activities
            
            
            8,430
            
            
            59,697




**March 31,**
              **2008**
            
            **December 31,**
              **2007**Cash
            
            
            32,829
            
            
            43,870Restricted
                cash
            
            
            7,500
            
            
            7,500Working
                capital
            
            
            39,928
            
            
            46,914Property,
                plant and equipment, net of depreciation
            
            
            94,981
            
            
            77,951Construction
                in progress
            
            
            12,082
            
            
            21,864Stockholders’
                equity
            
            
            46,605
            
            
            65,289




**Three months ended**
              **March 31,****2008**
            
            **2007**Revenues
                net
            
            
            9,256
            
            
            1,233Gross
                loss
            
            
            (2,190
            )
            
            (1,396
            )Net
                loss
            
            
            (19,624
            )
            
            (2,634
            )Net
                loss per common share, basic and diluted
            
            $
            (0.14
            )
            $
            (0.03
            )Gold
                ounces produced
            
            
            9,146
            
            
            1,936Gold
                ounces sold
            
            
            9,960
            
            
            1,875Average
                price received per ounce
            
            $
            929
            
            $
            658Cost
                of sales per ounce(i)
            
            $
            939
            
            $
            1,202




(i)
            Cost
                of sales per ounce is a measure frequently used to compare performance
                of
                mining operations and includes mine cost of goods sold less depreciation,
                amortization and accretion, and reclamation cost recovery, divided
                by
                ounces sold in the period.





**Three months ended**
              **March 31,****2008**
            
            **2007**Cost
                of goods sold
            
            
            11,446
            
            
            2,629Depreciation,
                amortization, and accretion
            
            
            (2,094
            )
            
            (375
            )Cost
                of sales
            
            
            9,352
            
            
            2,254





**Consolidated
      Financial Results / Overall Performance**





The
      Company’s net loss to common shareholders for the three month period ended March
      31, 2008 (“Q1/08”) was $19.6 million, or $0.14 per share, compared with $2.6
      million, or $0.03 per share, for the three month period ended March 31, 2007
      (“Q1/07”).


25





The
      net
      loss for Q1/08 includes $24.1 million non-cash, pre-tax expense 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. These contracts are in respect of
      429,000 ounces of gold at an average forward price of $801 per ounce spread
      evenly over the period of 78 months (5,500 ounces per month) commencing July
      2008. The spot price of gold at March 31, 2008 was $934 per ounce as compared
      to
      $837 at December 31, 2007 and $660-675 per ounce when the forward contracts
      were
      entered into in June 2007.





Results
      for Q1/08 reflect our first full quarter with Mesquite as a producing mine,
      and
      as such are not comparable with results for Q1/07 when Mesquite was a residual
      leaching operation based on ore production several years previously. Revenues
      for the current year are up by $8.0 million over the previous year. Of this
      total, $5.3 million relates to increased gold ounces sold. Although ounces
      sold
      increased from 1,875 in Q1/07 to 9,960 in Q1/08, the Q1/08 total was at the
      low
      end of the range that we had previously forecast. It is taking longer than
      originally forecast to achieve a “steady state” of solution flow through the new
      leach pad. $2.7 million of the revenue increase relates to the increase in
      the
      average selling price from $658 to $929 per ounce. Cost of sales per ounce
      for
      Q1/08, based on mine cost of sales less non-cash depreciation, amortization
      and
      depletion, was $939, as compared with $1,202 per ounce in Q1/07 .
      Unit costs for Q1/08 are still substantially higher than the projected estimate
      for full year 2008 of $470 - $490 per ounce, reflecting the delay in reaching
      normal production from the leach pad, the relatively high ratio of waste
      material to ore mined during the quarter, and current fuel prices which have
      increased by approximately 30% since late 2007. In
      addition, tire costs are considerably higher than originally forecast. In common
      with many mining companies, we are being adversely effected by a world-wide
      shortage of radial-ply truck tires; costs of the poorer performing bias-ply
      tires have escalated dramatically; usage is up and haul trucks are operating
      at
      less than planned speed. To compensate for this, during March 2008 we hired
      an
      additional crew and we began 24 / 7 mining operations effective March 31, 2008.





