**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.20549**




**FORM
      10 - KSB**





(Mark
      One)


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


For
      the
      fiscal year ended December 31, 2007





OR





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





For
      the
      transition period from – to –





Commission
      File Number: 000 - 51076




**WESTERN
      GOLDFIELDS INC.**


(Name
      of
      Small Business Issuer in its Charter)




Ontario,
                Canada
            98
                - 0544546(State
                or Other Jurisdiction of
            (I.R.S.
                Employer Identification No.)Incorporation
                or Organization)2
                Bloor Street West, Suite 2102, PO Box 110Toronto,
                Canada
            M4W
                3E2(Address
                of Principal Executive Office)
            (Zip
                Code)





Registrant’s
      telephone number, including area code: (416) 324 - 6000





Securities
      registered under Section 12(b) of the Exchange Act: None





Securities
      Registered pursuant to Section 12 (g) of the Act: **Common
      Stock** ****


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) filed all reports required to   be filed by Section
      13 or 15(d)   of   the   Securities   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 ninety (90) days. Yes x No o





Check
      if
      there is no disclosure of delinquent filers in   response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No x





State
      issuer’s revenues for its most recent fiscal year: $4,665,890




The
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates of the issuer as of February 29, 2008 was $479,400,000. For
        purposes of this computation, all executive officers, directors and 10%
        shareholders were deemed affiliates. Such a determination should not be
        construed as an admission that such 10% shareholders are
        affiliates.





As
      of
      February 29, 2008 there were 136,174,686 shares
      of
      common stock of the issuer issued and outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE: None





Transitional
      Small Business Disclosure Form at (check one): Yes o No x












**TABLE
      OF CONTENTS**





PART
                IItem
                1.
            Description
                of Business
            
            4Item
                2.
            Description
                of Properties
            
            33Item
                3.
            Legal
                Proceedings
            
            33Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            34PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            
            35Item
                6.
            Management’s
                Discussion and Analysis and Results of Operations
            
            37Item
                7.
            Financial
                Statements
            
            54Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Statements
            
            83Item
                8A.
            Controls
                and Procedures
            
            83Item
                8B.
            Other
                Information
            
            83PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance with Section 16(a) of the Exchange Act
            
            84Item
                10.
            Executive
                Compensation
            
            87Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            90Item
                12.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            92Item
                13.
            Exhibits
            
            93Item
                14.
            Principal
                Accountant Fees and Services
            
            93




2


**CAUTIONARY
      NOTE REGARDING FORWARD LOOKING STATEMENTS**





We
      have
      included and from time to time may make in our public filings, press releases
      or
      other public statements, certain statements, including, without limitation,
      those under “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in Part II, Item 6. 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
      businesses could affect the matters referred to in such statements and it is
      possible that our actual results may differ materially from the anticipated
      results indicated in these forward looking statements. Important factors that
      could cause actual results to differ from those in the forward-looking
      statements include, without limitation:





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




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




**CAUTIONARY
      NOTE TO U.S INVESTORS CONCERNING ESTIMATES OF MEASURED,INDICATED AND
      INFERRED RESOURCES**




This 10-KSB
      uses the terms "measured", "indicated" and/or "inferred" mineral resources.
      United States investors are advised that while such terms are recognized by
      Canadian regulations, the United States Securities and Exchange Commission
      does
      not recognize them. United States investors are cautioned not to assume that
      all
      or any part of mineral resources will ever be converted into mineral reserves.
      Inferred mineral resources have a great amount of uncertainty as to their
      existence, and as to their economic and legal feasibility. It cannot be assumed
      that all or any part of an inferred mineral resource will ever be upgraded
      to a
      higher category. Under Canadian rules, estimates of inferred mineral resources
      may not form the basis of feasibility or other economic studies. United States
      investors are cautioned not to assume that all or any part of an inferred
      mineral resource exists, or is economically or legally mineable.




3


**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**(a)
      Business Development**





We
      were
      formed pursuant to a reorganization completed in June 2007 whereby our
      predecessor, Western Goldfields, Inc., an Idaho corporation (“WGI Idaho”),
      became our wholly-owned subsidiary as a result of a merger with a newly created
      subsidiary company, Western Goldfields (USA) Inc., a Nevada Corporation. WGI
      Idaho was incorporated as Bismarck Mining in the State of Idaho in 1924 and
      changed its name to Western Goldfields, Inc. in July 2002. We are an independent
      gold producer focused on completing the expansion of the Mesquite Mine
      (“Mesquite” or the Mine”) in Imperial County, California.





In
      early
      2003, we acquired Mesquite from Hospah Coal Company (“Hospah”), a wholly-owned
      subsidiary of Newmont Mining Corporation (“Newmont”), pursuant to an asset
      purchase agreement. These assets are now held by our wholly-owned subsidiary,
      Western Mesquite Mining Inc. The transaction included:





·
            Assumption
                of reclamation and closure liabilities at the property, estimated
                at
                $6,000,000;




·
            Provision
                of approximately $7,800,000 in reclamation bonds to various governmental
                authorities replacing equivalent bonds previously provided by Newmont.
                In
                January 2007 and May 2007, we were notified that the required amount
                of
                bonding had been increased to $8,600,000 and $11,300,000,
                respectively;




·
            Issuance
                of additional common shares and warrants to purchase our common shares
                valued at approximately $3,100,000. As a result of the transaction,
                Hospah
                acquired 3,454,468 of our common shares and warrants to purchase
                an
                additional 8,091,180 of our common shares. On April 18, 2005, Hospah
                surrendered warrants to purchase 2,035,000 of our common
                shares;




·
            The
                grant to Hospah of a perpetual net smelter return royalty ranging,
                according to location, from 0.5% to 2.0% on any newly mined ore;
                and




·
            The
                grant to Hospah of a net operating cash flow royalty equal to 50%
                of the
                proceeds received from the sale of gold and silver produced from
                materials
                in place on the heap leach pads on the date of the acquisition, less
                certain operating costs, capital expenses and other allowances and
                adjustments.




Mesquite
      is our most important asset, and provided us with current gold production from
      material that was placed on the heap leach pads by Newmont and previous owners
      of the property until late 2007. The gold produced provided us with operating
      cash flow. In January 2008 we commenced operations for the production of gold
      from ore placed on the leach pads in the second half of 2007.




In
      2007
      we completed the financing required for the development of the Mesquite Mine
      to
      bring it back into full production based on the feasibility report completed
      in
      August 2006. See “Our Feasibility Study” below and “Cautionary Notice Regarding
      Forward-Looking Statements.”





In
      early
      2006, we conducted a review of certain of our other exploration properties
      which
      were located in California, Idaho and Nevada. Based on the outcome of this
      review, we disposed of these exploration properties on June 19,
      2006.





4




**New
      Management and Private Placement Financing**





On
      February 13, 2006, we announced the restructuring of our Board of Directors
      and
      the appointment of a new senior management team, including Mr. Randall Oliphant
      as Chairman of the Board, Mr. Raymond Threlkeld as President and Chief Executive
      Officer, Mr. Brian Penny as Chief Financial Officer and Mr. Paul Semple as
      Vice
      President of Projects. On February 20, 2006, we announced the completion of
      a
      $6,000,000 private placement of our common stock. The proceeds from this private
      placement were used:





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





·
            to
                pay $1,953,257 to Romarco Minerals Inc. in full satisfaction of amounts
                owing upon termination of a merger agreement with that
                company;





·
            to
                pay costs of approximately $821,000 for the completion of the Mesquite
                feasibility study; and





·
            the
                balance for general corporate
                purposes.





**Feasibility
      Study and Subsequent Developments**





On
      August
      9, 2006, we announced the completion of a positive feasibility study to expand
      the operation of our Mesquite mine property. We also announced proven and
      probable reserves of 2.36 million ounces of gold. See “Our Feasibility Study”.
      Accordingly, we have begun to capitalize costs considered to be development
      of
      the Mesquite mineral property.





Since
      completion of the feasibility study, our primary focus has been on obtaining
      financing for and completing the expansion of the Mine. We expect to complete
      the expansion project in the second fiscal quarter of 2008. On August 28, 2006,
      our common shares commenced trading on the Toronto Stock Exchange under the
      symbol WGI, and on November 8, 2007, our common shares commenced trading on
      the
      American Stock Exchange under the symbol WGW.





On
      November 21, 2006, we announced that the Board of Directors had approved capital
      expenditures for the mining fleet totaling $67.0 million and that we had issued
      purchase orders totaling $60.9 million.





On
      November 30, 2006, we announced the signing of a mandate letter with Investec
      Bank (UK) Limited to arrange and underwrite up to $105 million of project debt
      and that we had received an indicative term sheet.





On
      December 13, 2006, we announced positive initial results from the exploration
      drilling program underway at the Mesquite Mine.





On
      January 25, 2007, we sold 31,115,000 shares of common stock pursuant to a
      prospectus supplement to our shelf prospectus, which we filed in October 2006
      for gross proceeds of approximately $59.4 million and net proceeds of
      approximately $55.2 million. On February 1, 2007, we sold a further 2,215,000
      shares of common stock pursuant to a prospectus supplement to our shelf
      prospectus, for gross proceeds of approximately $4.2 million and net proceeds
      of
      approximately $4.0 million. These shares of common stock were issued upon the
      exercise of the underwriter’s over allotment option. We have been using the
      proceeds from this offering to finance our on-going activities at Mesquite,
      including the acquisition of the majority of the mining equipment fleet, as
      well
      as for general corporate purposes.





5




On
      March
      30, 2007, the Company, through its wholly-owned subsidiary, Western Mesquite
      Mines, Inc., entered into a new term loan facility with Investec Bank (UK)
      Limited under which the Company will be able to borrow up to $105.0 million
      in
      connection with the development of the Mesquite Mine. Interest on advances
      will
      be at U.S. LIBOR plus 2.2% until completion (as defined in the credit agreement)
      and 1.75% after completion. Completion is expected to occur during the second
      half of 2008. The agreement, in conjunction with the earlier equity financing,
      completed the financing requirements for Mesquite. The Company anticipates
      drawing $87.3 million to complete the Mesquite development plan. As of December
      31, 2007, $76.5 million had been drawn and a further $2.7 million was drawn
      on
      February 7, 2008.





On
      October 12, 2007 we completed an offering of an aggregate of 11,316,000 common
      shares of the Company, no par value, at Cdn. $3.05 per share pursuant to a
      short
      form prospectus filed in Canada. The offering was not registered in the United
      States. The gross proceeds received from this offering were $35.0 million and
      the net proceeds were approximately $33.4 million. We plan to use the proceeds
      from this offering to finance regional exploration activities, carrying out
      testing on the non-oxide resources, corporate development activities and for
      general working capital purposes.





**Hedging
      Activities**





Our
      preferred approach is to avoid hedging and provide our shareholders with
      leverage to changes in the price of gold by selling in the spot market. Under
      the terms of the term loan facility which we negotiated in early 2007, we were
      required to enter into a gold hedging program acceptable to the banking
      syndicate. In June, 2007 we entered into a series of flat forward sales
      contracts for 429,000 ounces of gold at a price of $801 per ounce. These 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 of these contracts is immediately reflected on the income
      statement of the Company and the cumulative effect is reflected as an asset
      or
      liability on the balance sheet. At December 31, 2007, the spot price for gold
      was $836 per ounce as compared with our forward sale price of $801, which
      resulted in our recording an unrealized loss and a long term liability of $58.9
      million.




**Reorganization**





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





On
      completion of the reorganization, the shares of common stock in Western
      Goldfields, Inc. (the predecessor Idaho corporation) automatically became an
      equal number of common shares of no par value in Western Goldfields Inc. (the
      successor Ontario corporation) and the economic ownership of shareholders in
      the
      new company remained unchanged.





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




6




Our
      current corporate structure is as follows:




Western Goldfields Logo


**(b)
      Business of the Issuer**





We
      are an
      independent gold production and exploration company with a focus on precious
      metal mining opportunities in North America. Currently the Mesquite Mine is
      our
      sole mineral property. Mesquite is a low-grade, open-pit operation employing
      heap leach pad technology which we acquired in November 2003 from Newmont.
      The
      mine is fully permitted.





From
      late
      2003 until late 2007, the Mine provided us with residual gold production from
      material that had been placed on the heap leach pads by Newmont and previous
      owners of the property. This production provided us with some operating cash
      flow to help sustain our operations pending the reactivation of the Mine. In
      January 2008 we commenced operations for the production of gold from ore placed
      on the leach pads in the second half of 2007.





After
      a
      change in the management team and the provision of interim new financing in
      February 2006, in August 2006 we completed a feasibility study for expansion
      and
      operation of Mesquite based on proven and probable reserves of 2.36 million
      ounces of gold. The feasibility study provided grounds to resume mining
      operations and to expand existing, inactive open pit mines on the property.
      See
“Our Reserves”.





In
      2006
      we also conducted a review of certain of our other exploration properties.
      Based
      on the outcome of this review, we disposed of these exploration properties
      on
      June 19, 2006.





Since
      completion of the feasibility study, our priority has been to finance the
      development of the Mesquite Mine and bring it back into full production. We
      achieved both these objectives by December 31, 2007. The Mine is now fully
      funded and we anticipate average annual production between
      150,000 – 170,000 ounces of gold during the first eight years of the twelve
      year mine life. Full production at the Mine resumed in January 2008 and our
      focus is now on achieving the anticipated rate of production and completing
      planned improvements to the property.




7




In
      late
      2006 we embarked on an expansion capital expenditure program of $108.6
      million to acquire the mobile mining fleet and carry out several major
      infrastructure projects necessary to bring Mesquite back into full production.
      The fleet includes 14 haul trucks, 2 shovels, 1 front end loader and several
      ancillary items. Commencing in the Spring of 2007 we started to take delivery
      of
      the mining units and by year-end all the units had been placed into service.
      The
      major items in the construction program are the leach pad expansion, retrofit
      of
      the process plant, and construction of a truck repair shop, warehouse and mine
      operations administrative office. Much of this work had been completed by
      December 31, 2007 and we expect the remaining tasks to be completed early in
      the
      second quarter of 2008. The expansion program has gone according to plan and
      is
      on budget; on the basis of progress in the construction program, we were able
      to
      accelerate the start of gold production at Mesquite to January 2008, three
      months ahead of the original schedule.





On
      March
      26, 2007 we announced that we had increased proven and probable reserves at
      Mesquite from 2.36 million ounces of gold to 2.77 million ounces. Approximately
      50% of the increase is attributable to assay results from a drilling program
      of
      27 holes at the Brownie Hill area of the mine which converted inferred oxide
      resources to proven and probable reserves, and the remaining 50% is attributable
      to an increase in the reserve gold price assumption from $450 to $500 per ounce.
      At December 31, 2007, proven and probable reserves were estimated to be 2.76
      million ounces, reflecting production depletion from the March 2007
      estimates.





Our
      current operations involve circulating cyanide solution through the heap leach
      pads. The gold and silver in solution is then extracted by processing the
“pregnant” solution through activated carbon which is then periodically treated
      to recover the gold and silver into dore. The dore is then transported to
      Johnson Matthey Inc. for further refining to 99.99% pure bullion.




We
      sell
      our gold production to bullion dealers and refiners. In 2007, our sales of
      $4.7
      million were exclusively to one customer. In 2006, sales to two customers were
      $6.9 million and $0.9 million, respectively.




**Description
      of the Mesquite Mine**




The
      Mine
      property is located primarily in Sections 3-10 and 15-19, Township 13 South,
      Range 19 East, SBB&M, south of the Chocolate Mountains in Imperial County,
      California, approximately 35 miles east of Brawley, California, and 45 miles
      northwest of Yuma, Arizona, just north of the Mexican border at an elevation
      of
      between 600 and 1,000 feet above sea level. The property consists of 309
      unpatented mining and millsite claims located on federal land administered
      by
      the Bureau of Land Management (“BLM”), approximately 170 patented tracts that
      are privately owned, and one piece of school trust lands leased from the
      California State Lands Commission (“State”). Part of the property is operated by
      Western Mesquite Mines, Inc. (“WMMI”) for mining purposes and part is operated
      by County Sanitation District No. 2 of Los Angeles (“LACSD”) for a regional
      landfill facility. The rights and obligations of WMMI and the LACSD are
      contained in a Mineral Lease and Landfill Facilities Lease Agreement dated
      June
      25, 1993 (“the Landfill Agreement”). The term of the Landfill Agreement is 31
      years commencing June 25, 1993, and so long thereafter as WMMI continues to
      mine
      or process ore on the property, but not to exceed 85 years in
      total.





With
      regard to that part of the property used for mining purposes, portions are
      privately owned by WMMI, portions consist of unpatented mining and millsite
      claims on BLM land that are owned (264 claims) or leased (45 claims) by WMMI,
      and portions are owned by the State and leased by WMMI. The subject leases
      are
      as follows:





§
            WMMI
                leases a group of 40 unpatented mining and millsite claims from the
                Sanitation District under the terms of the Landfill Agreement. As
                noted
                above, the term of that lease is 31 years commencing June 25, 1993,
                and so
                long thereafter as WMMI continues to mine or process ore on the property,
                but not to exceed 85 years in
                total.




8





§
            WMMI
                leases a group of five unpatented mining claims from Bonnie Kovac,
                James
                Harbison and Stephen Galambos Jr. pursuant to a Mineral Lease and
                Purchase
                Option dated October 20, 1982. The term of that lease is initially
                for 21
                years and for a period so long thereafter as WMMI continues to exercise
                certain rights and continues to make minimum advance royalty payments
                under the lease.





§
            WMMI
                leases 657.87 acres of land from the State pursuant to a Mineral
                Extraction Lease (No. PRC 8039.2) issued October 1, 2002. The term
                of that
                lease is ten years with a preferential right to renew for two successive
                periods not to exceed ten years each upon such reasonable terms and
                conditions as may be prescribed by the
                State.





The
      overall area covered by the Conditional Use Permit, issued by Imperial County,
      and the Record of Decision, issued by the BLM, is approximately 5,200 acres.
      Mining operations are supported by existing infrastructure, a reliable water
      supply, grid electric power and State Highway 78, which passes close to the
      Mine. The nearest rail siding is 15 miles away, but the rail line will be
      extended to the Mine as part of the LACSD landfill project. The property is
      in a
      desert region with average annual rainfall of approximately three inches and
      sparse desert vegetation.













9


Since
      mining operations commenced in 1986, three major pits have been developed:
      Big
      Chief to the northwest of the property, Rainbow to the northeast of the
      property, and Vista in between them. The Mine infrastructure is located in
      the
      center of the property, feeding two distinct areas of leach pads located to
      the
      south on the pediment. Gold recovery and leach pad infrastructure is located
      to
      the northeast of the two pad areas and to the south of the mine
      infrastructure.





**Expansion
      plan**




Newmont
      developed a Mesquite Mine expansion plan to mine additional mineralized material
      remaining in-situ and adjacent to the open pits. A Record of Decision (“ROD”)
      was issued by the U.S. Bureau of Land Management (“BLM”) in 2002, allowing for
      the expansion of the existing operations. The ROD defines and authorizes future
      new disturbance that allows for expansion of the Big Chief, Rainbow and Vista
      open pits. Our feasibility study of August 2006 is the basis for the
      redevelopment of the mining operations.




Under
      the
      terms of our permits, new operations will process run-of-mine ore by expanding
      the easternmost, Phase 6 leach pads. The feasibility study report set out the
      mining fleet requirements for pre-production and commercial production. Our
      fleet acquisition program in 2007 was based on these requirements. Additional
      investment in the processing facilities, in the amount of $26.5 million, which
      includes $19.5 million for the heap leach pad expansion and $7 million for
      new
      processing facilities and modernization of existing facilities was also included
      in the expansion. In May 2007, an additional $2.6 million surety bond was posted
      in respect of future reclamation costs, bringing the total amount subject to
      such bonds in respect of reclamation costs to $11.3 million. Permit conditions
      defined by the ROD also include, among other things, the implementation and
      maintenance of tortoise education programs for employees, the construction
      of
      approved tortoise fencing and the provision of 1,394 acres of tortoise habitat
      within the Chuckawalla Bench Area, an area to the north of Mesquite Mine, to
      mitigate future disturbance of tortoise habitat. During the fourth quarter
      of
      2006 we provided funds to the appropriate regulatory agencies for the purchase
      and management of the compensation lands.





Hanson
      Natural Resources Company (“HNRC”), a previous owner of the Mine, permitted a
      permanent landfill facility on a portion of the lands occupying the south-west
      sector of the property. In June 1993, Newmont entered into a mineral lease
      and
      landfill facilities lease agreement with HNRC to conduct mining operations
      concurrently with the proposed landfill operation. HNRC subsequently sold the
      landfill site to LACSD which proposes to commence landfill operations in 2009.
      We believe that there are opportunities for synergies between our mining
      operations and this future landfill operation. This agreement is more fully
      described in Future Landfill Development, below.





**Geology
      and mineralization**





The
      Mesquite Mining District lies beneath alluvial pediment deposits at the base
      of
      the Chocolate Mountains. Small bedrock outcrops were left uncovered by this
      pediment to form the pre-mine surface exposure of the deposit. Several regional
      blocks, comprised of distinct rock units, form boundaries to the
      district.





Lithologies
      exposed in the southern Chocolate Mountains include Proterozoic granitic and
      metamorphic rocks, Mesozoic metamorphic and plutonic units, early to
      mid-Tertiary volcanic and plutonic rocks, and Tertiary to Recent sedimentary
      units. Proterozoic to Mesozoic units are represented by the Chuckwalla Complex,
      while the Mesozoic terraine is a structurally complicated package of gneisses,
      schist, phylitte, and plutons (Manske, 1991). These include the Orocopia Schist,
      and probable Jurassic Winterhaven Formation, overlain by the Tertiary Quechan
      Volcanic rocks and Quaternary alluvial deposits. There are three main structural
      components which appear to have provided conduits for mineralization and offsets
      to mineralization found at the Mesquite Mine.





10




The
      Mesquite mine area is hosted in a Jurassic aged gneiss and pluton terrane.
      The
      stratigraphic sequence is, from bottom to top: mafic, hornblende biotite, and
      biotite gneiss overlain by Bay Horse Quartzite and Muscovite Schist. These
      units
      have been crosscut by a number of quartz, feldspar, biotite and muscovite rich
      granite sills, plutons and dikes. The gneiss units are present in a shallowly
      dipping stratigraphic sequence, offset by numerous high and low angle faults.
      This package is overlain by up to 400 feet of Tertiary lithified silts, sands,
      and gravels and unconsolidated Quaternary gravels.




Northwest
      trending structures appear to have the greatest control on gold distribution,
      while the younger northeast trending faults have offset mineralization in a
      stair step fashion. East west striking near vertical and northwest striking
      low
      angle structures are also seen on the property. The system is bounded by
      structures sub-parallel to the San Andreas Fault system. Deposition of gold
      was
      within an epithermal environment along fractures, and the deposit was
      subsequently oxidized down to around 500 feet below current surface topography.
      Visible gold has been identified throughout the Mesquite area. Small flakes
      of
      free “flour” gold have been found within the fault zones. Gold occurs at
      Mesquite as both submicron disseminated and coarse gold. All documented gold
      occurrences are native gold, and classification has been based on silver content
      and grain size.





The
      ores
      of Mesquite have proven to be readily amenable to heap leach processing over
      the
      past twenty years of operations.




**Prior
      ownership and mining operations**




In
      1980,
      Goldfields Mining Corporation (“Goldfields”), began acquiring leases and started
      an exploratory drill program. In 1982, Goldfields announced it had discovered
      a
      bulk mineable gold deposit and the Mine was developed in 1985 with the
      construction of an open pit mine with heap leach gold recovery that commenced
      commercial operations in March 1986. In 1989, HNRC acquired Goldfields and
      subsequently exchanged its wholly owned gold operations for assets held by Santa
      Fe Pacific Minerals Corporation (“Santa Fe”) in 1993. In 1997, Newmont acquired
      Santa Fe and continued mining operations until May 2001. Newmont continued
      depositing ore on the heap leach pads until August 2001. Residual gold was
      drawn
      from the leach pads from 2001 until late 2007.





Total
      gold production from mine inception in 1986 through December 31, 2007 has been
      approximately 3,000,000 ounces of gold. Production during the final five years
      of mining operations is set out in the following table:


**Year**
              
              **Ore mined**
                **(000 tons)**
              
              **Gold production**
                **(000 ounces)**1997
              
              
              16,463
              
              
              2281998
              
              
              11,537
              
              
              1541999
              
              
              14,087
              
              
              1652000
              
              
              12,841
              
              
              1212001
              
              
              4,226
              
              
              93Total
              
              
              59,154
              
              
              761




11




Since
      cessation of mining operations in 2001, production from the residual leach
      operations has been as follows:





**Year**
            
            **Gold Production**
              **(000
                ounces)**2002
            
            
            572003
            
            
            532004
            
            
            272005
            
            
            222006
            
            
            132007
            
            
            8Total
            
            
            180





Past
      results are not necessarily indicative of future production; although we
      anticipate annual production could be vary between 150,000 – 170,000 ounces
      of gold during the first eight years of a twelve year mine life, there can
      be no
      assurance that this production will occur on an economically feasible basis,
      if
      at all.





**Holding
      costs and royalty agreements**





We
      pay
      annual holding costs for our Mesquite properties of approximately $180,000.
      These include payments to the BLM, maintenance fees to Imperial County,
      California, state lease fees, a lease payment to LACSD and other lease fees
      and
      property taxes.




Previously
      mined material and any newly mined material at Mesquite will be subject to
      production royalties ranging from 2% to 6.8% depending on the
      location.





Newmont
      retained a 50% interest in the net operating cash flow on ore currently on
      the
      pad undergoing residual leaching. No royalty was paid under the
      contractual agreement in 2006 and 2007. This cash flow royalty was
      terminated in 2007.





In
      addition, Newmont retained a production royalty ranging from 0.5% to 2% net
      smelter return (“NSR”) on any newly mined ore. We started to pay this royalty in
      respect of our new production in late 2007. This interest was assigned by
      Newmont to Franco-Nevada U.S. Corporation under an agreement dated December
      20,
      2007.


**Property**
              
              **Original Owner**
              
              **Newmont**California
                  State Lands Lease
              
              
              4.0 –
                  6.0
              %
              
              0.5
              %Wade/Kelly
                  Patents
              
              
              6.3
              %
              
              0.5
              %McCrae/Hoover
                  Patents
              
              
              6.3
              %
              
              0.5
              %Glamis
                  & Associates Claims
              
              
              2.0
              %
              
              1.0
              %Hospah
                  Claims (Newmont)
              
              
              —
              
              
              2.0
              %





The
      majority of the property is not subject to production royalties since the
      original owners’ claims were mined out during earlier mining at Mesquite. The
      majority of the tons planned for the initial reactivation and expansion of
      Mesquite will be subject only to the Newmont 2% production royalty.





12





**Mining
      permits**





In
      May
      2001, Newmont ceased mining at Mesquite. Permits for a proposed expansion were
      obtained by Newmont in early 2002 and include a Conditional Use Permit from
      Imperial County, California, dated March 27, 2002 and a Record of Decision
      from
      the Bureau of Land Management dated July 16, 2002. These permits were covered
      by
      our Asset Purchase Agreement of November 7, 2003 with Newmont and were fully
      transferred to us in April 2004. In addition, in February 2002, Newmont prepared
      a reclamation and closure plan for Mesquite that was approved by the relevant
      governmental agencies.





**Discontinued
      residual leaching operations**





With
      no
      new ore having been placed on the leach pads since 2001, the productive capacity
      of the leach pads has progressively deteriorated through 2007. Although we
      implemented various strategies to maintain output levels and monitor solution
      grades being produced by the leach pads, during the third quarter of 2006 we
      concluded that it was no longer economic to continue leaching the Vista pad
      and
      we commenced closure operations. Rinsing of the pad was completed in late
      January 2007 and a 16 hole drilling program was conducted to provide information
      as to residual cyanide levels. Formal approval of this closure was received
      from
      the California Regional Water Quality Board in May 2007. Costs of $350,000
      relating to the Vista Pad reclamation and closure program were fully recoverable
      from the reimbursement account maintained with AIG.





We
      carry
      out regular reviews of our plans and provisions for closure operations. The
      feasibility study completed in August 2006 increased the mineral reserves for
      the Mesquite Mine. As a result, we completed a review of the reclamation plan
      and the reclamation and remediation liability as at September 1, 2006. The
      net
      present value of these obligations was revised to $4.9 million. In May 2007,
      we
      announced a further increase in the mineral reserves and the net effect is
      reflected in an increase of $0.1 million in our provision for reclamation and
      remediation as at December 31, 2007.





Until
      late 2007, virtually all our gold production at Mesquite came from residual
      leaching operations. During this period we were operating under an Interim
      Management Plan (IMP) prepared and approved by the U.S. Bureau of Land
      Management. The plan outlined the measures to be undertaken by us, as operator
      of the Mesquite site, to maintain the site during the period of non-mining
      activity. Under the IMP, priority was given to protecting public health and
      safety, while maintaining the site in a condition suitable for reopening when
      economic conditions were favourable.





In
      2007
      and 2006, all processing and gold dore bar production up to final refining
      was
      carried out on-site with our mine personnel. Poured gold production for the
      year
      was 8,000 ounces and 12,668 ounces in 2007 and 2006 respectively.





In
      the
      Spring of 2007 we started to place our new mining fleet in service and we began
      stripping operations in May. In July, we started to move new ore to the heap
      leach pads. Ore production and haulage rates improved rapidly and by year-end
      we
      had placed approximately 1.0 million tons of material, containing an estimated
      approximately 19,000 ounces of gold, on the leach pads. Leaching of the new
      ore
      started in December and was being reflected in gold production and sales in
      January 2008. Our focus is now on achieving levels of production commensurate
      with our objective of sales of approximately 155,000 – 165,000 ounces in
      2008





**Our
      feasibility study**




In
      March
      2006 we initiated a feasibility study with a view to establishing mineable
      reserves at Mesquite. Specifically, the study is designed to determine whether
      mineralized material, that is accessible under the approved expansion permits,
      can be economically exploited. The study used drilling results conducted by
      previous holders of the property and mineral rights. The total cost of the
      feasibility study was approximately $821,000.




13




In
      August
      2006, Micon International Limited (“Micon”), an independent consultant of
      Toronto, Canada, completed the feasibility study and reported positive
      results.




The
      mineral reserve estimate for the Mesquite Mine Feasibility Study was prepared
      by
      M. Hester FAusIMM, Vice President, Independent Mining Consultants, Inc. (IMC),
      Tucson AZ. IMC updated the resource block model for the Mesquite Mine in May
      2006.





The
      May
      resource model was estimated and classified based primarily on the historical
      drill data, consisting of 6,221 predominantly reverse circulation drill holes
      totaling 2.7 million feet. Gold assays were collected on five foot intervals
      providing approximately 487,850 sample intervals that were used in completing
      the estimate. The following figure shows the drill hole density over the
      Mesquite Mine area.





Western Goldfields Logo




The
      resource block model is a computer generated model encompassing the entire
      proposed mining area with a series of regular blocks with dimensions of 25
      feet
      x 25 feet x 30 feet in height. Relevant geological contacts, including the
      gravel-rock contact and the oxide-non oxide contacts were coded into the model
      blocks as was the current topographic surface. The contacts were primarily
      soft
      boundaries which had limited influence on grade interpolation.





Individual
      sample grades were capped at appropriate levels based on statistical analysis
      of
      the available sample data. The capped five foot sample data was composited
      over
      a 15 foot interval and used to interpolate gold grades into the individual
      model
      cells using an ordinary kriging algorithm based on variograms developed through
      geostatistical analysis of the composite data.




Block
      tonnage factors of 13.58 cubic feet per ton and 15.94 cubic feet per ton were
      assigned for hard rock and gravel respectively based on historical
      data.




14




The
      resulting block model was then classified as Measured, Indicated or Inferred
      based on modern geostatistical classification methods. IMC verified the resource
      model grade estimation by comparing the tonnages and grades estimated by the
      drill data to the tonnages and grades indicated by the historical blasthole
      data
      collected when the mine was in operation.





The
      resource model was subjected to floating cone analyses, based on the
      Lerchs-Grossman algorithm, at a gold price of US $450 per ounce and operating
      cost estimates as outlined in the following Table.





**Economics
                for Floating Cone Evaluation
                (US$)**




Oxide
            
            Non-oxideMining
                Cost Per TonOre
            
            $
            1.00
            
            $
            1.00Waste
            
            $
            0.60
            
            $
            0.60Processing
                Cost Per Ore Ton
            
            $
            1.00
            
            $
            1.00G&A
                Cost Per Ore Ton
            
            $
            0.25
            
            $
            0.25Process
                Recovery
            
            
            75
            %
            
            35
            %Gold
                Price Per Troy Ounce
            
            $
            450
            
            $
            450




Pit
      slope
      angles were based on “Report to Newmont Gold Company - Mesquite Mine - Re: Pit
      Slope Design and Development” by C.O. Brawner Engineering Ltd., dated June
      1999.




Final
      pit
      designs were based on floating cones at a gold price of US$ 450 per ounce,
      except for the west side of Vista and east side of Big Chief where the $350
      cone
      defined the location of a planned surface diversion drainage channel. The
      designs include haul roads and adequate working room for the equipment. The
      roads are 90 feet wide and at a maximum grade of 10%.




Based
      on
      the final pit designs, IMC developed a life of mine plan scheduled to deliver
      ore containing approximately 165,000 ounces recoverable gold per year to a
      run-of-mine (ROM) leach pad by conventional open pit mining methods. Depending
      on ore grade and recovery, this requires mining from 10.1 million to 16.2
      million tons of ore per year (average of 13.6 million tons of ore per year).
      The
      peak total material movement is 54 million tons per year. The mine plan was
      sequenced to allow a significant amount of waste to be backfilled into
      previously completed mining areas.





IMC
      completed a life of mine production schedule to tabulate ore tons, gold grade,
      total material tons, and waste material tons on an annual basis. The
      distribution of ore and waste contained in each of the mining phases was used
      to
      develop the schedule, assuring that criteria such as continuous ore exposure,
      mining accessibility, and consistent material movements were met.





It
      is the
      opinion of IMC that the mine production schedule defines a mineral reserve
      for a
      mining project. Measured and indicated mineral resources in the design pits
      are
      converted to proven and probable mineral reserves respectively. Oxide reserves
      are reported above a cut-off grade of 0.006 oz per ton, non-oxide reserves
      are
      reported above a 0.012 oz per ton cut-off grade.




15




IMC
      estimated a mineral reserve for the Mesquite Mine as described in the following
      Table.




**Mesquite
      Mineral Reserves (1)**


**August
      2006**


Reserve
                  Class
              
              Tonnage
                (000s) (2)
              
              Grade
                oz/ton
              
              Gold Ounces
              
              Metallurgical
                Recovery (3)Proven
                  Mineral ReservesOxide
              
              
              55,923
              
              
              0.017
              
              
              923,000
              
              
              75-80
              %Non-oxide
              
              
              12,749
              
              
              0.024
              
              
              306,000
              
              
              35-40
              %Subtotal
              
              
              68,672
              
              
              0.018
              
              
              1,229,000Probable
                  Mineral ReservesOxide
              
              
              52,589
              
              
              0.017
              
              
              910,000
              
              
              75-80
              %Non-oxide
              
              
              9,647
              
              
              0.023
              
              
              222,000
              
              
              35-40
              %Subtotal
              
              
              62,236
              
              
              0.018
              
              
              1,132,000Proven
                and Probable Total
              
              
              130,908
              
              
              0.018
              
              
              2,361,000





(1)
            The
                term “reserve” means that part of a mineral deposit that can be
                economically and legally extracted or produced at the time of the
                reserve
                determination.





The
      term
“economically,” as used in the definition of reserve, means that profitable
      extraction or production has been established or analytically demonstrated
      in a
      full feasibility study to be viable and justifiable under reasonable investment
      and market assumptions.




The
      term
“legally,” as used in the definition of reserve, does not imply that all permits
      needed for mining and processing have been obtained or that other legal issues
      have been completely resolved. However, for a reserve to exist, we must have
      a
      justifiable expectation, based on applicable laws and regulations, that issuance
      of permits or resolution of legal issues necessary for mining and processing
      at the Mesquite Mine will be accomplished in the ordinary course and
      in a timeframe consistent with our current mine plans.




The
      term
“proven reserves” means reserves for which (a) quantity is computed from
      dimensions revealed in outcrops, trenches, workings or drill holes;
      (b) grade and/or quality are computed from the results of detailed
      sampling; and (c) the sites for inspection, sampling and measurements are
      spaced so closely and the geologic character is sufficiently defined that size,
      shape, depth and mineral content of reserves are well established.




The
      term
“probable reserves” means reserves for which quantity and grade are computed
      from information similar to that used for proven reserves, but the sites for
      sampling are farther apart or are otherwise less adequately spaced. The degree
      of assurance, although lower than that for proven reserves, is high enough
      to
      assume continuity between points of observation.




Proven
      and probable reserves were calculated using different cut-off grades. The term
      “cut-off grade” means the lowest grade of mineralized material that can
      economically be included in the reserves in a given deposit. Cut-off grades
      vary
      between deposits depending upon prevailing economic conditions, mineability
      of
      the deposit, amenability of the ore to gold extraction, and type of milling
      or
      leaching facilities available. The cut-off grades used in the reserve estimates
      at the Mesquite Mine were 0.006 for oxide material and 0.012 for non-oxide
      material.




16




August
      2006 reserves were calculated at a gold price of $450.





(2)
            Tonnages
                include allowances for losses resulting from mining methods. Tonnages
                are
                rounded to the nearest 100,000.




(3)
            Ounces
                are estimates of metal contained in ore tonnages and do not include
                allowances for processing losses. Metallurgical recovery rates represent
                the estimated amount of metal to be recovered through metallurgical
                extraction processes. Ounces are rounded to the nearest
                1,000.





Based
      on
      these estimated mineable reserves, we have developed a mine plan and processing
      design to mine and treat around 16 million tons per year of ore.  Based on
      the total of 131 million tonnes contained in the mineable reserves, a project
      life of about 13 years is proposed, including 19 months of engineering,
      procurement, construction and development followed by about 91⁄2 years of mine
      production and 2 additional years of re-leaching.




Western Goldfields Logo





The
      feasibility study results were based on the following main
      assumptions:





· sunk
      costs were not included


· payment
      of applicable royalties, estimated at approximately $20 million, was
      included


· payment
      of California gold tax, estimated at approximately $8 million, was
      included


· a
      working
      capital allowance was not included


· state
      and
      federal taxes, including property taxes, were included; and


· all
      operating and capital costs were based on second quarter 2006 US dollar
      costs.