Other
      operating expenses for Q1/08 were $1.7 million compared with $1.8 million in
      Q1/07. General and administrative expenses of $1.1 million are consistent with
      Q1/07 expenses, but several cost elements have changed. Salary, head office
      travel and audit fees have increased, whereas legal costs and listing fees
      have
      come down. Non-cash stock based compensation for Q1/08 of $0.4 million was
      lower
      than the $0.5 million expense the previous year. The higher expense in 2007
      primarily reflects grants of options to our new management team in early
      2006. Exploration expense in Q1/08 of $0.2 million relates to a drilling program
      to
      explore for oxide resources to the south of the Brownie Hill area at Mesquite.





Other
      income (expense) for Q1/08 was $(25.6) million compared with $0.6 million in
      Q1/07. The major negative factor was the $24.1 million non-cash expense relating
      to the mark-to-market of our gold forward sales contracts. The spot price of
      gold at the time the hedging contracts were entered into was $660-675 per ounce
      as compared with a price of $934 at March 31, 2008 and $836 at December 31,
      2007. We have recorded an unrealized loss of $24.1 million for the three month
      period ended March 31, 2008 and $58.9 million for the year ended December 31,
      2007. The cumulative unrealized pre-tax loss of $83.0 million has been disclosed
      as a liability as at March 31, 2008.





Other
      income (expense) for Q1/08 included $0.4 million of interest income as compared
      with $0.5 million in Q1/07, reflecting the higher cash balances in 2007
      immediately after the January 2007 equity issue, which generated cash of $59.2
      million. Interest expense for Q1/08 was $0.7 million reflecting advances under
      the term loan facility in the range of $76.5 - $84.3 million. An additional
      $0.4
      million of interest expense was capitalized to property, plant and equipment
      during the quarter. The loss
      on foreign currency exchange of $1.0 million in Q1/08 relates to our holding
      significant cash balances in Canadian dollars during a period when that currency
      weakened in relation to the U.S. dollar.





Prior
      to
      2007, we did not recognize the recoverability of any part of our deferred tax
      assets, including operating losses carried forward. 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 deferred tax asset that we have accumulated.
      Accordingly, at December 31, 2007 we recorded a tax recovery of $37.1 million,
      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
      Q1/08
      we have recorded an additional $9.8 million of deferred
      taxes.


26


**Three months ended**
              **March 31,****2008**
            
            **2007**Gold
                sales revenue
            
            
            9,256
            
            
            1,233Average
                price realized per ounce
            
            $
            929
            
            $
            658Increase
                (decrease) in revenues
            
            
            8,023
            
            
            (1,542
            )Change
                in revenues attributable to ounces sold
            
            
            5,316
            
            
            (1,734
            )Change
                attributable to average selling price
            
            
            2,707
            
            
            192





Revenues
      from gold sales for Q1/08 increased by $8.0 million or 751% compared to Q1/07
      as
      new ore production at Mesquite ramped up and the selling price for gold
      continued to increase.





**Three months ended**
              **March 31,****2008**
            
            **2007**Cost
                of sales
            
            
            11,446
            
            
            2,629Increase
                (decrease)
            
            
            8,817
            
            
            (406
            )





Cost
      of
      sales for Q1/08 increased by $8.8 million compared to Q1/07, reflecting a full
      quarter of mining operations. Gold production and sales were low in relation
      to
      tonnage mined, reflecting the start up phase of the new leach pad and the high
      volume of waste material moved to access the ore body. The higher costs also
      reflect increases in several cost inputs, notably fuel, tires and mining fleet
      maintenance. Mine site administration costs have also increased as we now have
      a
      full management team in place. Costs for Q1/08 also reflect substantially higher
      amortization charges for the new plant and equipment that was placed in service
      during 2007.




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





**Three months ended**
              **March 31,****2008**
            
            **2007**Mine
                operating costs
            
            
            8,156
            
            
            1,773Mine
                site administration
            
            
            920
            
            
            431Amortization
                and accretion
            
            
            2,094
            
            
            375Royalties
            
            
            265
            
            
            45




Other
      operating expenses for Q1/08 are $1.7 million, compared with $1.8 million in
      Q1/07. Although general and administrative expenses overall are consistent
      at
      $1.1 million, the components are different; higher salary and travel costs,
      reflecting head office staff increases and significant involvement at the mine
      site, and higher audit fees, reflecting our engagement of a major international
      accounting firm as auditors, were offset by lower listing fees and legal fees,
      which were high in Q1/07 because of financing activities. Stock based
      compensation in Q1/08 is approximately $0.1 million lower than the prior year
      primarily because of higher initial amortization relating to options awarded
      to
      the new management team in 2006.