17
 
  ***Capital
        Cost Estimates***





The
      following chart shows the December 2006 estimates of the main initial capital
      costs involved in the reactivation of the Mine. These estimates are based on
      the
      feasibility study, updated to include the actual cost of the mining fleet and
      other expenditures committed to at December 31, 2006.


MillionsMining
                  fleet
              
              
              
              
              $
              67.0InfrastructurePlant and infrastructure
              
              $
              15.0Heap leach pad expansion
              
              
              10.3
              
              
              25.3Contingency
              
              
              
              
              
              3.3Owner’s
                  cost
              
              
              
              
              
              2.3Total
              
              
              
              
              $
              97.9


In
      addition, approximately $18.7 million was required to be spent on pre-stripping
      activities in 2007 prior to the commencement of expanded operations in
      2008.




***Operating
      Cost Estimates***





The
      following chart shows the feasibility study estimates regarding the main
      operating costs involved in the operation of the Mine. Operating cost estimates
      included all on site mining and processing activities as well as general and
      administration costs to manage the operations. The operating costs were based
      upon August 2006 salary levels and consumable costs for the existing operations
      at the Mine.





**Unit
      Operating Costs Estimates**





Mining
                cost per ton
            
            $
            0.76Processing
                cost per ton of ore
            
            $
            1.02General
                and administrative cost per ton
            
            $
            0.32California
                gold tax per ounce
            
            $
            5.00Royalties
                (NSR)
            
            
            2.41
            %





18





***Cost
      of Sales Per Ounce***





The
      following chart shows the feasibility study estimates regarding the cost of
      sales from the Mine during the life of the mine.





**Cost
      of Sales Per Ounce(1)**


**($
      per ounce)**


Cost
                  of sales per ounce before California gold tax and
                  royalties
              
              $
              318California
                  gold tax
              
              
              5Royalties
              
              
              12Cost
                  of sales per ounce beforepre-production
                  stripping expense
              
              
              335Pre-production
                  stripping expense (principally 2007)
              
              
              11Total
                  cost of sales per ounce
              
              
              346Total
                  capital (LOM) - $112.6 millionTotal
                  ounces of gold recovered - 1,666,255Capital
                  cost per ounce recovered
              
              
              68Total
                  costs per ounce
              
              $
              414




**Capital
      and Operating Costs – Updated Projections to Early 2008.**





While
      we
      believe that the Feasibility Study provided an excellent basis for the long
      term
      planning for resumption and continuation of mining operations at Mesquite,
      we
      recognize that the cost structure and assumptions that underpin it are dynamic.
      We continue to experience a period of worldwide high demand for mineral
      resources which has had a significant impact on commodity prices and on the
      price and availability of many of our major cost inputs. We are continually
      updating our projections and assumptions based on changing
      circumstances.





A
      $108.6
      million expansion capital spending plan for Mesquite, including $76.5
      million for acquisition of the mining fleet, was approved by our Board of
      Directors in late 2006. The major reason for the increase over the Feasibility
      Study estimate of $97.9 million was our decision to source truck haul units
      that
      would meet more stringent environmental standards in California. We currently
      estimate that actual spending on the program will be approximately $109.2
      million.





In
      early
      March 2008, we announced that forecasted cost of sales per ounce for the full
      year 2008 will be in the range of $410 - $430(1). The increase over
      previous guidance is due to certain factors and assumptions that were not built
      into the Feasibility Study, such as additional labour and fuel costs associated
      with adding a fourth crew of truck operators. The additional crew will ensure
      adequate waste removal to offset the effect of lower than modeled truck speeds
      for waste and ore hauls. The reduced speeds are a result of the type of tires
      currently available in the marketplace. The Company expects to procure better
      performing radial tires for 2009 which will result in increased truck speeds
      for
      its haul trucks, allowing Mesquite to return to originally anticipated
      production rates and cost of sales. Production for 2009 is forecast between
      150,000 – 160,000 ounces of gold at a cost of sales of $360 -
      $370(1) per ounce, in line with original forecasts.


(1)
              Cost
                  of sales per ounce is a non-GAAP measure and is defined as cost
                  of sales
                  per the company’s Financial statements (Mine
                  operating costs plus royalties) divided by the numbered ounces
                  sold.




19




**Current
      Mineral Resources and Reserves**





In
      March
      2007, we announced that we had increased proven and probable reserves at
      Mesquite to 2.77 million ounces. Approximately 50% of the increase was
      attributable to assay results from a drilling program of 27 holes at the Brownie
      Hill area of the mine which converted inferred oxide resources to proven and
      probable reserves, and the remaining 50% was attributable to an increase in
      the
      reserve gold price assumption from $450 to $500 per ounce.





As
      at
      December 31, 2007, proven and probable reserves were estimated to be 2.76
      million ounces, reflecting production depletion from the March 2007
      estimate.





Estimated
      measured and indicated resources for the project as at December 31, 2007 were
      based on an assumed gold price of US$650 per ounce, a US$50 increase over the
      March 2007 estimate. The mineral resource model was also updated to include
      results of all drilling completed subsequent to the March 2007
      estimate.




The
      majority of the data used to estimate the December 31, 2007 resources and
      reserves was previously reviewed and verified by IMC as part of the 2006
      feasibility study and a description of the procedures used is included in the
      Mesquite Gold Project Technical Report dated May 26, 2006. Data collected since
      filing of said Technical Report has been reviewed and verified by W. Hanson,
      P.Geo., Vice President of Mine Development.





20





**Mesquite
      Mineral Reserves and Resources (1) (4) (6)**


**December
      31, 2007**




**Mineral
        Reserves**


**Tons**
              
              **Grade**
              
              
              
              
              **Metallurgical****Class**
              
              **Type**
              
              **(x
                  1,000) (2)**
              
              **(Au
                  ozs / ton)**
              
              **Ounces**
              
              
              **Recovery
                  (3)****Proven**
              
              
              Oxide
              
              
              97,513
              
              
              0.016
              
              
              1,533,000
              
              
              75-80%Non
                  oxide
              
              
              16,429
              
              
              0.023
              
              
              386,000
              
              
              35-40%**Subtotal**
              
              
              **113,942**
              
              
              **0.017**
              
              
              **1,919,000****Probable**
              
              
              Oxide
              
              
              38,000
              
              
              0.017
              
              
              660,000
              
              
              75-80%Non
                  oxide
              
              
              7,914
              
              
              0.022
              
              
              176,000
              
              
              35-40%**Subtotal**
              
              
              **45,914**
              
              
              **0.018**
              
              
              **836,000****Proven
                  & Probable**
              
              
              **Total**
              
              
              **159,856**
              
              
              **0.017**
              
              
              **2,755,000**




**Mineral
        Resources (4) (5) (6)**
 **(Exclusive
        of Reserves)**
  **Tons**
              
              **Grade****Class**
              
              **Type**
              
              **(x 1,000)
                  (2)**
              
              **(Au ozs / ton)****Measured**
              
              
              Oxide
              
              
              —
              
              
              —Non
                  oxide
              
              
              4,707
              
              
              0.025**Subtotal**
              
              
              **4,707**
              
              
              **0.025****Indicated**
              
              
              Oxide
              
              
              63,626
              
              
              0.011Non
                  oxide
              
              
              32,344
              
              
              0.021**Subtotal**
              
              
              **95,970**
              
              
              **0.015****Measured
                  & Indicated**
              
              
              **Total**
              
              
              **100,676**
              
              
              **0.015****Inferred**
              
              
              Oxide
              
              
              4,958
              
              
              0.013Non
                  oxide
              
              
              4,798
              
              
              0.022**Inferred**
              
              
              **Total**
              
              
              **9,756**
              
              
              **0.018**
 (1)
                The
                    term “reserve” means that part of a mineral deposit that can be
                    economically and legally extracted or produced at the time of
                    the reserve
                    determination.
 
 The
          term
“economically,” as used in the definition of reserve, means that profitable
          extraction or production has been established or analytically demonstrated
          in a
          full feasibility study to be viable and justifiable under reasonable investment
          and market assumptions.
  The
          term
“legally,” as used in the definition of reserve, does not imply that all permits
          needed for mining and processing have been obtained or that other legal
          issues
          have been completely resolved. However, for a reserve to exist, we must
          have a
          justifiable expectation, based on applicable laws and regulations, that
          issuance
          of permits or resolution of legal issues necessary for mining and processing
          at the Mesquite Mine will be accomplished in the ordinary course and
          in a timeframe consistent with our current mine plans.
  The
          term
“proven reserves” means reserves for which (a) quantity is computed from
          dimensions revealed in outcrops, trenches, workings or drill holes;
          (b) grade and/or quality are computed from the results of detailed
          sampling; and (c) the sites for inspection, sampling and measurements are
          spaced so closely and the geologic character is sufficiently defined that
          size,
          shape, depth and mineral content of reserves are well established.
  The
          term
“probable reserves” means reserves for which quantity and grade are computed
          from information similar to that used for proven reserves, but the sites
          for
          sampling are farther apart or are otherwise less adequately spaced. The
          degree
          of assurance, although lower than that for proven reserves, is high enough
          to
          assume continuity between points of observation.
  Proven
          and probable reserves were calculated using different cut-off grades. The
          term
“cut-off grade” means the lowest grade of mineralized material that can
          economically be included in the reserves in a given deposit. Cut-off grades
          vary
          between deposits depending upon prevailing economic conditions, mineability
          of
          the deposit, amenability of the ore to gold extraction, and type of milling
          or
          leaching facilities available. The cut-off grades used in the reserve estimates
          at the Mesquite Mine were 0.006 for oxide material and 0.012 for non-oxide
          material.
  December
          2007 reserves were calculated at a gold price of $500.
 
 (2)
                Tonnages
                    include allowances for losses resulting from mining methods.
                    Tonnages are
                    rounded to the nearest 1,000.
  (3)
                Ounces
                    are estimates of metal contained in ore tonnages and do not include
                    allowances for processing losses. Metallurgical recovery rates
                    represent
                    the estimated amount of metal to be recovered through metallurgical
                    extraction processes. Ounces are rounded to the nearest
                    1,000.
 21
 (4)
                  Mineral
                      resources and mineral reserves are classified in accordance
                      with the
                      Canadian Institute of Mining, Metallurgy and Petroleum’s (CIM) “Standards
                      on Mineral Resources and Reserves, Definitions and
                      Guidelines”.
 
 (5)
                  **CAUTIONARY
                      NOTE TO U.S. INVESTORS CONCERNING MEASURED, INDICATED AND INFERRED
                      MINERAL
                      RESOURCES:**These
                      terms are required by the CIM’s “Standards on Mineral Resources and
                      Reserves, Definitions and Guidelines”.**U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR ANY
                      PART OF THE
                      STATED MINERAL RESOURCES WILL BE CONVERTED INTO RESERVES.**
 
 (6)
                  The
                      mineral resource and reserve estimates set out above were prepared
                      under
                      the supervision of Mr. W. Hanson, P.Geo., Vice-President of
                      Mine
                      Development, Western Goldfields
                      Inc.
  **Exploration
          and environmental matters**




Our
      exploration, production and processing operations are extensively regulated
      under various U.S. federal, state and local laws and regulations relating to
      the
      protection of air and water quality, hazardous waste management and mine
      reclamation. These laws and regulations are subject to change and could
      substantially increase our liability or the costs of compliance. This could
      have
      a material adverse effect on our operations or financial position. In addition,
      whenever a previously unrecognized remediation claim becomes known or a
      previously estimated cost is increased, the additional costs could have a
      material adverse effect on our operations or financial position.





We
      believe that we operate Mesquite in compliance with all local, state and federal
      regulations. Stipulations in permits and approvals issued in respect of the
      Mine
      further define the site requirements. Based on our mode of operations,
      compliance with local, state and federal regulations relating to the protection
      of the environment is expected to require expenditures of approximately $0.6
      million in 2008.





On
      November 7, 2003, we secured a bonding and insurance plan through American
      International Specialty Lines Insurance Company in respect of the operations
      and
      certain closure liabilities at Mesquite. We paid the insurance company initial
      premiums of $7.7 million, comprising $6.0 million in respect of the net
      present value of expected reclamation costs and $1.7 million for an excess
      liability policy covering pollution and reclamation obligations up to $14.0
      million. The insurance company has provided a series of environmental insurance
      programs designed to cap our liability for reclamation and closure costs,
      including cost overruns as a result of unexpected contamination, increased
      costs
      and legislative changes. The plan provided $8.7 million in bonds in favor of
      government agencies. As a result of increases in proven and probable reserves
      in
      August 2006 and March 2007, which increased the life of the mine by a total
      of
      two years, we agreed with AIG and the regulatory agencies to revisions in our
      reclamation cost estimates. As a result, in May 2007 the bonding program was
      increased by $2.6 million to $11.3 million, and we were required to place an
      additional $2.1 million in the reimbursement account.




The
      insurance program covers closure and reclamation risk in excess of the amount
      covered by the reimbursement account with AIG ($8.7 million as at December
      31,
      2007), to an aggregate limit of $17.5 million, and expires November 7, 2020.
      During 2007, the program limit and term were increased from $14.0 million and
      November 7, 2014 respectively.





The
      insurance program also covers pollution and remediation risk up to $10.0
      million. Coverages pertaining to existing conditions and new conditions expire
      on November 7, 2013 and November 7, 2008 respectively. During 2007, the program
      limit was increased from $5.0 million.




22




Once
      closure of the heap leach pads covered by the bonds has started, we submit
      claims to the insurer to release funds from the reimbursement account to pay
      for
      the reclamation and closure expenditures as they are incurred. Any revenue
      from
      the sale of material is to our account and any gains from cost savings in the
      actual program versus the bonded amount will be released to us when the project
      bonding is released.





During
      the third quarter of 2006, we concluded that it was no longer economic to
      continue leaching the Vista pad and we commenced closure operations. Closure
      costs of $0.2 million and $0.1 million, respectively, were incurred in 2006
      and
      2007, and were reimbursed to us by AIG from the reimbursement account.




**Competition**





While
      a
      market for our product is always assured, we nevertheless face competitive
      pressures in all aspects of our activities, including: the sourcing of
      investment capital, the acquisition of economically attractive exploration
      properties and existing mineral resources, attracting and retaining a skilled
      and experienced workforce, and acquiring raw materials, capital equipment and
      technical resources on an economic and timely basis.





Our
      competitors include large international mining companies, independent producers
      and numerous small companies and individuals, many of whom may have greater
      financial, technical and other resources at their disposal. In general,
      companies producing from properties with a higher grade of recoverable mineral
      or which are more readily mineable are at a competitive advantage in that the
      cost of production of the final mineral product is lower.





Mines
      have limited lives and as a result, in the future we may identify and try to
      acquire new exploration properties. There is a limited supply of desirable
      mineral lands available in the United States where we would consider conducting
      exploration activities. As a result of competitive pressures from other mining
      companies, we may be unable to acquire attractive new mining properties on
      terms
      that we consider acceptable.




**Employees**




As
      of
      February 28, 2008, we had 194 employees, including our six executive officers.
      None of our employees are represented by a labor union. We consider our
      relationships with our employees to be good.





**Insurance**





We
      have
      the following insurance coverages which are effective until November 7, 2008:





**Policy
                Type**
            
            **Limit**Umbrella
                Liability
            
            $
            10,000,000Commercial
                General Liability
            
            
            2,000,000Directors
                and Officers Liability
            
            
            10,000,000Business
                Automotive
            
            
            1,000,000Workers
                Compensation
            
            
            1,000,000





23




In
      addition we have the following insurance coverages which are effective until
      the
      dates noted :





**Expiry****Policy
                Type**
            
            **Date**
            
            **Limit**Commercial
                Property / Builders’ Risk(1)
            
            
            June
                1, 2008
            
            $
            100,000,000Fiduciary
                Liability
            
            
            Nov.
                7, 2008
            
            
            1,000,000Commercial
                Crime
            
            
            Jan.12,
                2009
            
            
            3,000,000Pollution
                Legal Liability(2)
            
            
            Nov.
                7, 2013
            
            
            10,000,000Reclamation
                Costs Policy
            
            
            Nov.
                7, 2020
            
            $
            17,500,000




(1)
              Includes
                  $10,000,000 Business Interruption. In view of the impending completion
                  of
                  construction activity we are currently in negotiations with our
                  insurers
                  to convert this policy to standard property damage and business
                  interruption coverage.


(2)
            Includes
                $5,000,000 excess coverage for new conditions and pre-existing conditions
                expiring Nov.7, 2008 and Nov.7, 2013, respectively





We
      believe that we maintain insurance at levels that are consistent with industry
      standards and sufficient for companies at our stage of development.





**Future
      landfill development**




When
      Mesquite was owned by Hanson Natural Resource Company (“HNRC”), a permanent
      landfill facility was permitted on a portion of the lands occupying the
      south-west sector of the property. The lands on which portions of the landfill
      were to be constructed were originally administered by the BLM and were
      subsequently acquired by HNRC by way of a land “swap”. In 1993, a Mineral Lease
      and Landfill Facilities Agreement (“the Landfill Agreement”) was signed between
      HNRC on the one hand and Hospah Coal Company (“Hospah”), a subsidiary of
      Newmont, and Santa Fe on the other. The LACSD is now the successor to HNRC
      and
      we assumed the rights and obligations of Hospah / Santa Fe / Newmont when we
      acquired the entire Mesquite operations on November 9, 2003.





The
      Landfill Agreement sets out the parties’ respective rights and obligation with
      respect to real property, overburden, and ore material. The general objective
      of
      the Landfill Agreement is to enable us to freely and profitably develop and
      operate the Mine, and for LACSD to freely and profitably operate the landfill.
      This will be accomplished by:





·
            cooperation
                and coordination between the
                parties;




·
            avoidance
                and minimization of conflicts arising through the respective
                operations;




·
            ensuring
                that one party’s operations do not result in greater costs for the other
                party;




·
            joint
                utilization of certain properties, facilities and
                resources;




·
            mutual
                benefit through efficient and thorough use of resources, including
                recycling of overburden and spent ore, and optimization of efficiency,
                capabilities and profitability of the parties’ respective
                operations.





24




Under
      the
      Agreement we have the right to explore for, 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. We understand that LACSD will be starting active landfill operations
      in
      2009.





*Title
      and liabilities - real property*





Under
      the
      1993 Agreement, LACSD has retained all Reclamation and Environmental
      Responsibilities (“R & E Responsibilities”) as of the closing date which
      were legally required to be completed and performed with respect to the Hospah
      owned property (as distinguished from overburden and ore material) and the
      Santa
      Fe leased property prior to that date.





*Title
      and liabilities - overburden*





Title
      to
      existing overburden and overburden stockpiles at Mesquite as at the date of
      the
      1993 Agreement with LACSD was transferred to LACSD. Ownership of overburden
      material placed on the leased property after that date transfers to LACSD on
      its
      placement. We have assumed all R & E Responsibilities with respect to
      overburden existing as of the closing date of the 1993 Agreement and incurred
      after that date. The agreement makes provision for us to use material in
      connection with our mining operations and for reimbursement to us of any
      incremental costs incurred in moving material to accommodate LACSD
      operations.





*Title
      and liabilities - ore, spent ore and associated materials (“Ore
      Material”)*





We
      acquired the ore material that was on the leach pads on the lease property
      at
      the date of the 1993 Agreement, but LACSD has retained R & E
      Responsibilities up to that date. Ownership of the underlying pads and real
      property remains with LACSD, subject to the mining lease. Ownership of ore
      material placed on the pads after the 1993 Agreement belongs to us and we retain
      R & E Responsibilities. The 1993 Agreement provides that we are to locate
      any new leach pad and stockpiled ore on the leased property and also on the
      LACSD owned property if necessary for efficient treatment of ore.