**Three months ended**
              **March 31,****2008**
            
            **2007**General
                and administrative
            
            
            1,111
            
            
            1,085Stock
                based compensation
            
            
            370
            
            
            468Exploration –
                Mesquite
            
            
            224
            
            
            283




27





Other
      expense for Q1/08 was $25.6 million compared with $0.6 million the previous
      year. The major contributor to this cost increase was the $24.1 million charge
      in respect of the unrealized mark-to-market loss on our gold forward sales
      contracts. Interest income for Q1/08 was $0.4 million compared with $0.5 million
      the previous year. Cash balances were relatively high in early 2007 after the
      equity issue in January of that year. Interest expense and commitment fees
      of
      $0.7 million in Q1/08 reflects term loan advances in the range of $76.5 - $84.3
      million during the quarter. In addition, in Q1/08 we recorded a foreign exchange
      loss of $1.0 million as a result of our holding net Canadian dollar cash
      balances at a time when that currency was weakening in relation to the U.S.
      dollar.





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




**Three
                months ended**
              **March
                31,****2008**
            
            **2007**Interest
                income
            
            $
            384
            
            $
            517Interest
                expense and commitment fees
            
            
            (699
            )
            
            -Amortization
                of deferred debt issuance costs
            
            
            (115
            )
            
            -Unrealized
                loss on mark-to-market of gold forward sales contracts
            
            
            (24,111
            )
            
            -Loss
                on foreign exchange
            
            
            (1,020
            )
            
            80




28





**Results
      of Operations**





**Three
      Months Ended March 31, 2008 (“Q1/08”) compared to Three Months Ended March 31,
      2007 (“Q1/07)”.**




Poured
      gold production for Q1/08 was 9,146 ounces compared with 1,936 ounces in Q1/07.
      During 2007, production at Mesquite derived from residual gold contained in
      ore
      placed on the leach pads several years previously. Mining of new ore at Mesquite
      started in July 2007 and our first pour of gold from new ore occurred in January
      2008. Ore production has been building up steadily since that time but monthly ore
      production during Q1/08 trailed plan because haul truck speeds are being
      restricted by the quality of tires currently available in the market place.
      A pproximately
      11.0 million tons of waste and 1.3 million tons of ore were mined in Q1/08.
      The
      low production in Q1/07 reflects the almost total depletion of the recoverable
      gold ounces from ore placed on the leach pads prior to our acquisition of
      Mesquite. Gold sales for Q1/08 were 9,960 ounces at an average selling price
      of
      $929 for revenues of $9.3 million compared with 1,875 ounces at an average
      selling price of $658 for revenues of $1.2 million in Q1/07. The higher average
      selling price reflects the increase in the world price for gold.





Mine
      operating costs, before adjustment for inventory changes, were $8.2 million
      in
      Q1/08, compared to $1.7 million in Q1/07. Q1/08
      costs represent the first quarter of full mining operations; operating labour,
      contracted services and fuel and tire costs are the largest cost items. Fuel
      and
      tire costs have increased significantly and currently account for approximately
      50% of mine operating costs. Mine
      site
      administration costs for Q1/08 were $0.9 million compared with $0.4 million
      in
      Q1/07, reflecting the increase in staff and associated costs to support the
      capital program and full mining operations. Depreciation, amortization and
      accretion expense for Q1/08 was $2.1 million compared with $0.4 million in
      Q1/07, reflecting mining fleet additions from May 2007 onwards and the new
      leach
      pad addition in January 2008.





Inventoried
      costs associated with the build up of leach pad and metal-in-process inventories
      in Q1/08 were $5.8 million compared with $0.1 million in the first quarter
      of
      2007. The new leach pad is still in start up mode and we have not yet attained
      the steady state of solution flow and gold production rates that we are planning
      on. As a result, unit production costs are still high and are not representative
      of anticipated future costs. Accordingly, the estimated approximately 18,700
      recoverable gold ounces contained in ore on leach pads as of March 31, 2008
      were
      valued at estimated net realizable value. In Q1/07, no value was attributed
      to
      gold ounces in the leach pads. Metal-in-process inventory represents metal
      in
      solution or in subsequent stages of the refining process. Reflecting the
      start-up phase of the operation, unit production costs for this aspect of
      inventory were also high. Accordingly, the estimated approximately 1,000 ounces
      of metal-in-process inventory as of March 31, 2007 were also valued at net
      realizable value.