We
      are
      obligated to rinse and neutralize spent ore in accordance with the approved
      reclamation plan and certify this fact to our regulators. On acceptance of
      this
      certification by LACSD, the leach pad and real property involved will then
      be
      eliminated from our lease and the title to the spent ore will be conveyed to
      LACSD.





If
      LACSD
      requires rinsing and neutralization beyond applicable licenses and laws, it
      will
      reimburse us for our incremental costs, with any additional gold recovery being
      used as an offset. If we are operationally unable to perform supplementary
      rinsing and neutralizing, LACSD can do this at its expense and retain any
      additional gold recovery.





LACSD
      may
      at its cost remove rinsed and certified spent ore, which has been conveyed
      to
      it, from the pads for purposes of the landfill. It will then assume R & E
      Responsibilities for this material and reimburse us for any incremental cost
      as
      a result of such removal. LACSD will assume R & E Responsibilities for the
      leach pads and associated real property only to the extent actually occupied
      by
      LACSD and incorporated by construction into the landfill project.





LACSD
      has
      the right to terminate the lease in respect of any leach pads and the associated
      real property on giving reasonable advance notice (1) after ore on the pad
      has
      reached design load capacity and further leaching is not economic; or (2) more
      than five years following cessation of regular leaching; in which event LACSD
      will pay us any damages in connection with the loss of prospective profits
      from
      recoverable gold left on the pad, according to calculations contained in the
      1993 Agreement.





25





**Risk
      Factors**




Factors
      that could cause our actual results to differ materially from those described
      in
      the forward-looking statements contained in this Form 10-KSB and other documents
      we file with the Securities and Exchange Commission include the risks described
      below. You should also refer to the other information in this Annual Report
      on
      Form 10-K SB,
      including the financial statements and accompanying notes thereto.




** *Risks
      Related To Our Operations*




***If
      we continue to experience significant*** ***net
      operating losses, we may need additional financing to fund our operations,
      which
      may not be available to us.***




We
      emerged from dormancy in 1999 to pursue mineral exploration and development
      opportunities, and we have a limited operating history in our current form.
      Since we reorganized our business in 2003, we have incurred operating costs
      in
      each quarter but only began to generate any revenue in January 2004. With the
      resumption of mining operations in mid 2007 and gold production from new ore
      in
      January 2008 we expect to have positive cash flow in 2008, however, we have
      a
      cumulative deficit in shareholders’ equity of approximately $76.0 million as at
      December 31, 2007.




We
      have a
      limited history of earnings or cash flow from our operations. In addition,
      in
      our acquisition of the Mesquite Mine, we purchased an asset that had been
      scheduled for closure by the previous owner. Newmont Mining Corporation operated
      the Mesquite Mine in a limited caretaker mode with a view towards closure until
      our acquisition of the Mesquite Mine in November 2003. At that time, Newmont
      Mining Corporation did not operate the Mesquite Mine as an operating mine but
      as
      an operation to be discontinued, and we may not be able to successfully operate
      the mine and to execute our business strategy.





To
      date
      we have been largely dependent on equity and debt financing to carry out our
      expansion plans at Mesquite. If our operations do not generate positive cash
      flow in future, additional financing may not be available when needed or on
      acceptable terms, if at all.  If
      we are
      unable to raise additional financing when necessary, we may have to delay our
      exploration, development and production efforts or any property acquisitions
      or
      be forced to cease operations.





***Exploration
      and production may not prove successful, will involve risks and have no
      guaranteed outcome.***




Although
      the resumption of mining operations at Mesquite was based on a positive
      feasibility study incorporating substantial volumes of drilling data, our
      business operations are subject to risks and hazards inherent in the mining
      industry. The reactivation of the Mine and the exploration for additional
      reserves involve significant risks that even a combination of careful
      evaluation, experience and knowledge may not eliminate.




Our
      exploration and production may be hampered by mining, heritage and environmental
      legislation, industrial accidents, industrial disputes, cost overruns, land
      claims and compensation and other unforeseen contingencies. Our success also
      depends on the delineation of economically recoverable reserves, the
      availability and cost of required development capital, movement in the price
      of
      commodities, as well as obtaining all necessary consents and approvals for
      the
      conduct of our production and exploration activities.




Exploration
      and production at the Mesquite Mine may prove unsuccessful. Mineable reserves
      may become depleted resulting in a reduction of the value of those tenements
      and
      a diminution in our cash flow and cash reserves as well as possible
      relinquishment of the exploration and mining tenements.




26


Risks
      involved in mining operations include unusual and unexpected geologic
      formations, seismic activity, rock bursts, cave-ins, flooding and other
      conditions involved in the drilling and removal of any material, any of which
      could result in damage to life or property, environmental damage and possible
      legal liability.




Whether
      income will result from the Mesquite Mine depends on the successful
      establishment of mining operations. Factors including costs, actual
      mineralization, consistency and reliability of ore grades and commodity prices
      affect successful project development. The reactivation and efficient operation
      of processing facilities, the existence of competent operational management
      and
      prudent financial administration, as well as the availability and reliability
      of
      appropriately skilled and experienced consultants also can affect successful
      project development.




***We
      hav*** ***e
      194*** ***full-time
      employees including our executive officers, and we are dependent on our
      directors, officers and third-party contractors.***




We
      have 6
      executive officers and 188 other
      individuals who are full time employees. Our management team at Mesquite
      comprises approximately 8 people. We also engage consultants from time to time.
      Although we believe that we have a talented team in place, competition for
      skilled personnel, notably geologists and engineers, is intense and there is
      no
      assurance that we will be able to hire and retain such personnel in the future.
      We are also dependent upon the efforts and abilities of our officers and
      directors. While much of our operations are handled by our employees, our
      directors and officers direct our policies and manage our operations. The loss
      of any one of these individuals could adversely affect our business.




***Our
      business is dependent on good labor and employment relations.***




Production
      at the Mesquite Mine is dependent upon the efforts of our employees. Relations
      between us and our employees may be impacted by changes in labor relations
      which
      may be introduced by, among others, employee groups, unions, and the relevant
      governmental authorities in whose jurisdictions we carry on business. Adverse
      changes in such legislation or in the relationship between us and our employees
      may have a material adverse effect on our business, results of operations,
      and
      financial condition.




***If
      we do not*** ***continually
      place new ore in sufficient quantities and of adequate grade on the leach pads,
      we will be unable to achieve or maintain targeted production
      levels.***




We
      must
      continually place fresh gold-bearing ore on the leach pads to replace current
      production. Depleted deposits must be replaced by expanding operations on our
      existing property or by locating new deposits in order for us to maintain our
      production levels over the long term. Although our feasibility study and mine
      plan indicate that, based on certain major assumptions as to the selling price
      of gold and cost inputs, economic deposits will be available for the life of
      the
      Mine, there can be no assurance that this will in fact be the case. Success
      in
      exploration for gold is uncertain. There is no assurance that we will continue
      to find additional commercially viable mineral deposits on our property. As
      a
      result, our metals inventory may decline as minerals are produced without
      adequate replacement.




***Estimates
      of proven and probable deposits are uncertain, and any inaccuracies could result
      in the estimates being overstated.***




Estimates
      of proven and probable deposits and costs of goods sold are subject to
      considerable uncertainty. Such estimates are, to a large extent, based on
      interpretations of geologic data obtained from drill holes and other sampling
      techniques. Gold producers use feasibility studies to derive estimates of costs
      of goods sold based upon anticipated tonnage and grades of minerals to be mined
      and processed, the predicted configuration of the deposits, expected recovery
      rates, comparable facility, equipment and operating costs, and other factors.
      Actual costs of goods sold and economic returns on projects may differ
      significantly from original estimates. It could take several years from initial
      drilling of an area at Mesquite until it is brought into production and, during
      that time, the economic feasibility of exploiting the area may change. Any
      significant inaccuracies in the interpretations or assumptions used or changes
      in conditions could cause the quantities and net present value of the Mesquite
      deposit to be overstated. The data included and referred to in this annual
      report represent only estimates. You should not assume that the present value
      referred to in this annual report represents the current market value of our
      estimated deposits.




27




**A** ***shortage
      of equipment and supplies could adversely affect our ability to operate our
      business.***




We
      are
      dependent on the availability of key supplies and equipment to carry out our
      mining operations. This risk has been heightened by the increased level of
      activity in the mining industry worldwide in recent years. The shortage of
      such
      supplies, equipment and parts could have a material adverse effect on our
      ability to carry out our operations and therefore limit or increase the cost
      of
      production.




***Increased
      costs could affect our financial condition.***




Costs
      at
      the Mesquite Mine are subject to variation due to factors, such as changing
      ore
      grade, metallurgy and revisions to mine plans in response to the physical shape
      and location of the ore body. Operating costs can be significantly affected
      by
      volatility in the price of various commodities, notably fuel and electricity.
      Such commodities are at times subject to volatile price movements, including
      increases that could make production at certain operations less profitable.
      Increases in the price of these major cost drivers could have a significant
      effect on our profitability.




***Unforeseen
      title defects may result in a loss of entitlement to production and reserves.***




In
      common
      with many mineral properties, our ownership of Mesquite could be subject to
      prior undetected claims or interests. Although we performed a title review
      of
      the Mine in 2007 as a pre-condition to establishing our term loan facility,
      this
      does not guarantee or certify that an unforeseen defect in title will not arise
      to defeat a claim by us. If any such defect were to arise, our entitlement
      to
      the reserves associated with the Mesquite Mine could be jeopardized, and could
      have a material adverse effect on our financial condition, results of operations
      and our ability to timely execute our business plan.




***Our
      business activities are subject to extensive laws and regulations that expose
      us
      to significant compliance costs and the risk of lawsuits.***




Our
      operations and exploration and development activities are subject to extensive
      United States and Canadian federal, state, provincial and local laws and
      regulations governing various matters, including:




·
            taxation;




·
            mining
                royalties;




·
            environmental
                protection; and




·
            labor
                standards and occupational health and safety, including mine
                safety.




The
      costs
      associated with compliance with these laws and regulations are substantial
      and
      possible future laws and regulations, changes to existing laws and regulations
      or more stringent enforcement of current laws and regulations by governmental
      authorities, could cause additional expense, capital expenditures, restrictions
      on or suspensions of our operations and delays in the development of the
      Mesquite Mine. Moreover, these laws and regulations may allow governmental
      authorities and private parties to bring lawsuits based upon damages to property
      and injury to persons resulting from the health and safety impacts of our past
      and current operations, and could lead to the imposition of substantial fines,
      penalties or other civil or criminal sanctions.




28




***Our
      operations are subject to numerous governmental permits which are difficult
      to
      obtain and we may not be able to obtain or renew all of the permits we
      require.***




In
      the
      ordinary course of business, we are required to obtain and renew governmental
      permits for the operation, re-commissioning and expansion of the Mesquite Mine.
      Obtaining or renewing the necessary governmental permits is a complex and
      time-consuming process involving costly undertakings on our part. The duration
      and success of our efforts to obtain and renew permits are contingent upon
      many
      variables not within our control including the interpretation of applicable
      requirements implemented by the permitting authority. We may not be able to
      obtain or renew permits that are necessary to our operations, or the cost to
      obtain or renew permits may exceed our estimates. Failure to comply with
      applicable environmental and health and safety laws and regulations may result
      in injunctions, fines, suspension or revocation of permits and other penalties.
      There can be no assurance that we have been or will at all times be in full
      compliance with all such laws and regulations and with our environmental and
      health and safety permits or that we possess all required permits. The costs
      and
      delays associated with compliance with these laws, regulations and permits
      and
      with the permitting process could prevent us from continuing with the operation
      or development of Mesquite or could increase the costs of development or
      production and materially adversely affect our business, results of operations
      or financial condition.




***We
      are subject to substantial costs for compliance with environmental laws and
      regulation and may be subject to substantial costs for liability related to
      environmental claims.***




Our
      exploration, production and processing operations are extensively regulated
      under various U.S. federal, state and local laws relating to the protection
      of
      air and water quality, hazardous waste management, endangered species, and
      mine
      reclamation. We may be subject to future liability for environmental costs,
      including capital costs to comply with environmental laws, costs associated
      with
      the remediation of soil or groundwater contamination at our current and formerly
      owned or operated properties, and reclamation and closure costs upon cessation
      of our operations at the Mesquite Mine. In addition, we may be subject to
      reclamation costs for our claims, even if we have not conducted the activity
      on
      those properties. Further, the regulatory environment for our operations could
      change in ways that would substantially increase our liability or the costs
      of
      compliance and that could have a material adverse effect on our operations
      or
      financial position.




Various
      laws and permits require that financial assurances be in place for certain
      environmental and reclamation obligations and other potential liabilities.
      Without adequate insurance we may be unable to undertake further trenching,
      drilling or development or continue operations at Mesquite until we obtain
      financial assurances to cover potential liabilities. We have an existing
      insurance policy for our reclamation costs at the Mesquite Mine. During 2007
      we
      negotiated amendments to the policy resulting in increased limits and extension
      of the term of coverage to reflect increases in reclamation costs due to
      expansion at Mesquite. Such insurance coverage will be subject to review from
      time to time and there can be no guarantee that it will be available on
      acceptable terms in the future.




*Risks
      Related To Our Industry*




***We
      are dependent on the price of gold, which is subject to numerous factors beyond
      our control. A substantial or extended decline in gold prices would have a
      material adverse effect on our revenues, profits and cash
      flows.***




Our
      business is extremely dependent on the price of gold, which is affected by
      numerous factors beyond our control. Factors tending to put downward pressure
      on
      the price of gold include:




·
            sales
                or leasing of gold by governments and central banks;




·
            a
                low rate of inflation and a strong U.S.
                dollar;




·
            global
                and regional recession or reduced economic activity;




29




·
            speculative
                trading;




·
            the
                demand for gold for industrial uses, use in jewelry, and investment;




·
            high
                supply of gold from production, disinvestment, scrap and
                hedging;




·
            interest
                rates;




·
            sales
                by gold producers in forward transactions and other hedging;




·
            the
                production and cost levels for gold in major gold-producing nations;
                and




·
            the
                cost level (in local currencies) for gold in major consuming nations.




Any
      drop
      in the price of gold would adversely impact our future revenues, profits and
      cash flows. In addition, sustained low gold prices can:




·
            reduce
                revenues further by production cutbacks due to cessation of the mining
                of
                deposits or portions of deposits that have become uneconomic at the
                then-prevailing gold price;




·
            halt
                or delay the development of new projects;
                and




·
            reduce
                funds available for exploration, with the result that depleted minerals
                are not replaced.




During
      the last five years, the average annual market price of gold has fluctuated
      between $364 per ounce and $696 per ounce, as shown in the table below.


**2003**
              ****
              **2004**
              ****
              **2005**
              
              **2006**
              
              **2007**$                                  364
              
              $
              406
              
              $
              445
              
              $
              603
              
              $
              696


***We
      are subject to substantial costs for compliance with environmental laws and
      regulations and may be subject to substantial costs for liability related to
      environmental claims.***




Our
      exploration, production and processing operations are extensively regulated
      under various U.S. federal, state and local laws relating to the protection
      of
      air and water quality, hazardous waste management and mine reclamation. We
      may
      have potential future liability for environmental costs. In addition, we may
      be
      subject to reclamation costs for our claims, even if we have not conducted
      the
      activity on those properties. Further, the regulatory environment for our
      operations could change in ways that would substantially increase our liability
      or the costs of compliance and that could have a material adverse effect on
      our
      operations or financial position.




Various
      laws and permits require that financial assurances be in place for certain
      environmental and reclamation obligations and other potential liabilities.
      If we
      were unable to post the bonds or provide the financial assurances required
      by
      various regulatory agencies, we might be unable to undertake further trenching,
      drilling, or development or continue operations at Mesquite.




***Our
      operations may be adversely affected by risks and hazards associated with the
      mining industry.***




Our
      business is subject to a number of risks and hazards including adverse
      environmental effects, technical difficulties due to unusual or unexpected
      geologic formations, and pit wall failures.




30




Such
      risks could result in personal injury, environmental damage, damage to and
      destruction of our production facility, delays in mining and liability. For
      some
      of these risks, we maintain insurance to protect against these losses at levels
      consistent with our historical experience and industry practice. However, we
      may
      not be able to maintain current levels of insurance, particularly if there
      is a
      significant increase in the cost of premiums. Insurance against environmental
      risks is generally expensive and may not continue to be available for us and
      other companies in our industry. Our current policies may not cover all losses.
      Our existing policies may not be sufficient to cover all liabilities arising
      under environmental law or relating to hazardous substances. Moreover, in the
      event that we are unable to fully pay for the cost of remedying an environmental
      problem, we might be required to suspend or significantly curtail operations
      or
      enter into other interim compliance measures.




***We
      have n*** ***umerous
      competitors in the mining industry, many of whom have greater resources and
      technical capacity than we do and, as a result, we may be unable to effectively
      compete.***




Mineral
      exploration and mining is competitive in all of its phases. We compete with
      numerous other companies and individuals, including some with greater financial,
      technical and other resources than us, in the search for and the acquisition
      of
      attractive mineral properties. Our ability to operate successfully in the future
      will depend not only on our ability to develop the Mesquite Mine, but also
      on
      our ability to select and acquire suitable producing properties or prospects
      for
      mineral exploration. We may be unable to compete successfully with our
      competitors in acquiring such properties or prospects on terms we consider
      acceptable, if at all, which could have a material adverse effect on our future
      operations.




***Gold*** **** ***producers
      must continually obtain additional reserves.***




Gold
      producers must continually replace reserves depleted by production. Depleted
      reserves must be replaced by expanding known ore bodies or by locating new
      deposits in order for producers to maintain production levels over the long
      term. Exploration is highly speculative in nature, involves many risks and
      frequently is unproductive. No assurances can be given that any of our new
      or
      ongoing exploration programs will result in new mineral producing operations.
      Once mineralization is discovered, it may take many years from the initial
      phases of drilling until production is possible, during which time the economic
      feasibility of production may change.




*Risks
      Related To Our Common shares*




***We
      will likely require additional capital in the future and no assurance can be
      given that such capital will be available at all or available on terms
      acceptable to us*** ***.***




Although
      we believe that the Mesquite expansion is fully funded, in order to finance
      the
      future growth of our business, it is likely that we will need to raise further
      capital. The success and the pricing of any such financing will be dependent
      upon the prevailing market conditions at that time. If additional capital is
      raised by an issue of securities, this may have the effect of diluting the
      interests of our existing shareholders. Any debt financing, if available, may
      involve financial covenants that limit our operations. If we cannot obtain
      such
      additional financing, we may be required to reduce the scope of any activities
      that could adversely affect our business, operating results and financial
      condition.