The
      foregoing factors resulted in a gross loss of $2.2 million for Q1/08 compared
      with $1.4 million in Q1/07.





General
      and administrative expense of $1.1 million for Q1/08 was consistent with the
      previous year’s expense. Head office salary and travel costs have increased;
      this primarily reflects greater technical, systems and other support services
      being provided to Mesquite. Audit and taxation fees have also increased
      reflecting the increasing complexity of our activities. Listing and legal fees
      for Q1/08 were lower than in the previous year on account of the financing
      and
      reorganization activities ongoing at that time.





Stock
      based compensation represents the non-cash costs of options, as calculated
      under
      the Black-Scholes option pricing model, granted to directors, officers and
      employees. The lower cost in Q1/08 reflects the higher initial amortization
      of
      options granted to the new management team in 2006.


29





Exploration
      activities at Mesquite during Q1/08 totaled $0.2 million and relate primarily
      to
      a drilling program to explore for oxide resources south of the Brownie Hill
      area
      at Mesquite. Costs of $0.3 million in Q1/07 relate to a similar drilling
      program.





Other
      expense for Q1/08 was $25.6 million compared to $0.6 million in Q1/07. The
      increase primarily reflects the $24.1 million charge in respect of the
      unrealized mark-to-market loss on our gold forward sales contracts. Interest
      income for Q1/08 was $0.4 million compared with $0.5 million the previous year.
      Cash balances were relatively high in early 2007 after the equity issue in
      January of that year. Interest expense of $0.7 million in Q1/08 reflects the
      term loan advances in the range of $76.5 - $84.3 million during the quarter.
      There were no loans outstanding during Q1/07. In addition, in Q1/08 we recorded
      a foreign exchange loss of $1.0 million relating to our 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 deferred tax asset that we
      have accumulated. Accordingly, at December 31, 2007 we recorded a tax recovery
      of $37.1 million, 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 Q1/08 we have recorded an additional $9.8 million of deferred
      tax
      recovery.





The
      above
      were the major factors in our reporting a net loss to common shareholders for
      Q1/08 of $19.6 million or $0.14 per share, compared with a net loss of $2.6
      million or $0.03 per share in Q1/07.





**Liquidity
      and Capital Resources**




Our
      financing activities in 2007 positioned the Company to fund the completion
      of
      the expansion program at Mesquite and the ramp up of production until we achieve
      the generation of free cash flow, expected during the second fiscal 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
      Q1/07 we drew down a further $7.9 million under the term loan facility and
      we
      raised $0.6 million through the exercise of warrants and stock options.





Cash
      required for operating activities in Q1/08 was $10.7 million compared with
      $2.3
      million in Q1/07. The net loss for the quarter was $20.5 million, including
      the
      non-cash impact of the $24.1 million mark-to-market loss on forward sales
      contracts and the non-cash recovery of deferred income taxes of $8.9 million.
      Other non-cash expense items were: depreciation and accretion expense of $2.1
      million, amortization of deferred debt issuance costs of $0.1 million, and
      stock-based compensation of $0.4 million. Changes in the composition of non-cash
      working capital items during the quarter required $7.9 million. The largest
      single item in this requirement was the increase in inventories of $6.0 million,
      reflecting an increase of approximately 6,600 ounces in recoverable gold on
      the
      leach pads during the quarter. A reduction in accounts payable of $1.8 million
      and a reduction in accrued payroll of $1.6 million were also significant
      contributing factors.





Cash
      required for investing activities in Q1/08 was $8.7 million compared with $5.7
      million in Q1/07. The spending in 2008 was on several process related projects
      forming part of the Mesquite expansion program, notably the new leach pad,
      new
      carbon columns and the retrofit of the process plant.





The
      foregoing factors resulted in a decrease in our cash position of $11.0 million
      in Q1/07.