31




***Failure
      to achieve and maintain effective internal control over our financial reporting
      in accordance with the rules of the SEC could harm our business and operating
      results and/or result in a loss of investor confidence in our financial reports,
      which could have a material adverse effect on our business and stock price.***




As
      a
      public company, we are required to fully comply with Section 404 of the
      Sarbanes-Oxley Act, and, beginning with the year ending December 31, 2008,
      we
      will have to obtain an annual attestation from our independent auditors
      regarding our internal control over financial reporting in addition to our
      management’s assessment of internal control over financial reporting. We cannot
      be certain as to the timing of completion of our auditor’s internal control
      evaluation, testing and remediation actions or of their impact on our
      operations. While our management has designed or caused to be designed internal
      controls over financial reporting procedures, and has found those procedures
      to
      be effective as of December 31, 2007, upon completion of our auditor’s
      evaluation, we may identify control deficiencies of varying degrees of severity
      under applicable SEC and Public Company Accounting Oversight Board rules and
      regulations that remain unremediated. We will be required to report, among
      other
      things, control deficiencies that constitute a “material weakness” or changes in
      internal controls that materially affect, or are reasonably likely to materially
      affect internal controls over financial reporting. A “material weakness” is a
      significant deficiency or combination of significant deficiencies that results
      in more than a remote likelihood that a material misstatement of the annual
      or
      interim financial statements will not be prevented or detected. If we fail
      to
      implement the requirements of Section 404 in a timely manner, we might be
      subject to sanctions or investigation by regulatory authorities, including
      the
      SEC. In addition, failure to comply with Section 404 or the report by us of
      a
      material weakness may cause investors to lose confidence in our financial
      statements, and our stock price may be adversely affected as a result. If we
      fail to remedy any material weakness, our financial statements may be
      inaccurate, we may face restricted access to the capital markets and our stock
      price may be adversely affected. See “Controls and Procedures”.




***All
      of our directors and officers may not be subject to legal process in the United
      States.***




Our
      directors and officers reside in Canada and the United Kingdom. As a result,
      it
      may be difficult or impossible to effect service of process within the United
      States upon those individuals, to bring suit against any of those individuals
      in
      the United States or to enforce in the United State courts any judgment obtained
      there against any of those individuals predicated upon any civil liability
      provisions of the United States federal securities laws. Investors should not
      assume that Canadian or British courts will enforce judgments of United States
      federal securities courts against any director or officer residing in Canada
      or
      the United Kingdom, including judgments obtained in actions predicated upon
      the
      civil liability provisions of the United States federal securities laws or
      the
      securities or “blue sky” laws of any state within the United States, or will
      enforce, in original actions, liabilities against such directors or officers
      predicated upon the United States federal securities laws or any such state
      securities or blue sky laws.




***We
      may experience volatility in our stock price.***




The
      market price of our common shares may fluctuate significantly in response to
      a
      number of factors, some of which are beyond our control, including:




·
            quarterly
                variations in operating results;




·
            changes
                in financial estimates by securities
                analysts;




·
            changes
                in market valuations of other similar
                companies;




·
            announcements
                by us or our competitors of new products or of significant technical
                innovations, contracts, acquisitions, strategic partnerships or joint
                ventures;




·
            additions
                or departures of key personnel;




·
            any
                deviations in net sales or in losses from levels expected by securities
                analysts; and




·
            future
                sales of common shares




As
      a
      result of any of these factors, the market price of our shares of common shares
      at any given point in time may not accurately reflect our long-term value.
      Securities class action litigation often has been brought against companies
      following periods of volatility in the market price of their securities. We
      may
      in the future be the target of similar litigation. Securities litigation could
      result in substantial costs and damages and divert management’s attention and
      resources.




32




***Any
      future restatement of our financial statements may adversely affect the trading
      price of our*** ***common
      shares.***




In
      August
      2006 we completed the restatement of our consolidated financial statements
      for
      the years ended December 31, 2005 and 2004, and we believe they are presented
      in
      accordance with the requirements of United States generally accepted accounting
      principles. However, such restatements do not prevent future changes or
      adjustments, including additional restatements. If there were future
      restatements of our consolidated financial statements, such restatements may
      adversely affect the trading price of the our common shares.




***We
      have not paid dividends in the past and do not anticipate doing so in the
      future.***




To
      date,
      we have not paid any dividend on our shares of common shares. We believe that
      our cash flow can best be deployed in growing our business and we do not intend
      to declare or pay any cash dividends in the foreseeable future. Payment of
      any
      future dividends will be at the discretion of our board of directors, after
      taking into account many factors, including our operating results, financial
      condition, and current and anticipated cash needs.




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTIES**




As
      of
      December 31, 2007, we owned or retained interests in properties comprising
      the
      Mesquite Mine more fully described in Part 1, Item 1(b) “Description of Mesquite
      Mine”.





Since
      June 2006 our head office has been located in Toronto, Ontario, Canada, where
      we
      share premises with Silver Bear Resources Inc. (“Silver Bear”), a related party
      through common directors and senior executives. Under a cost sharing agreement
      with Silver Bear, we are charged with 50% of the rental and operating costs
      of
      the space occupied. For the period January 1, 2007 to May 31, 2007, our share
      of
      the monthly cost was $6,658 and for the period June 1, 2007 to May 31, 2008,
      our
      share of the monthly cost is $7,041.





We
      are
      relocating our Toronto head office in Spring of 2008 and we have entered into
      a
      lease for alternative 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 $5,385,000.
      Silver Bear will initially share 50% of these costs.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




We
      are
      not currently a party to any material legal proceedings. We may become from
      time
      to time involved in legal proceedings in the ordinary course of business. We
      may
      not be successful in defending these or other claims. Regardless of the outcome,
      litigation can result in substantial expense and could divert the efforts of
      our
      management.





**Holly
      Gold Property**





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




33




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





**Congrove
      Construction**





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
      judgement against WMMI.





The
      Company does not believe this claim has 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.




**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





There
      were no matters submitted to a vote of our security holders during the fourth
      quarter ended December 31, 2007.





34


**PART
      11**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**





Until
      November 7, 2007, our common shares were quoted under the symbol “WGDF.OB” on
      the Over-the-Counter Bulletin Board. Since November 8, 2007, our common shares
      have been quoted under the symbol “WGW” on the American Stock Exchange. In
      Addition, since August 28, 2006 our common shares have been quoted under the
      symbol “WGI.TO” on The Toronto Stock Exchange. The following tables set forth
      the high and low bid information for our common shares for the periods indicated
      in the past two fiscal years, which reflect inter-dealer prices, without retail
      mark-up, mark-down or commission and may not represent actual
      transactions:





**American
      Stock Exchange**




**Quarter
                Ended**
            
            **High
                Bid**
              **Quotation**
            
            **Low
                Bid**
              **Quotation****2007:**Fourth
                quarter (November 8, 2007 to December 31, 2007)
            
            $
            4.16
            
            $
            3.16





**Over-the-Counter
      Bulletin Board**




**Quarter
                Ended**
            
            **High
                Bid**
              **Quotation**
            
            **Low
                Bid**
              **Quotation****2007:**Fourth
                quarter (September 1, 2007 to November 7, 2007)
            
            $
            4.27
            
            $
            3.35Third quarter
            
            $
            3.79
            
            $
            1.69Second
                quarter
            
            $
            2.61
            
            $
            1.81First
                quarter
            
            $
            2.44
            
            $
            1.60**2006:**Fourth
                quarter
            
            $
            2.43
            
            $
            1.26Third quarter
            
            $
            2.70
            
            $
            1.70Second
                quarter
            
            $
            3.08
            
            $
            0.83First
                quarter
            
            $
            0.92
            
            $
            0.16





**The
      Toronto Stock Exchange (in Canadian dollars)**


**Quarter
                  Ended**
              
              **High
                  Bid**
                **Quotation**
              
              **Low
                  Bid**
                **Quotation****2007:**Fourth
                  quarter
              
              C$
              3.91
              
              C$
              3.15Third quarter
              
              C$
              3.43
              
              C$
              1.73Second
                  quarter
              
              C$
              2.65
              
              C$
              2.03First
                  quarter
              
              C$
              2.85
              
              C$
              1.902006:Fourth
                  quarter
              
              C$
              2.95
              
              C$
              1.40Third quarter (commencing August 28, 2006)
              
              C$
              3.50
              
              C$
              1.92





**Holders**





As
      of
      February 29, 2008, we estimate that we have approximately 6,900 shareholders
      of
      record of our common shares, however we believe that there are additional
      beneficial owners of our common shares who own our stock in “street
      name.”




35




**Dividends**





We
      have
      never declared or paid dividends on our common shares. We currently intend
      to
      retain future earnings, if any, for use in our business, and, therefore, we
      do
      not anticipate declaring or paying any dividends in the foreseeable future.
      Payments of future dividends, if any, will be at the discretion of our board
      of
      directors after taking into account various factors, including our financial
      condition, operating results, current and anticipated cash needs and plans
      for
      expansion.





**Unregistered
      Sales of Securities and Use of Proceeds**





On
      October 12, 2007, we completed an unregistered offering of an aggregate of
      11,316,000 common shares, no par value, at Cdn$3.05 per share, pursuant to
      a
      prospectus filed in Canada. The gross proceeds received from this offering
      were
      Cdn$34,513,800. In connection with this offering, we paid a commission of
      Cdn$0.1525 per share.





The
      offering was made to non-U.S. persons, as defined in Regulation S (“Regulation
      S”) under the Securities Act of 1933, as amended (the “Securities Act”) and to
      qualified institutional buyers, as defined in Rule 144A (“Rule 144A”) under the
      Securities Act. We received representations from the underwriters that all
      sales
      were made in compliance with the requirements of Regulation S or Rule 144A.
      The
      principal underwriters were Wellington West Capital Markets, RBC Dominion
      Securities Inc. and Scotia Capital Inc.




36




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




The
      following discussion provides information that management believes is relevant
      to an assessment and understanding of the consolidated financial condition
      and
      results of operations of Western Goldfields Inc. and its subsidiaries and
      including its predecessor, Western Goldfields, Inc. (collectively “Western
      Goldfields” or the “Company”). **This
      item should be read in conjunction with our audited consolidated financial
      statements for the year ended December 31, 2007 and 2006 and the notes thereto.
      The information is presented as o** **f
      March 6, 2008. All amou** **nts
      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 this MD&A under “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 155,000 – 165,000 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 commercial production at the Mesquite Mine.
      We
      completed two equity financings and arranged a term loan facility to finance
      the
      project; we executed a major capital expenditure and construction program which
      is nearing completion; we built a strong management team and hired and trained
      the personnel for resumed mining operations, and we have increased the proven
      and probable reserves at Mesquite. In June 2007 we commenced pre-stripping
      operations and we announced that commercial production at the Mine was being
      brought forward by three months to January 2008. Production of new ore built
      up
      gradually during the second half of 2007 and leaching of the new ore started
      in
      December. These activities have been carried out on time and within budget
      against a background of sustained strength in the mining sector, with resultant
      cost pressures and demands for skilled personnel.





**Equity
      Financings**





With
      a
      view to subsequently raising debt financing for the Mesquite expansion, in
      January 2007 we issued 33,333,000 common shares at a price of Cdn. $2.25 per
      share for net proceeds of $59.2 million. In October 2007, we completed a share
      offering of 9,840,000 common shares at a price of Cdn.$3.05 per share for net
      proceeds of $33.5 million.





37





**New
      Term Loan Facility and Related Hedging**





On
      March
      30, 2007 our wholly-owned subsidiary, Western Mesquite Mines, Inc., entered
      into
      a new term loan facility with a syndicate of banks for $105.0 million. The
      agreement was amended and restated effective May 31, 2007. The facility
      comprises multiple-draw loans maturing December 31, 2014, of which $87.3 million
      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
      December 31, 2007, amounts borrowed pursuant to the credit facility were
      approximately $76.5 million. A further $2.7 million was drawn on February 7,
      2008.





In
      connection with the term loan facility, 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 will be covered by
      the
      Hedging Contracts, leaving approximately 100,000 ounces annually 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. The cumulative mark-to-market loss
      of
      $58.9 million at December 31, 2007 is reflected as a liability as at that date
      and is included in other income (expense) for the year ended December 31,
      2007.





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





Our
      latest forecast for spending on the capital program, launched in late 2006
      and
      expected to be completed in the second quarter of 2008, is $112.0 million.
      Of
      this amount, $109.2 million relates to the mine expansion and a further $2.8
      million relates to capital projects not directly related to the expansion
      program, primarily development drilling.





Total
      planned spending on the mining fleet is now $73.6 million, of which
      approximately $72.6 million had been spent by December 31, 2007. The major
      components of the mining fleet and their approximate cost, including all
      relevant taxes, are as follows: 14 haul trucks - $37.5 million; 2 shovels -
      $16.5 million; 1 front-end loader - $4.5 million; other mobile and ancillary
      equipment, including drills, bull-dozers, graders and water trucks - $14.1
      million. Throughout the year we worked closely with our suppliers to ensure
      timely delivery and commissioning of the mining fleet which resulted in our
      achieving commercial production by January 2008.





Orders
      for the majority of the mining equipment fleet were placed in November 2006.
      The
      two 45 cubic yard hydraulic shovels were operating throughout the second quarter
      and all fourteen of the 205 ton haul trucks were operational by December 31,
      2007.





In
      addition to the mining fleet, our capital program includes $38.5 million for
      plant and infrastructure upgrades and other expansion projects at Mesquite,
      of
      which approximately $26.3 million had been spent by December 31, 2007. The
      major
      items in this program are the leach pad expansion, retrofit of the process
      plant, and construction of a truck repair shop, warehouse and mine operations
      administrative office. We continue to work closely with the environmental
      agencies and local authorities to ensure that all required building and
      expansion permits are received on a timely basis. During the second quarter
      we
      put in place an enhanced bonding and insurance program in respect of
      reclamation, remediation and pollution exposures arising out of our expanded
      operations.




38




Over
      the
      past two years we have built a strong team to manage the capital program and
      resumed mining operations at Mesquite. We have made significant progress in
      recruiting, hiring and training the skilled workforce required for our expanded
      operations. We have developed training and safety programs and there will an
      ongoing commitment to these activities now that we are in full production.





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





**Increase
      in Reserves**





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





As
      at
      December 31, 2007, proven and probable reserves were estimated to be 2.76
      million ounces, reflecting production depletion from the March 2007 estimate.





**Corporate
      Reorganization**





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





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





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


**Summary
                  of Quarterly Results***(in
                  $000s unless otherwise stated****)***
 **Dec-07**
              
              **Sept-07**
              
              **Jun-07**
              
              **Mar-07**
              
              **Dec-06**
              
              **Sept-06**
              
              **Jun-06**
              
              **Mar-06**Total
                  revenues
              
              
              606
              
              
              1,281
              
              
              1,546
              
              
              1,233
              
              
              1,083
              
              
              1,897
              
              
              2,104
              
              
              2,775Unrealized
                  loss on mark-to-marketof
                  gold hedging contracts
              
              
              (30,570
              )
              
              (28,331
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Income
                  tax recovery
              
              
              37,133
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              
              (7,293
              )
              
              (36,374
              )
              
              (4,007
              )
              
              (2,634
              )
              
              (3,169
              )
              
              (1,985
              )
              
              (2,610
              )
              
              (3,819
              )Basic
                  and diluted lossper
                  share ($s)
              
              
              (0.05
              )
              
              (0.31
              )
              
              (0.04
              )
              
              (0.03
              )
              
              (0.04
              )
              
              (0.02
              )
              
              (0.04
              )
              
              (0.08
              )Cash
                  and cash equivalents
              
              
              51,370
              
              
              25,538
              
              
              26,250
              
              
              57,147
              
              
              5,503
              
              
              3,156
              
              
              3,775
              
              
              1,943Total
                  assets
              
              
              214,495
              
              
              126,252
              
              
              92,037
              
              
              79,894
              
              
              22,214
              
              
              16,357
              
              
              17,273
              
              
              15,516Total
                  long-term financial liabilities
              
              
              131,608
              
              
              83,590
              
              
              4,826
              
              
              4,741
              
              
              4,805
              
              
              4,852
              
              
              6,314
              
              
              6,255Cash
                  dividends declared per share
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —




39





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





**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Cash
                outflows for investing activities
            
            
            (104,103
            )
            
            (3,444
            )
            
            38Cash
                inflows from financing activities
            
            
            171,049
            
            
            16,210
            
            
            (795
            )




**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Cash
            
            
            43,870
            
            
            5,503
            
            
            52Restricted
                cash
            
            
            7,500
            
            
            —
            
            
            —Working
                capital
            
            
            46,159
            
            
            4,549
            
            
            (2,515
            )Property,
                plant and equipment, net of depreciation
            
            
            77,951
            
            
            4,329
            
            
            4,860Construction
                in progress
            
            
            21,863
            
            
            2,881
            
            
            11Stockholders’
                equity
            
            
            65,290
            
            
            14,879
            
            
            3,889




**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Revenues
                  net
            
            
            4,665
            
            
            7,859
            
            
            9,798Gross
                loss
            
            
            (18,845
            )
            
            (1,601
            )
            
            (815
            )Net
                loss
            
            
            (50,308
            )
            
            (11,583
            )
            
            (3,340
            )Net
                loss to common shareholders
            
            
            (50,308
            )
            
            (11,600
            )
            
            (5,075
            )Net
                loss per common share, basic and diluted
            
            $
            (0.43
            )
            $
            (0.18
            )
            $
            (0.13
            )Gold
                ounces produced
            
            
            8,000
            
            
            12,668
            
            
            21,776Gold
                ounces sold
            
            
            6,889
            
            
            13,210
            
            
            23,818Average
                price received per ounce
            
            $
            677
            
            $
            595
            
            $
            411Cash
                cost of sales per ounce(i)
            
            $
            2,800
            
            $
            724
            
            $
            401




(i)
            Cash
                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.




**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Cost
                of goods sold
            
            
            23,511
            
            
            9,461
            
            
            10,613Depreciation,
                amortization, and accretion
            
            
            (4,241
            )
            
            (1,352
            )
            
            (1,599
            )Reclamation
                cost recovery
            
            
            21
            
            
            1,460
            
            
            544Cash
                cost of sales
            
            
            19,291
            
            
            9,569
            
            
            9,588





**Consolidated
      Financial Results / Overall Performance**





The
      Company’s net loss to common shareholders for the year ended December 31, 2007
      (“2007”) was $50.3
      million, or $0.43 per
      share, compared with $11.6 million, or $0.18 per share, for the year ended
      December 31, 2006 (“2006”).





40





The
      net
      loss for 2007 includes $58.9 million of 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 December 31, 2007 was $837 per ounce as compared
      with $660-675 when the forward contracts were entered into.





Results
      for 2007, as compared with 2006, were negatively impacted by the 48% reduction
      in gold ounces sold from 13,210 ounces to 6,889 ounces. With no new ore being
      placed on the leach pads for most of 2007, it was increasingly difficult to
      extract the residual gold and maintain the solution grades coming from the
      leach
      pads. This lower production was partially offset by the 14% increase in the
      average selling price per ounce from $595 to $677, reflecting the continuation
      of relatively strong pricing in world markets. Cost of sales per ounce for
      2007,
      based on mine cost of sales less non-cash depreciation, amortization and
      depletion, was $2,800, as compared with $724 per ounce in 2006. During the
      first
      half of the year, these costs reflected the high fixed cost component in cost
      of
      goods sold, the increase in mine staffing as we prepared to go back into
      production, and the expensing of stripping costs. During the second half of
      the
      year, as mining of new ore got underway, we incurred operating costs without
      generating revenues from new gold from the leach pads.





Other
      operating expenses for 2007 were $9.2 million, unchanged from 2006. General
      and
      administrative expenses of $5.8 million were up $1.5 million from $4.3 million
      in 2006 reflecting staff increases and incentive compensation payments. Non-cash
      stock based compensation for 2007 of $2.6 million was significantly lower than
      the $3.2 million expense the previous year. The higher expense in 2006 primarily
      reflects grants of options to our new management team in early 2006. Other
      operating expenses in 2006 also included $0.5 million in respect of severance
      costs payable in common shares. Exploration expense in 2007 relates mainly
      to
      the drilling program to identify new resources in a new area for drilling to
      the
      south of the Brownie Hill. In 2006, exploration expense relates mainly to the
      feasibility study.