At
      March
      31, 2008, we had available cash balances of $32.8 million, restricted cash
      of
      $7.5 million, and working capital of $39.9 million. In addition, we had
      unutilized credit facilities of $20.7 million of which $3.0 million was
      available for the Mesquite Expansion project and $17.7 million was available
      for
      general corporate purposes. Subsequent to the end of the quarter we were
      advanced $2.0 million under the credit facility.


30





We
      expect
      to spend an additional $6.4 million in completing the expansion related
      projects, most of which will be in the second fiscal quarter of 2008. In
      addition, we have placed an order for an additional loader to be delivered
      during the third quarter of 2008, at a cost of $3.4 million. Although it is
      taking longer than originally forecast to achieve a “steady state” of solution
      flow through the new leach pad, we expect to generate free cash flow by
      mid-year.





**Critical
      Accounting Policies**




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





*Derivative
      Instruments*





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





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





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





*Depreciation
      and Amortization*




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




We
      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.




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.


31





*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*





The
      Company accounts for income taxes using the liability method, recognizing
      certain temporary differences between the financial reporting basis of the
      Company’s 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 the Company, as measured by the statutory tax rates
      in
      effect. The company derives its deferred income tax benefit or charge by
      recording the change in either the net deferred income tax asset or liability
      balance in the year .





The
      Company’s 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 Leach Pads and Metal-in-Process Inventories*





*Ore
      on Heap Leach Pads*




Prior
      to
      July 2007, the Company 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 the Company on November 7, 2003. The reserve estimates reported
      by
      the Company 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. The
      Company expects to continue to process and recover metal from the leach pads
      until no longer considered economically feasible.


32




*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.




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




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





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





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





**Recent
      Accounting Pronouncements**





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 the Company’s fiscal year ending December 31, 2008.
      In February 2008, the FASB amended SFAS No. 157 to exclude leasing transactions
      and to delay the effective date by one year for non-financial assets and
      liabilities that are recognized or disclosed at fair value in the financial
      statements on a non-recurring basis. 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 to the Company’s financial
      statements.





In
      February 2007, the 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.


33





In
      December 2007, the 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, the 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,
      the
      Company will evaluate the application of FAS 160.





In
      March
      2008, the 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 is forward gold sales contracts.





**Contractual
      Obligations**





The
      following table presents the contractual obligations outstanding as at March
      31,
      2008:





**Total**
            
            **Less than**
              **1 Year**
            
            **2- 3**
              **Years**
            
            **4- 5**
              **Years**
            
            **More than**
              **5 Years**Mesquite expansion
                project and sustaining capital
            
            $
            11,299
            
            $
            11,299
            
            $
            —
            
            $
            —
            
            $
            —Reclamation
                and remediation obligations (1)
            
            
            11,888
            
            
            164
            
            
            560
            
            
            128
            
            
            11,036Share
                of office lease
            
            
            2,716
            
            
            238
            
            
            536
            
            
            532
            
            
            1,410Total
            
            $
            25,903
            
            $
            11,701
            
            $
            1,096
            
            $
            660
            
            $
            12,446





(1)
      In
      current dollars (undiscounted).





**Off-Balance
      Sheet Arrangements**





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


34





**Outlook –
      balance of 2008**




As
      at
      December 31, 2007 all units of the mining fleet had been placed into service.
      Management’s primary focus is now on increasing ore production through improved
      effectiveness of the mining fleet in light of the operational constraints
      currently imposed by the type of tires available, completing the remaining
      aspects of the capital program, and achieving “steady state” production from the
      new ore being placed on the leach pads, with a view to achieving gold production
      of 135,000 – 145,000 ounces of gold in 2008. We anticipate cash flow from
      operations to be positive from mid-year onwards.





Our
      capital program includes approximately $6.4 million to complete the expansion
      related projects at Mesquite, most of which will be incurred in the second
      fiscal quarter of 2008. The major items in this program are the leach pad
      expansion, installation of new carbon columns, and retrofit of the process
      plant. In addition, we have recently placed an order for $3.4 million for
      delivery of a third loader unit for delivery during the third quarter of 2008
      to
      ensure mining productions levels are achieved.