Other
      income (expense) for 2007 was $(59.4) million compared with $(0.7) million
      in
      2006. The major negative factor was the $58.9 million non-cash expense relating
      to the mark-to-market of our gold forward sales contracts. As a requirement
      of
      our term loan facility, in June 2007 we executed flat forward sales contracts
      for 429,000 ounces of gold (the “Hedging Contracts”) at a price of $801 per
      ounce. The Hedging Contracts represent a commitment of 5,500 ounces for 78
      months commencing July 2008, with the last commitment deliverable December
      2014.
      We expect to produce between 150,000 and 170,000 ounces annually during the
      term
      of the Hedging Contracts, of which 66,000 will be covered by the Hedging
      Contracts. This leaves approximately 100,000 ounces annually leveraged to the
      price of gold. Since we have not designated these contracts as cash flow hedges,
      the hedge accounting rules of SFAS No.133 are not being applied and the
      period-end mark-to-market is being immediately reflected on our income
      statement. The loss stems from the fact that 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 $836 at December 31, 2007.





Other
      income (expense) for 2007 was favourably impacted by an increase in interest
      income from $0.4 million to $2.0 million. The equity financings in January
      and
      October 2007 generated net proceeds of approximately $92.6 million. Although
      we
      used part of the proceeds to fund our capital program, much of this cash was
      available for most of the year. Interest
      expense for 2007 was $1.1 million reflecting the increase in advances under
      the
      term loan facility during the second
      half of the year. An additional $0.5 million of interest was capitalized to
      property, plant and equipment during the year. Agency and commitment fees
      relating to the term loan facility for 2007 were $0.8 million.





Results
      for 2006 were impacted by non-recurring costs of $1.2 million relating to
      termination of a proposed merger agreement.




41




Prior
      to
      2007, we did not recognize the recoverability of any part of our deferred tax
      assets including operating losses carried forward. After consideration of
      several factors, including our plans for operations based on the feasibility
      study of August 2006, the successful resumption of full mining operations,
      confirmation that ore grades to date are consistent with reserve estimates,
      and
      our updated projections, we have determined that it is more likely than not
      that
      we will realize the benefit of a substantial amount of the deferred tax asset
      that we have accumulated. In 2007 we have 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.





Over
      the
      past several quarters, until we started moving new ore to the leach pads in
      the
      second half of 2007, we were implementing various strategies to extend the
      productive life of the leach pads. Nevertheless, we have experienced a steady
      reduction in the gold ounces produced. In 2007 production was 8,000 ounces
      compared with 13,210 in 2006. During the third quarter of 2006 we concluded
      that
      it was no longer economic to continue leaching the Vista pad. Closure operations
      for this location were completed in February 2007; formal approval of closure
      of
      the site and reclassification of the waste material was received in May 2007
      from the California Regional Water Quality Board. Under the terms of our bonding
      arrangement with AIG, we have recovered costs of $0.3 million in respect of
      closure expenditures.





**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Gold
                sales revenue
            
            
            4,666
            
            
            7,859
            
            
            9,798Average
                price realized per ounce
            
            
            677
            
            
            595
            
            
            411Decrease
                in revenues
            
            
            3,193
            
            
            1,939
            
            
            1,069Change
                in revenues attributable to ounces sold
            
            
            (3,761
            )
            
            (4,364
            )
            
            (1,406
            )Change
                attributable to average selling price
            
            
            568
            
            
            2,425
            
            
            337





Revenues
      from gold sales for 2007 decreased by $3.2 million or 41% compared to 2006
      as
      the effect of lower ounces sold significantly outweighed the positive impact
      of
      higher selling prices, continuing the pattern established in 2006 and
      2005.





**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Cost
                of sales
            
            
            23,511
            
            
            9,461
            
            
            10,613Increase
                (decrease)
            
            
            14,050
            
            
            (1,152
            )
            
            (1,352
            )Cost
                of sales before recognition of reclamation cost recovery
            
            
            23,533
            
            
            10,921
            
            
            11,157Increase
                (decrease)
            
            
            12,612
            
            
            (236
            )
            
            (808
            )Gross
                loss %
            
            
            403
            %
            
            20
            %
            
            8
            %Increase
                (decrease) in gross loss %
            
            
            383
            %
            
            12
            %
            
            (2
            )%





Cost
      of
      sales for 2007 increased by $14.0 million or 149% compared to 2006. The increase
      reflects the commencement of stripping activities as the mining fleet came
      into
      service during the third quarter and the costs of resumed mining operations
      which built up steadily during the second half of the year. The higher costs
      also reflect increases in fuel, chemicals, power and payroll costs. Mine site
      administration cost have also increased as we assembled the management team
      to
      handle the construction program and resumed production. Costs for 2007 were
      also
      impacted by substantially higher amortization charges for the new plant and
      equipment that was placed in service during the year. Our evaluation of the
      provision for mine reclamation costs at December 31, 2007 resulted in only
      a
      minor adjustment whereas in 2006 a similar review resulted in a reduction in
      the
      liability of $1.5 million which was reflected as a reclamation cost recovery.
      The inventory adjustment in 2007 relates to the increase in the value attributed
      to year end inventories at December 31, 2007 compared to the prior year. Since,
      for the first time since we acquired Mesquite in November 2003, we had
      identifiable new gold ounces relating to the new ore placed on the leach pads,
      we were able to include this value in inventory. There was no comparable
      inventory item in previous years.




42




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


**Years
                  ended December 31,****2007**
              
              **2006**
              
              **2005**Mine
                  operating costs
              
              
              25,234
              
              
              7,193
              
              
              6,551Mine
                  site administration
              
              
              3,108
              
              
              1,642
              
              
              1,391Amortization
                  and accretion
              
              
              4,242
              
              
              1,352
              
              
              1,599Royalties
              
              
              192
              
              
              303
              
              
              744Reclamation
                  cost recovery
              
              
              (22
              )
              
              (1,460
              )
              
              (544
              )Inventory
                  adjustment
              
              
              (9,295
              )
              
              399
              
              
              807




**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**General
                and administrative
            
            
            5,809
            
            
            4,261
            
            
            1,653Stock
                based compensation
            
            
            2,561
            
            
            3,209
            
            
            518Severance
                costs payable in common shares
            
            
            —
            
            
            547
            
            
            —Exploration –
                Mesquite
            
            
            795
            
            
            1,221
            
            
            221




Other
      operating expenses for 2007 are $9.2 million, unchanged from 2006. General
      and
      administrative expenses for 2007 are higher than 2006 by approximately $1.5
      million, primarily reflecting increased incentive compensation payments and
      legal expenses in connection with the reorganization. Stock based compensation
      in 2007 is approximately $0.5 million lower than the prior year primarily
      because of high initial amortization expense, reflecting the vesting schedule
      of
      awards to the new management team in 2006. 2006 also includes $0.5 million
      in
      respect of severance costs for former management, settled by way of issuance
      of
      common shares.





Other
      expense for 2007 amounted to $59.4 million compared with $0.7 million the
      previous year. The major contributor to this cost increase was the $58.9 million
      charge in respect of the unrealized mark-to-market loss on our gold forward
      sales contracts. Interest income for 2007 was $2.0 million compared with $0.4
      million the previous year. The increase relates primarily to cash on deposit
      after the equity issues in January and October 2007. Interest expense of $1.1
      million in 2007 reflects advances under the term loan facility which commenced
      in July 2007. In addition, in 2007 YTD we recorded a foreign exchange loss
      of
      $0.3 million relating to our holding U.S. dollar cash at a time when that currency was weakening in
      relation to the Cdn. dollar. Dur ing
      2007
      we incurred agency and commitment fees of $0.8 million and amortized deferred
      debt issuance costs of $0.3 million in connection with the term credit facility
      that became effective March 30, 2007. The most significant item of other expense
      in 2006 was the $1.2 million required to terminate a merger proposal.





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





**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Interest
                income
            
            $
            1,976
            
            $
            392
            
            $
            173Interest
                expense
            
            
            (1,102
            )
            
            (20
            )
            
            (349
            )Agency
                and commitment fees
            
            
            (761
            )
            
            —
            
            
            —Amortization
                of deferred debt issuance costs
            
            
            (342
            )
            
            —
            
            
            —Unrealized
                loss on mark-to-market of gold forward sales contracts
            
            
            (58,901
            )
            
            —
            
            
            —Loss
                on foreign exchange
            
            
            (343
            )
            
            (14
            )
            
            —Expenses
                of merger termination
            
            
            —
            
            
            (1,225
            )
            
            —




43




**Results
      of Operations**





**Year
      Ended December 31, 2007 “2007”Compared to Year Ended December 31, 2006
“2006”.**




Poured
      gold production for 2007 was 8,000 ounces compared with 12,668 ounces in 2006.
      The lower production reflects the almost total depletion of the ore placed
      on
      the leach pads prior to our acquisition of Mesquite. Continued leaching of
      the
      old ore was only justified by the sustained high price of gold in the year.
      Gold
      sales for 2007 were 6,889 ounces at an average selling price of $677 for
      revenues of $4.7 million compared with 13,210 ounces at an average selling
      price
      of $595 for revenues of $7.9 million in 2006. The higher average selling price
      reflects the increase in the world price for gold and our sale of all production
      in the spot market.





Mine
      operating costs for 2007 were $25.2 million, compared to $7.2 million for 2006.
      During 2006 there was no active mining at Mesquite. The increase reflects the
      commencement of stripping activities as the mining fleet came into service
      during the second quarter onwards and the costs of resumed mining operations
      which built up steadily during the second half of the year. Approximately 18.9
      million tons of waste and 1.0 million tons of ore were mined in 2007. Costs
      in
      2007 also reflect increases in fuel, chemicals, power and payroll costs. Mine
      site administration costs for 2007 were $3.1 million compared with $1.6 million
      in 2006, reflecting the increase in staff and associated costs to support the
      capital program and resumed mining operations as the year progressed. This
      program was only getting underway in 2006. Depreciation, amortization and
      accretion expense for 2007 was $4.2 million compared with $1.4 million in 2006,
      reflecting the placing into service of the mining fleet from May 2007 onwards
      and higher accretion expense associated with revisions to the reclamation plan
      at Mesquite in 2006.





Costs
      associated with the change in leach pad and metal-in-process inventories in
      2007
      were $9.3 million compared with $0.4 million in 2006. The Company resumed mining
      operations and started placing new ore on the leach pads in July 2007. Because
      we were in start up mode, unit production costs were unusually high and not
      at
      all representative of anticipated future costs. Accordingly, the estimated
      12,080 recoverable gold ounces contained in ore on leach pads as of December,
      2007 were valued at estimated net realizable value. Previously no value had
      been
      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 1,086 ounces
      of
      metal-in-process inventory as of December 31, 2007 were also valued at net
      realizable value.





In
      the
      third quarter of 2006 we recorded a cost recovery of $1.5 million resulting
      from
      a reduction in the estimate of the net present value of expected reclamation
      costs at Mesquite. A re-evaluation of the liability was made on completion
      of
      the feasibility study in August 2006. We performed a similar evaluation at
      December 31, 2007 which gave rise to a negligible change in the
      liability.





The
      foregoing factors resulted in a gross loss of $18.8 million for 2007 compared
      with a gross loss of $1.6 million in 2006.





General
      and administrative expense increased to $5.8 million for 2007 from $4.3 million
      for 2006. Costs in 2007 reflect the increasing scope of corporate activities
      with emphasis on financing initiatives, investor relations, technical support
      for Mesquite operations and information technology initiatives. Incentive
      compensation costs were also higher in 2007 than 2006. Costs in early 2006
      included significant one-time expenses such as costs associated with a proposed
      merger, severance costs and costs of transitioning to the new management team.





Stock
      based compensation represents the non-cash costs of options, as calculated
      under
      the Black-Scholes option pricing model, granted to directors, officers and
      employees. The decrease in expense to $2.6 million in 2007 from $3.2 million
      in
      2006 relates to the high initial amortization in 2006 of options granted to
      the
      new management team during that year. Costs in 2006 also include $0.5 million
      in
      respect of severance costs for former management; there was no comparable
      expense in 2007.




44




Exploration
      activities at Mesquite during 2007 totaled $0.8 million and relate primarily
      to
      a drilling program to establish a new resource in an area to the south of the
      Brownie Hill where a recently completed infill drilling program had successfully
      established an increase in the resource. In 2006, exploration activities
      primarily related to the feasibility study.





Other
      expense for 2007 was $59.4 million compared to $0.7 million in 2006. We earned
      $2.0 million on our surplus cash in 2007 which arose from the equity issues
      in
      January and October 2007. Advances under the term credit facility commenced
      in
      July 2007 and gave rise to interest expense of $1.1 million. There was no
      comparable expense in 2006. The term credit facility that became effective
      March
      30, 2007 also gave rise to agency and commitment fees of $0.8 million that
      have
      been expensed in 2007 and deferred debt issuance costs of $3.7 million, of
      which
      $0.3 million has been amortized in 2007. In addition, at December 31, 2007,
      we
      recorded a cumulative loss of $58.9 million relating to the mark-to-market
      of
      our forward gold sales contracts, and recorded an exchange loss of $0.3 million through
      holding U.S. $ cash balances at a time when that currency was weakening in
      relation to the Cdn. dollar. The most si gnificant
      item of cost in Q1/06 was our payment of a termination fee of $1.0 million
      and
      expense reimbursement costs of $0.2 million on termination of a proposed merger
      agreement.





Prior
      to
      2007 we did not record any credit to earnings in respect of the value of tax
      losses available for set off against future profits. Since we now believe,
      on
      the basis of our mine plan and the successful resumption of production at
      Mesquite, that it is more likely than not that we will be able to use these
      tax
      losses, we have recorded a recovery of $37.1 million i n
      2007.





The
      above
      were the major factors in our reporting a net loss to common shareholders for
      2007 of $50.3 m illion
      or
      $0.43 per share, compared with a net loss of $11.6 million or $0.18 per share
      in
      2006.





**Year
      Ended December 31, 2006 (“2006”) Compared to Year Ended December 31, 2005
      (“2005”).**




Poured
      gold production for 2006 was 12,668 ounces compared with 21,776 ounces in 2005.
      Since no new ore has been placed on the leach pads since 2001, the productive
      capacity of the leach pads was diminishing and we continued with various
      strategies, initiated in the first quarter of 2006, to maintain output levels.
      Gold sales for 2006 were 13,210 ounces at an average selling price of $595
      for
      revenues of $7.9 million compared with 23,818 ounces at an average selling
      price, after hedging, of $411 for revenues of $9.8 million in 2005. The higher
      average selling price reflects the increase in the world price for gold and
      our
      sale of all production in the spot market. We incurred no hedging losses in
      2006
      as compared to a loss of $687 in 2005.





Mine
      operating costs for 2006 were $7.2 million compared to $6.6 million for 2005.
      The increase primarily reflects higher power rates, increased costs of chemicals
      and increases in engineering department labour and use of consultants. During
      2006 we continued our strategies aimed at lowering costs and concentrating
      production on the most productive areas of the leach pads. Mine site
      administration costs for 2006 were $1.6 million compared with $1.4 million
      in
      2005, reflecting additional staffing and relocation costs. Depreciation,
      amortization and accretion expense for 2006 was $1.4 million compared with
      $1.6
      million in 2005. The decrease reflects lower accretion expense associated with
      revisions to the reclamation plan at Mesquite. Costs associated with the change
      in metal-in-process inventories in 2006 were $0.4 million compared with $0.8
      million in 2005 as work in process inventories declined to 441 ounces at
      December 31, 2006 from 1,406 ounces at December 31, 2005. Since the acquisition
      of Mesquite in 2003, no value has been attributed to the gold ounces contained
      in ore on the heap leach pads. In the third quarter of 2006 we recorded a cost
      recovery of $1.5 million resulting from a reduction in the estimate of the
      net
      present value of reclamation costs at Mesquite. A re-evaluation of these costs
      was made on completion of the feasibility study in August 2006. The foregoing
      factors resulted in a gross loss of $1.6 million for 2006 compared with a gross
      loss of $0.8 million in 2005.




45




General
      and administrative expense increased to $4.3 million for 2006 from $1.7 million
      for 2005. We incurred significant costs early in the year associated with the
      proposed Romarco merger, severance costs and costs of transitioning to the
      new
      management team. We then incurred significant legal costs relating to several
      regulatory filings designed to facilitate the exchange of and trading in our
      common shares, warrants and options, and costs of obtaining a listing on The
      Toronto Stock Exchange. The higher costs for the year also reflect higher
      management salary costs, related recruiting costs and management travel costs
      as
      we completed the feasibility study and started to gear up for resumption of
      mining operations at Mesquite.




Stock
      based compensation represents the non-cash costs of options, as calculated
      under
      the Black-Scholes option pricing model, granted to directors, officers and
      employees. The increase in expense to $3.2 million in 2006 from $0.5 million
      in
      2005 relates to the high initial amortization of options granted to the new
      management team in February and June of 2006 and their ongoing amortization
      thereafter.





Under
      the
      terms of severance arrangements concluded with two of our former officers in
      October 2005, we were required to issue a certain number of our common shares
      upon completion of the Mesquite feasibility study. The completion of the study
      was announced on August 9, 2006 and we used the closing price of the stock
      on
      that date to calculate the liability to these former officers in the amount
      of
      $0.5 million.





Exploration
      activities, including head office and Mesquite activities, during 2006 were
      $1.2
      million and relate primarily to the completion of the mine feasibility study.
      Exploration activities in 2005 cost $0.2 million.





Other
      income (expense) for 2006 was $0.7 million compared to $0.1 million in 2005.
      The
      most significant item of cost occurred in February 2006, when we paid Romarco
      Minerals Inc. (“Romarco”) a termination fee of $1.0 million and expense
      reimbursement costs of $0.2 million on termination of a proposed merger
      agreement. The proceeds of the first tranche of $3.7 million of private
      placement units that closed on February 13, 2006 enabled us to repay the two
      loans outstanding at that time. Completion of the second tranche of $2.3 million
      on February 20, 2006 and subsequent receipts of cash on exercise of common
      stock
      options and warrants as 2006 progressed, resulted in our having cash on deposit
      for the rest of the year. Interest income for 2006 was $0.4 million compared
      with $0.2 million in 2005, and interest expense in 2006 was $nil compared with
      $0.3 million in 2005.





The
      net
      loss in 2005 was increased by the recognition of a conversion benefit arising
      to
      holders of our Series A Preferred stock and warrants in the amount of $1.7
      million. This has been accounted for as a deemed dividend and as additional
      paid-in capital. The conversion benefit was triggered by our granting to Romarco
      an option to purchase our common stock on August 25, 2005.





The
      above
      were the major factors in our reporting a net loss to common shareholders for
      2006 of $11.6 million or $0.18 per share, compared with a net loss of $5.1
      million or $0.13 per share in 2005. In 2005 other comprehensive income includes
      a gain of $0.7 million in respect of the mark-to-market of forward gold sales
      contracts. We had no comparable income or expense in 2006 since all gold sales
      were on a spot basis. Our net comprehensive loss in 2006 was $11.6 million
      compared with $2.7 million in 2005.




**Liquidity
      and Capital Resources**





Our
      August 2006 feasibility study and subsequent projections, indicated that we
      would need significant funding to sustain our operations and complete our
      capital program until we started to generate free cash flow, now expected in
      April, 2008. During 2007 we addressed these capital needs. In January 2007,
      we
      raised $59.2 million through a public offering of 33,330,000 common shares
      at a
      price of Cdn.$2.25 per share; in March 2007, we established a credit facility
      of
      $105.0 million; and in October 2007, we raised $33.4 million through a public
      offering of 11,316,000 common shares at a price of Cdn. $3.05 each.





46




At
      December 31, 2007 our available cash balance was $43.9 million, our restricted
      cash was $7.5 million, and our working capital was $46.2 million. In addition,
      we had unutilized credit facilities of $28.6 million of which $10.9 million
      is
      available for the Mesquite Expansion project and $17.7 million is available
      for
      general corporate purposes. On February 7, 2008 an additional $2.7 million
      was
      drawn under the credit facility, leaving $8.2 million available for the Mesquite
      Expansion and $17.7 for general corporate purposes. This represents a
      significant improvement in our financial position since December 31, 2006 when
      we reported cash of $5.5 million and working capital of $4.6 million.





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





In
      connection with the term loan facility, 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 will be covered by
      the
      Hedging Contracts, leaving approximately 100,000 ounces annually leveraged
      to
      the price of gold.





On
      June
      14, 2007 we announced that we had satisfied or had received a waiver on all
      conditions precedent to the availability of the term loan facility, and on
      July
      18, 2007 we received $20.4 million as the first advance. A further $56.1 million
      was received in four subsequent advances up to December 31, 2007.





During
      2007 our liquidity was also improved through the conversion of warrants and
      the
      exercise of stock options, for proceeds of $5.6 million.





Cash
      required for operating activities in 2007 was $28.6 million compared with $7.3
      million in 2006. The net loss for the year was $50.3 million but this included
      the non-cash impact of the $58.9 million mark-to-market loss on forward sales
      contract and the non-cash recovery of deferred income taxes. Other significant
      non-cash expense items were: depreciation and accretion expense of $4.3 million,
      amortization of deferred debt issuance costs of $0.3 million and stock-based
      compensation of $2.6 million. Changes in the composition of non-cash working
      capital items during 2007 required $6.9 million. A major component of this
      was
      the increase in inventories of $10.7 million relating primarily to the valuation
      for the first time of recoverable gold ounces contained in ore on the leach
      pads. This was partially offset by an increase in accounts payable and accrued
      expenses of $4.0 million reflecting the increased activity levels at the fully
      operational mine. In 2006, our net loss was $11.6 million. This cash requirement
      was reduced by non-cash depreciation and accretion of $1.4 million and
      stock-based compensation of $3.2 million. In addition, a reduction in cash
      for
      working capital items generated $0.5 million.





47




Cash
      required for investing activities in 2007 was $104.1 million compared with
      $3.4
      million in 2006. Major aspects of this spending are $72.2 million for shovels,
      haul trucks and other ancillary equipment under our mining fleet acquisition
      program, $13.1 million for leach pad expansion, $1.6 million for development
      drilling at the Brownie Hill zone and $2.1 million as an additional deposit
      to
      our reclamation and remediation account with AIG. In addition, available cash
      was reduced by a $7.5 million transfer to a Cost Overrun Account established
      under the term credit facility. This has been classified as restricted
      cash.





The
      foregoing factors resulted in an increase in our cash position of $38.4 million
      in 2007 compared with $5.5 million in 2006.





During
      the first quarter of 2008, our cash requirements to fund operations and the
      capital program will be funded by additional advances under the term loan
      facility and from our existing cash balances. We expect to be generating
      positive free cash flow in the second quarter of 2008. We therefore believe
      that
      we have adequate financial resources in place to finance the Mesquite expansion.




**Critical
      Accounting Policies**




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





*Derivative
      Instruments*





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





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.





48


*Depreciation
      and Amortization*




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




We
      have
      expensed all mine development costs prior to our establishing proven and
      probable reserves upon completion of the feasibility study in August 2006.
      In
      the event that we have deferred development costs in the future, these will
      be
      amortized on a units-of-production basis.




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




*Carrying
      Value of Long-Lived Assets*




We
      review
      and evaluate the carrying value of our long-lived assets for impairment when
      events or changes in circumstances indicate the carrying values may not be
      recoverable. Our long-lived assets comprise the fair values allocated to the
      plant and equipment acquired upon completion of the Mesquite acquisition and
      subsequent additions. Annually, we review the present value of future cash
      flows
      to determine if the amounts carried under plant and equipment are
      recoverable.




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





*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).





49





*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.




*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.




50


**Recent
      Accounting Pronouncements**





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





In
      March
      2006, the FASB issued Emerging Issues Task Force Issue No. 04-06 (“EITF 04-06”),
“Accounting for Stripping Costs Incurred during Production in the Mining
      Industry”. EITF 04-06 addresses the accounting for stripping costs incurred
      during the production phase of a mine and refers to these costs as variable
      production costs that should be included as a component of inventory to be
      recognized in costs applicable to sales in the same period as the revenue from
      the sale of inventory. As a result, capitalization of post-production stripping
      costs is appropriate only to the extent product inventory exists at the end
      of a
      reporting period. During the development stage of a mine, pre-production
      stripping costs are capitalized and typically are amortized over the productive
      life of the mine. The Company is following this guidance in its accounting
      for
      stripping costs associated with the expansion of the existing mine workings
      at
      Mesquite.





In
      September 2006, the 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. However, for some entities, application of the Statement will
      change current practice. The provisions of the Statement are effective for
      the
      Company’s fiscal year ending December 31, 2008. The Company is currently
      evaluating the impact of the adoption of SFAS No. 157 on the Company’s overall
      results of operations or financial position.





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




**Contractual
      Obligations**





The
      following table presents the contractual obligations outstanding as at December
      31, 2007:


**Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **2-
                  3**
                **Years**
              
              **4-
                  5**
                **Years**
              
              **More
                  than**
                **5
                  Years**Mesquite
                  expansion project
              
              $
              12,304
              
              $
              12,304
              
              $
              —
              
              $
              —
              
              $
              —Reclamation
                  and remediation obligations (1)
              
              
              11,888
              
              
              120
              
              
              520
              
              
              170
              
              
              11,078Share
                  of office lease
              
              
              2,739
              
              
              193
              
              
              537
              
              
              533
              
              
              1,476Total
              
              $
              26,931
              
              $
              12,617
              
              $
              1,057
              
              $
              703
              
              $
              12,554


(1)
      In
      current dollars (undiscounted).





51




**Off-Balance
      Sheet Arrangements**





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





**Outlook –
      2008**




As
      at
      December 31, 2007 all units of the mining fleet had been placed into service.
      Management’s primary focus is now on optimizing the effectiveness of the fleet,
      increasing ore production and completing the remaining aspects of the capital
      program, with a view to achieving gold production of 155,000 – 160,000
      ounces of gold in 2008. We anticipate cash flow from operations to be positive
      from the second quarter of 2008 onwards.





In
      addition to the mining fleet expenditures, our capital program includes $35.7
      million for plant and infrastructure upgrades and other expansion projects
      at
      Mesquite, of which approximately $26.3 million had been spent by December 31,
      2007. The major items in this program are the leach pad expansion, retrofit
      of
      the process plant, and construction of a truck repair shop, warehouse and mine
      operations administrative office. We expect to complete these projects early
      in
      the second quarter of 2008.





During
      2006 we started to build the management team for the re-activated operations
      at
      Mesquite. This process continued throughout 2007 and we have now have in place
      the management, supervisory and operating personnel for resumed mining
      operations at Mesquite Mine. We now have a full complement of
      approximately 194 e mployees
      at Mesquite, excluding outside contractors for our fleet maintenance function.





During
      2008, the Mesquite Mine will ramp up production as the operation continues
      with
      waste rock mining, exposing the ore zones and mining of the oxide reserves.
      Based on the mining schedule, the leaching curve and solution inventory,
      Mesquite is expected to produce between 10,000 - 13,000 ounces of gold in the
      first quarter at cost of sales exceeding $1,000 per ounce(1). Second
      quarter production will increase to between 40,000 - 50,000 ounces of gold
      at
      cost of sales less than $300 per ounce(1).




Forecasted
      cost of sales per ounce for the full year 2008 will rise to between $410 -
      $430,
      compared to previous estimates of $355 - $365(1). The increase to
      forecasted cost of sales per ounce is due to additional labour and fuel costs
      associated with adding a fourth crew of truck operators. The additional crew
      will ensure adequate waste removal to offset the effect of lower than modeled
      truck speeds for waste and ore hauls. The reduced speeds are a result of the
      type of tires currently available in the marketplace. The Company expects to
      procure better performing radial tires for 2009 which will result in increased
      truck speeds for its haul trucks, allowing Mesquite to return to originally
      anticipated production rates and cost of sales. Production for 2009 is forecast
      between 150,000 – 160,000 ounces of gold at a cost of sales of $360 - $370
      per ounce(1), in line with original forecasts.





Cost
      of
      sales for 2008 is also impacted by an increase in inventory adjustment compared
      to 2007. The Company’s year-end gold inventory in the leach pad was computed at
      net realizable value less the estimated cost to process and sell the gold
      ounces. The effect of the charge on 2008 cost of sales per ounce(1),
      which will diminish in the future as steady state production is achieved, is
      approximately $25 - $30.





(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.





52




**Controls
      and Procedures**




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




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




53


**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





**TABLE
                OF CONTENTS**




PageReport
                of Independent Registered Public Accounting Firm - PricewaterhouseCoopers
                LLC
            
            55Report
                of Independent Registered Public Accounting Firm – HJ &
                Associates, LLC
            
            56Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            57Consolidated
                Statements of Operations and Other Comprehensive Loss for the years
                ended
                December 31, 2007, 2006 and 2005
            
            58Consolidated
                Statements of Changes in Stockholders’ Equity (Deficit) for the years
                ended December 31, 2007 and 2006
            
            59Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            
            61Notes
                to Consolidated Financial Statements
            
            62




54




REPORT
      OF INDEPENDENT AUDITORS





To
      the
      Stockholders of Western Goldfields Inc.





We
      have
      audited the consolidated balance sheet of Western Goldfields Inc. (the Company)
      as at December 31, 2007 and the consolidated statement of operations and
      comprehensive loss, consolidated statement of stockholders’ equity and
      consolidated statement of cash flows for the year ended December 31, 2007.
      These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audit. The consolidated financial statements
      of the Company as of December 31, 2006 and for each of the years in the two
      year
      period ended December 31, 2006 were audited by other auditors whose report,
      dated February 27, 2007, expressed an unqualified opinion on those
      statements.





We
      conducted our audit in accordance with Canadian generally accepted auditing
      standards and the standards of the Public Company Accounting Oversight Board
      (United States). Those standards require that we plan and perform an audit
      to
      obtain reasonable assurance whether the financial statements are free of
      material misstatement. An audit includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements. An audit
      also includes assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audit provides a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements present fairly, in all material
      respects, the financial position of the Company as at December 31, 2007 and
      the
      results of its operations and its cash flows for the years ended December 31,
      2007 in accordance with United States generally accepted accounting
      principles.





**(signed)
      “PricewaterhouseCoopers LLP”**


Chartered
      Accountants, Licensed Public Accountants


Toronto,
      Ontario


Canada


March
      7,
      2008




55


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Stockholders of


Western
      Goldfields, Inc.


Toronto,
      Ontario, Canada





We
      have
      audited the accompanying consolidated balance sheet of Western Goldfields,
      Inc.
      at December 31, 2006, and the related consolidated statements of operations
      and
      other comprehensive loss, stockholders’ equity (deficit) and cash flows for the
      years ended December 31, 2006 and 2005. These consolidated financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Western
      Goldfields, Inc. at December 31, 2006, and the consolidated results of its
      operations and its cash flows for the years ended December 31, 2006 and 2005
      in
      conformity with United States generally accepted accounting
      principles.




**(Signed)
      “HJ & Associates, LLC”**


Salt
      Lake
      City, Utah


February
      24, 2007




56




**PART
        I – FINANCIAL INFORMATION**
 **Item
        1.**  **Financial
        Statements**
 
 **WESTERN
                  GOLDFIELDS INC.****CONSOLIDATED
                  BALANCE SHEETS****(In
                  U.S. dollars)**
 
 December 31,
              
              December 31,2007
              
              2006**ASSETS
                  (Note 13)**CURRENT
                  ASSETSCash
                  and cash equivalent
              
              $
              43,870,426
              
              $
              5,502,535Restricted
                  Cash (Note 4)
              
              
              7,500,000
              
              
              —Receivables
              
              
              298,036
              
              
              223,507Inventories
                  (Note 2, 5)
              
              
              11,200,789
              
              
              511,663Prepaid
                  expenses
              
              
              887,485
              
              
              841,636TOTAL
                  CURRENT ASSETS
              
              
              63,756,736
              
              
              7,079,341Property,
                  plant, and equipment, net of accumulated amortization (Note
                  6)
              
              
              77,951,155
              
              
              4,328,512Construction
                  in progress (Note 7)
              
              
              21,863,561
              
              
              2,880,775Investments
                  - reclamation and remediation (Note 8)
              
              
              8,660,584
              
              
              6,337,006Long-term
                  deposits
              
              
              347,543
              
              
              329,146Long-term
                  prepaid expenses (Note 9)
              
              
              1,554,941
              
              
              1,009,555Deferred
                  debt issuance costs (Note 10)
              
              
              3,227,410
              
              
              250,000Deferred
                  income tax assets (Note 2, 11)
              
              
              37,133,460
              
              
              —TOTAL
                  OTHER ASSETS
              
              
              150,738,654
              
              
              15,134,994**TOTAL
                  ASSETS**
              
              $
              214,495,390
              
              $
              22,214,335**LIABILITIES
                  & STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              5,318,738
              
              $
              1,694,245Accrued
                  expenses
              
              
              1,540,711
              
              
              835,740Accrued
                  payroll
              
              
              1,561,848
              
              
              —Current
                  portion of mark-to-market loss on gold hedging contracts (Note
                  2,
                  12)
              
              
              1,935,306
              
              
              —Accrued
                  interest
              
              
              359,698
              
              
              —Current
                  portion of loan payable
              
              
              6,881,612
              
              
              —TOTAL
                  CURRENT LIABILITIES
              
              
              17,597,913
              
              
              2,529,985LONG-TERM
                  LIABILITIESMark-to-market
                  loss on gold hedging contracts (Note 2, 12)
              
              
              56,965,940
              
              
              —Loan
                  payable (Note 13)
              
              
              69,580,745
              
              
              —Reclamation
                  and remediation liabilities (Note 14)
              
              
              5,061,143
              
              
              4,805,473TOTAL
                  LIABILITIES
              
              
              149,205,741
              
              
              7,335,458COMMITMENTS
                  AND CONTINGENCIES (Note 19)
              
              
              —
              
              
              —STOCKHOLDERS'
                  EQUITYCommon
                  stock, of no par value, unlimited shares authorized; 135,049,685
                  and
                  78,452,876 shares issued and outstanding, respectively (Note 15,
                  16)
              
              
              133,725,314
              
              
              32,884,798Stock
                  options and warrants (Note 17)
              
              
              7,551,031
              
              
              7,674,270Accumulated
                  deficit
              
              
              (75,986,696
              )
              
              (25,678,233
              )Accumulated
                  other comprehensive income
              
              
              —
              
              
              (1,958
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              65,289,649
              
              
              14,878,877**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              214,495,390
              
              $
              22,214,335


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




57




**WESTERN
        GOLDFIELDS INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **AND
        COMPREHENSIVE LOSS**
 **(In
        U.S. dollars)**
 
 Year
                  Ended December 31,2007
              
              2006
              
              2005REVENUESRevenues
                  from gold sales
              
              $
              4,665,890
              
              $
              7,859,214
              
              $
              9,798,150COST
                  OF GOODS SOLDMine
                  operating costs
              
              
              19,099,461
              
              
              9,265,699
              
              
              8,784,115Amortization
                  and accretion
              
              
              4,241,789
              
              
              1,352,034
              
              
              1,599,098Royalties
              
              
              192,116
              
              
              302,693
              
              
              774,065Reclamation
                  cost recovery
              
              
              (21,940
              )
              
              (1,459,859
              )
              
              (543,964
              )23,511,426
              
              
              9,460,567
              
              
              10,613,314GROSS
                  LOSS
              
              
              (18,845,536
              )
              
              (1,601,353
              )
              
              (815,164
              )EXPENSESGeneral
                  and administrative
              
              
              5,809,160
              
              
              4,261,067
              
              
              1,653,268Stock
                  based compensation
              
              
              2,561,050
              
              
              3,209,285
              
              
              518,316Severance
                  costs payable in common shares
              
              
              —
              
              
              547,200
              
              
              —Exploration
              
              
              794,770
              
              
              1,220,892
              
              
              220,7559,164,980
              
              
              9,238,444
              
              
              2,392,339OPERATING
                  LOSS
              
              
              (28,010,516
              )
              
              (10,839,797
              )
              
              (3,207,503
              )OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              1,975,588
              
              
              391,824
              
              
              173,479Interest
                  expense
              
              
              (1,101,931
              )
              
              (20,434
              )
              
              (348,959
              )Agency
                  and commitment fees
              
              
              (760,883
              )
              
              —
              
              
              —Amortization
                  of deferred debt issuance costs
              
              
              (342,402
              )
              
              —
              
              
              —Unrealized
                  loss on mark-to-market of gold forward sales contracts (Note
                  12)
              
              
              (58,901,246
              )
              
              —
              
              
              —Gain
                  on extinguishment of debt
              
              
              —
              
              
              142,949
              
              
              —Loss
                  on foreign currency exchange
              
              
              (342,973
              )
              
              (13,970
              )
              
              —Gain
                  (Loss) on sale of assets
              
              
              42,440
              
              
              (18,837
              )
              
              42,734Expenses
                  of Romarco merger termination
              
              
              —
              
              
              (1,225,000
              )
              
              —(59,431,407
              )
              
              (743,468
              )
              
              (132,746
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (87,441,923
              )
              
              (11,583,265
              )
              
              (3,340,249
              )INCOME
                  TAX RECOVERY
              
              
              37,133,460
              
              
              —
              
              
              —NET
                  LOSS
              
              
              (50,308,463
              )
              
              (11,583,265
              )
              
              (3,340,249
              )PREFERRED
                  STOCK DIVIDENDS
              
              
              —
              
              
              (16,979
              )
              
              (1,734,375
              )NET
                  LOSS TO COMMON STOCKHOLDERS
              
              
              (50,308,463
              )
              
              (11,600,244
              )
              
              (5,074,624
              )OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              —
              
              
              (1,958
              )
              
              —Change
                  in market value of securities
              
              
              —
              
              
              —
              
              
              8,600Forward
                  sales derivative mark-to-market
              
              
              —
              
              
              —
              
              
              678,867NET
                  COMPREHENSIVE LOSS
              
              $
              (50,308,463
              )
              $
              (11,585,223
              )
              $
              (2,652,782
              )BASIC
                  AND DILUTED NET LOSS PER SHARE
              
              $
              (0.43
              )
              $
              (0.18
              )
              $
              (0.13
              )WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              116,903,752
              
              
              63,664,614
              
              
              38,942,158




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




58




**WESTERN
        GOLDFIELDS INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **(In
        U.S. dollars)**
 (Years
        ended December 31, 2007, 2006 and 2005)


Preferred Stock
              
              Common Stock
              
              Stock Options
              
              
              
              Accumulated OtherNumber
              
              
              