During
      2008 Mesquite Mine will continue to mine at the current rate and will build
      leach pad gold inventories to levels to sustain commercial production in the
      third quarter of 2008. We expect to produce between 20,000 to 30,000 ounces
      of
      gold in the second quarter. This is a 40% - 50% decrease from previously
      announced production guidance of 40,000 – 50,000 ounces. The shortfall in
      production relates to the timing of leaching and the amount of gold tied up
      in
      solution as leach pad inventory. Ounces placed on the heap leach pad are on
      or
      above budget, but the timing and amount of solution flowing to the carbon
      columns for gold recovery has not reached anticipated levels.





Now
      that
      the new process facility is operating, solution flow has more than doubled
      and
      will allow gold inventory to increase in the pad and allow more gold in solution
      to be processed from the heap leach pad. Overall gold recovery percentage is
      not
      affected.





Gold
      production for 2008 is now projected to be 135,000 – 145,000 ounces, a
      decrease of approximately 15% from guidance of 155,000 – 165,000 ounce
      provided in early March. Gold production for 2009 is also projected to be
      135,000 – 145,000 ounces.





Cost
      of
      sales for 2008 will average between $470 - $490 (1) per
      ounce, up approximately 15% from our previous guidance of $410 -
      $430 (1) per
      ounce. The increase is due to an increase in consumable costs, primarily diesel
      fuel, as discussed further below. Cost of sales for 2009 will average between
      $430 - $450 (1) per
      ounce.





Average
      annual gold production for the period 2010 – 2016 will be 160,000 –
170,000 at an average cost of sales of $390 - $410 (1) as we
      acquire radial tires, produce inventoried gold on the leach pad and achieve
      a
      steady ore haul profile to the leach pad.





Fuel
      prices have risen steadily since late December 2007. In our initial cost model
      for 2008, we assumed an average purchase price for off-road diesel fuel of
      $2.75
      per gallon. We are currently paying $3.55 per gallon - a 29% increase over
      our
      budget.





Fuel
      not
      only affects our direct mining costs, such as the operating costs of our haul
      trucks and shovels, but also affects the cost of delivered consumables, such
      as
      explosives and lime.





Our
      life
      of mine model now assumes that the price for off-road diesel will remain at
      the
      current level. We have used US gulf coast ultra low sulphur diesel fuel, the
      nearest proxy for our off-road diesel, to estimate our future fuel cost which
      is
      forecasted to be constant for the next few years.





(1) Cost of
      sales per ounce is a non-GAAP measure and is defined as cost of sales as per
      the
      Company’s financial statements (mine operating costs plus royalties) divided by
      the number of ounces sold.


35





**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. Changes
      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 issues derivative financial instruments for trading
      purposes.





At
      March
      31, 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 78 month period
      from July 2008 to December 2014. The fair value of the contracts as at March
      31,
      2008 was $(83.0) 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 $934
      per
      ounce at March 31, 2008 translates into a mark-to-market fluctuation of
      approximately $25
      million .





Gold
      sales covered by the forward sales contract represent approximately 24% and
      47%
      of our forecast annual shipments for 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 $934 per ounce at March 31, 2008 translates
      into a $10.0 million increase/decrease in revenues from un-hedged production
      in
      2008 and $6.9 million in 2009.





Fuel
      costs are a significant cost element costs at Mesquite, currently representing
      approximately 33% of our mining costs. The market price of diesel and gasoline
      is unpredictable and can fluctuate significantly. World oil prices are currently
      at historically high levels and are being reflected in the price we pay for
      fuel. We estimate that a 10% change in the price of diesel fuel from the level
      of $3.55 per gallon at March 31, 2008 translates into a
      $0.8 million increase/decrease in mining costs.





At
      March
      31, 2008 we had $83.4 million of bank debt outstanding of which an estimated
      $7.6 million is current. This debt currently bears interest based on short-term
      U.S. LIBOR rates, generally for one-month periods, plus 2.2%. A 1% fluctuation
      in interest rates at current levels of indebtedness would translate into a
      $0.8
      million change in reported pre-tax income.





**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.


36





**PART
      II. OTHER INFORMATION**




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




None.





**Item
              1 A**
            **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*




32.1
            Section
                1350 Certification of Principal Executive Officer
                *





32.2
            Section
                1350 Certification of Principal Financial Officer
                *




* Filed
        herewith


37





**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:May 12, 2008WESTERN
                GOLDFIELDS INC.By:
            /s/
                Raymond ThrelkeldName:Raymond
                ThrelkeldTitle:President
                and Chief Executive Officer


38