              Number
              
              
              
              and
              
              Accumulated
              
              Comprehensiveof Shares
              
              Amount
              
              of Shares
              
              Amount
              
              Warrants
              
              Deficit
              
              Income (Loss)
              
              TotalBalance,
                  December 31, 2004
              
              
              1,000,000
              
              $
              10,000
              
              
              38,721,810
              
              $
              387,218
              
              $
              4,779,018
              
              $
              (9,003,365
              )
              $
              (687,467
              )
              $
              5,851,709Options
                  issued for directors' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              173,658
              
              
              —
              
              
              —
              
              
              173,658Options
                  issued for officers' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              281,920
              
              
              —
              
              
              —
              
              
              281,920Options
                  issued for services by employees
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              58,953
              
              
              —
              
              
              —
              
              
              58,953Options
                  issued for services by consultants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,784
              
              
              —
              
              
              —
              
              
              3,784Common
                  stock issued for services
              
              
              —
              
              
              —
              
              
              746,241
              
              
              7,463
              
              
              —
              
              
              —
              
              
              —
              
              
              166,461Expiration
                  of warrants & options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (28,049
              )
              
              —
              
              
              —
              
              
              —Extension
                  of warrants due to expire
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              39,204
              
              
              —
              
              
              —
              
              
              39,204Surrendered
                  warrants - Newmont
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (366,300
              )
              
              —
              
              
              —
              
              
              —Net
                  loss for the year ended
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,340,249
              )
              
              —
              
              
              (3,340,249
              )December
                  31, 2005Deemed
                  and accrued dividends on preferred stock
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,734,375
              )
              
              —
              
              
              (34,375
              )Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              687,467
              
              
              687,467Balance,
                  December 31, 2005
              
              
              1,000,000
              
              $
              10,000
              
              
              39,468,051
              
              $
              13,014,333
              
              $
              4,942,188
              
              $
              (14,077,989
              )
              $
              —
              
              $
              3,888,532




(Continued
      on next page)




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




59




**WESTERN
                  GOLDFIELDS INC.****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' EQUITY (continued)****(In
                  U.S. dollars)**(Years
                  ended December 31, 2007, 2006 and 2005)
  Preferred Stock
              
              Common Stock
              
              Stock Options
              
              
              
              Accumulated OtherNumber
              
              
              
              Number
              
              
              
              and
              
              Accumulated
              
              Comprehensiveof Shares
              
              Amount
              
              of Shares
              
              Amount
              
              Warrants
              
              Deficit
              
              Income (Loss)
              
              TotalBalance,
                  December 31, 2005
              
              
              1,000,000
              
              $
              10,000
              
              
              39,468,051
              
              $
              13,014,333
              
              $
              4,942,188
              
              $
              (14,077,989
              )
              $
              —
              
              $
              3,888,532Common
                  stock  and warrants issued by way of private
                  placement
              
              
              —
              
              
              —
              
              
              20,000,000
              
              
              4,012,000
              
              
              1,988,000
              
              
              —
              
              
              —
              
              
              6,000,000Common
                  shares issued on conversion of  series A preferred stock
                  (Note15)
              
              
              (1,000,000
              )
              
              (10,000
              )
              
              3,125,000
              
              
              25,000
              
              
              (15,000
              )
              
              —
              
              
              —
              
              
              —Common
                  shares issued on conversion of  series A preferred stock
                  warrants
              
              
              —
              
              
              —
              
              
              1,562,500
              
              
              300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              300,000Common
                  shares issued on conversion of common stock warrants
              
              
              —
              
              
              —
              
              
              12,647,325
              
              
              11,533,811
              
              
              —
              
              
              —
              
              
              —
              
              
              11,533,811Common
                  shares issued on exersice of common stock options
              
              
              —
              
              
              —
              
              
              1,135,000
              
              
              632,750
              
              
              —
              
              
              —
              
              
              —
              
              
              632,750Common
                  shares issued for exploration assets and services and severance
                  agreements
              
              
              —
              
              
              —
              
              
              515,000
              
              
              683,700
              
              
              —
              
              
              —
              
              
              —
              
              
              683,700Options
                  issued for directors' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,032,488
              
              
              —
              
              
              —
              
              
              1,032,488Options
                  issued for officers' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,764,945
              
              
              —
              
              
              —
              
              
              1,764,945Options
                  issued for employees' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              411,853
              
              
              —
              
              
              —
              
              
              411,853Warrants
                  issued for consultants' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              233,000
              
              
              —
              
              
              —
              
              
              233,000Exercise
                  and expiration of warrants & options
              
              
              —
              
              
              —
              
              
              —
              
              
              2,683,204
              
              
              (2,683,204
              )
              
              —
              
              
              —
              
              
              —Net
                  loss for the twelve months ended December 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (11,583,265
              )
              
              —
              
              
              (11,583,265
              )Dividend
                  on preferred stock (Note 14)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (16,979
              )
              
              —
              
              
              (16,979
              )Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,958
              )
              
              (1,958
              )Balance,
                  December 31, 2006
              
              
              —
              
              
              —
              
              
              78,452,876
              
              
              32,884,798
              
              
              7,674,270
              
              
              (25,678,233
              )
              
              (1,958
              )
              
              14,878,877Common
                  stock and warrants issued under prospectus supplement
              
              
              —
              
              
              —
              
              
              44,646,000
              
              
              92,607,665
              
              
              —
              
              
              —
              
              
              —
              
              
              92,607,665Common
                  shares issued on conversion of common stock warrants
              
              
              —
              
              
              —
              
              
              10,248,052
              
              
              4,508,053
              
              
              —
              
              
              —
              
              
              —
              
              
              4,508,053Common
                  shares issued on exersice of common stock options
              
              
              —
              
              
              —
              
              
              1,702,757
              
              
              1,040,509
              
              
              —
              
              
              —
              
              
              —
              
              
              1,040,509Options
                  issued for directors' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              481,423
              
              
              —
              
              
              —
              
              
              481,423Options
                  issued for officers' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              998,107
              
              
              —
              
              
              —
              
              
              998,107Options
                  issued for employees' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,027,488
              
              
              —
              
              
              —
              
              
              1,027,488Options
                  issued for consultants' services
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              54,032
              
              
              
              
              
              —
              
              
              54,032Exercise
                  and expiration of warrants & options
              
              
              —
              
              
              —
              
              
              —
              
              
              2,684,289
              
              
              (2,684,289
              )
              
              —
              
              
              —
              
              
              —Net
                  loss for the year ended December 31, 2007
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (50,308,463
              )
              
              —
              
              
              (50,308,463
              )Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,958
              
              
              1,958Balance,
                  December 31, 2007
              
              
              —
              
              $
              —
              
              
              135,049,685
              
              $
              133,725,314
              
              $
              7,551,031
              
              $
              (75,986,696
              )
              $
              —
              
              $
              65,289,649


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




60
 
  **WESTERN
        GOLDFIELDS INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(In
        U.S. dollars)**
 
 Year
                  Ended December 31,2007
              
              2006
              
              2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (50,308,463
              )
              $
              (11,583,265
              )
              $
              (3,340,249
              )Adjustments
                  to reconcile net loss to net cash provided (used) by operating
                  activities:Items
                  not affecting cash:Amortization
              
              
              3,925,395
              
              
              1,087,517
              
              
              1,021,909Amortization
                  of deferred debt issuance costs
              
              
              342,402
              
              
              —
              
              
              208,501Accretion
                  expense (Note 14)
              
              
              337,176
              
              
              269,574
              
              
              381,540Deferred
                  income taxes
              
              
              (37,133,460
              )
              
              —
              
              
              —Reclamation
                  cost recovery
              
              
              (21,940
              )
              
              (1,459,860
              )
              
              (543,964
              )Reclamation
                  costs incurred
              
              
              (148,416
              )
              
              (200,811
              )
              
              —Gain
                  on sale of assets and investments
              
              
              (42,440
              )
              
              18,836
              
              
              (42,734
              )Interest
                  net of reimbursed costs - reclamation and remediation
              
              
              (233,484
              )
              
              (88,786
              )
              
              (158,648
              )Common
                  stock issued for exploration assets and services
              
              
              —
              
              
              136,500
              
              
              166,462Common
                  stock issued in respect of severance agreements
              
              
              —
              
              
              547,200
              
              
              —Stock
                  based compensation
              
              
              2,561,050
              
              
              3,209,285
              
              
              518,315Mark-to-market
                  loss on gold hedging contracts
              
              
              58,901,246
              
              
              —
              
              
              —Warrants
                  issued for services of consultant
              
              
              —
              
              
              233,000
              
              
              —Cost
                  of extending expiry date of warrants
              
              
              —
              
              
              —
              
              
              39,204Changes
                  in assets and liabilities:Decrease
                  (increase) in:Accounts
                  receivable
              
              
              (74,529
              )
              
              (213,327
              )
              
              2,777Inventories
              
              
              (10,689,126
              )
              
              393,684
              
              
              668,902Prepaid
                  expenses and deposits
              
              
              (609,632
              )
              
              (391,484
              )
              
              241,824Increase
                  (decrease) in:Accounts
                  payable
              
              
              2,155,809
              
              
              885,280
              
              
              147,922Accrued
                  expenses
              
              
              2,101,164
              
              
              (110,166
              )
              
              (45,548
              )Accrued
                  interest expense
              
              
              359,698
              
              
              (48,695
              )
              
              8,695Net
                  cash provided (used) by operating activities
              
              
              (28,577,550
              )
              
              (7,315,518
              )
              
              (725,092
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of property & equipment, including construction in
                  progress
              
              
              (94,610,737
              )
              
              (3,444,353
              )
              
              (10,853
              )Increase
                  in reclamation and remediation investment
              
              
              (2,090,094
              )
              
              —
              
              
              —Proceeds
                  from sale of investments
              
              
              —
              
              
              —
              
              
              47,734Purchase
                  of assets
              
              
              —
              
              
              —
              
              
              (24,366
              )Proceeds
                  from sale of assets
              
              
              97,500
              
              
              —
              
              
              25,000Restricted
                  cash
              
              
              (7,500,000
              )
              
              —
              
              
              —Net
                  cash provided (used) by investing activities
              
              
              (104,103,331
              )
              
              (3,444,353
              )
              
              37,515**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from loan payable - Romarco
              
              
              —
              
              
              —
              
              
              705,186Term
                  loan advances (repayments)
              
              
              76,462,357
              
              
              (2,205,186
              )
              
              (1,500,000
              )Deferred
                  debt issuance costs
              
              
              (3,569,812
              )
              
              —
              
              
              —Common
                  stock issued for cash
              
              
              92,607,665
              
              
              4,012,000
              
              
              —Warrants
                  issued for cash
              
              
              —
              
              
              1,988,000
              
              
              —Exercise
                  of options to purchase common stock
              
              
              1,040,509
              
              
              632,750
              
              
              —Exercise
                  of warrants to purchase common stock
              
              
              4,508,053
              
              
              11,833,809
              
              
              —Preferred
                  stock dividends
              
              
              —
              
              
              (51,354
              )
              
              —Net
                  cash provided (used) by financing activities
              
              
              171,048,772
              
              
              16,210,019
              
              
              (794,815
              )Change
                  in cash
              
              
              38,367,891
              
              
              5,450,148
              
              
              (1,482,392
              )Cash,
                  beginning of period
              
              
              5,502,535
              
              
              52,387
              
              
              1,534,778Cash,
                  end of period
              
              $
              43,870,426
              
              $
              5,502,535
              
              $
              52,387**SUPPLEMENTAL
                  CASH FLOW DISCLOSURES:**Interest
                  paid (received), net
              
              $
              (873,657
              )
              $
              69,130
              
              $
              162,419**NON-CASH
                  FINANCING AND INVESTING ACTIVITIES:**Stock,
                  options and warrants issued for services
              
              $
              2,575,417
              
              $
              4,125,985
              
              $
              684,777Equipment
                  purchases included in accounts payable
              
              $
              1,886,297
              
              $
              —
              
              $
              —Preferred
                  stock dividends
              
              $
              —
              
              $
              16,979
              
              $
              34,375Preferred
                  stock deemed dividends
              
              $
              —
              
              $
              —
              
              $
              1,700,000





The
        accompanying notes are an integral part of these consolidated financial
        statements.
  61


**WESTERN
      GOLDFIELDS, INC.**


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





**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, $87,300,000 is available until Completion of
      the
      project and $17,700,000 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.





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





In
      October, 2007 the Company completed a common share equity financing, including
      an underwriters’ over-allotment option, for general corporate purposes which
      provided the Company with net proceeds of approximately $33,400,000.





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
      December 31, 2007 and its results of operations and its cash flows for the
      year
      ended December 31, 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.




62




This
      summary of significant accounting policies is presented to assist in
      understanding the consolidated financial statements. These accounting policies
      conform to accounting principles generally accepted in the United States of
      America (“U.S. GAAP”) and have been consistently applied in the preparation of
      the consolidated financial statements.





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.





Accounts
      Receivable





The
      Company records its trade accounts receivable at cost less an allowance for
      doubtful accounts. On a periodic basis, the Company evaluates its accounts
      receivable and establishes an allowance for doubtful accounts based on a history
      of past write-offs and collections and current credit conditions.





The
      Company’s trade receivables are related to precious metals delivered against a
      forward sales contract or a spot sale contract whose settlement has not
      occurred. Settlement usually occurs in between two and fifteen business days
      and
      is made through international metals refiners and brokers. The Company had
      no
      trade receivables outstanding at December 31, 2007 and 2006.





Basic
      and Diluted Net Loss Per Share





Net
      loss
      per share was computed by dividing the net loss by the weighted average number
      of shares outstanding during the period. The weighted average number of shares
      was calculated by taking the number of shares outstanding and weighting them
      by
      the amount of time that they were outstanding. Basic and diluted net loss per
      share were the same, as the common stock equivalents outstanding would be
      considered anti-dilutive.




As
      at
      December 31, 2007, the Company had 135,049,685 shares of common stock, 6,806,180
      warrants and 13,301,618 options outstanding. As at December 31, 2006, the
      Company had 78,452,876 shares of common stock, 17,054,231 warrants and
      13,661,250 options outstanding.





Cash
      and Cash Equivalents





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.





Deposits





Under
      the
      terms of its agreement with the local electrical power utility, the Company
      is
      required to collateralize certain portions of its obligations and has assigned
      a
      $300,000 certificate of deposit for a period of three years. The timing of
      the
      release of this collateral is dependent on the credit worthiness of the Company
      and/or the timing and closure of the Mesquite mine. Collateral could also be
      released to the extent that the Company is able to secure alternative financial
      assurance satisfactory to the respective agency. Management expects that the
      collateral will remain in place beyond a twelve-month period and has therefore
      classified these deposits as long-term.




63




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 would
      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 would be accounted for as a
      charge to current operations.





The
      Company has not designated its gold forward sales contracts entered into in
      2007
      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 and the cumulative
      effect is reflected as an asset or liability on the balance sheet.





Exploration
      and Development Costs





In
      accordance with U.S GAAP, the Company expenses exploration costs as incurred.
      The Company capitalizes development costs in respect of projects that meet
      the
      definition of an asset after mineralization is classified as proven and probable
      reserves (as defined by Industry Guide 7). Upon the completion of the
      feasibility study in respect of the Mesquite Mine in August 2006 and the
      determination of proven and probable reserves, the Company now capitalizes
      development costs for that mineral property. Such development costs are
      amortized on a straight line basis over the expected life of the mineral
      property.





Fair
      Value of Financial Instruments





The
      Company's financial instruments as defined by SFAS No. 107, “Disclosures about
      Fair Value of Financial Instruments,” include cash, restricted cash, accounts
      and loans receivable, prepaid expenses, accounts payable, accrued expenses
      and
      short-term borrowings. All instruments are accounted for on a historical cost
      basis, which, due to the short maturity of these financial instruments,
      approximates fair value at December 31, 2007 and December 31, 2006.





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. Any adjustment to net realizable value
      is
      reflected in the income statement as a component of mine operating costs. 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).





64




*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.
      Metal-in-process inventories are valued at the lower of average cost or net
      realizable value and any adjustment to net realizable value is reflected in
      the
      income statement as a component of mine operating costs.





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.





*Bullion*




Bullion
      (metal refined to industry purity standards) inventory, which includes metal
      held on our behalf by third parties, is valued at the lower of average
      production cost or net realizable value.





*Materials
      and Supplies*




Materials
      and supplies inventory is stated at the lower of average cost or net realizable
      value.





Other
      Comprehensive (Loss)





The
      Company reports other comprehensive income according to SFAS No. 130, “Reporting
      Comprehensive Income”. SFAS No. 130 requires unrealized gains and losses on the
      Company's available-for-sale securities, to be included as a separate component
      of stockholders’ equity as other comprehensive income. In addition, gains and
      losses arising from the conversion to U.S. dollars of subsidiary company
      financial statements denominated in foreign currency, and gains and losses
      arising from the mark-to-market of forward sales derivative contracts which
      are
      accounted for as hedges, are required under SFAS No.130 to be reported as other
      comprehensive income as a separate component of stockholders’ equity. No such
      amounts have been recorded during 2007.





Property,
      Plant and Equipment





The
      Company evaluates the recoverability of property and equipment when events
      and
      circumstances indicate that such assets might be impaired. The Company
      determines impairment by comparing the present value of future cash flows
      estimated to be generated by these assets to their respective carrying amounts.
      Maintenance and repairs are expensed as incurred. Replacements and betterments
      are capitalized. The cost and related reserves of assets sold or retired are
      removed from the accounts, and any resulting gain or loss is reflected in
      results of operations.




Property,
      plant and equipment is stated at cost less accumulated depreciation.
      Depreciation of mobile mining equipment and other equipment is calculated using
      the straight-line method over the estimated useful lives of the assets, which
      range from three to twelve years. Depreciation of mine development costs,
      processing plant, mine structures and infrastructure is calculated on a units
      of
      production basis over the estimated life of the ore body based on estimated
      proven and probable reserves. (See Note 6)




65


Provision
      for 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 income 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.





Reclamation
      and Remediation Costs and Liabilities





Costs
      associated with reclamation and remediation of assets that are incremental
      to
      the assets identified in the Company’s closure plan of August 2006 for the
      Mesquite Mine, are accounted for as an asset retirement cost and are included
      in
      long-lived assets as a component of property, plant and equipment. These costs
      are also reflected as an increase in the asset retirement obligation. Asset
      retirement costs are amortized on a straight line basis over the expected life
      of the related assets.





The
      Company’s asset retirement obligation is based on the net present value of the
      estimated future costs of complying with legal and regulatory requirements
      pertaining to reclamation and remediation of the Mesquite Mine. Such costs
      include material changes in the life-of mine plan and other changes in estimates
      resulting from the passage of time and revisions to the estimates of the timing
      or amount of reclamation and remediation costs. The increase in the net present
      value of the asset retirement obligation arising through passage of time is
      charged to earnings as accretion expense.





Revenue
      Recognition





Revenue
      is recognized when metal is delivered and title passes. During 2007, the Company
      entered into forward sales contracts for the sale of 429,000 ounces of gold
      at
      $801 per ounce commencing July 2008 with the last commitment deliverable
      December 2014. There were no forward sales contracts entered into during 2006.
      Third party smelting and refining costs are recorded as a cost of sales and
      silver by-product credits serve to reduce cost of sales as generated.





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.





Stripping
      Costs Incurred During Production





The
      Company accounts for stripping costs during production in accordance with the
      FASB Emerging Issues Task Force Issue No. 04-06 (“EITF 04-06”), “Accounting for
      Stripping Costs Incurred during Production in the Mining Industry”. EITF 04-06
      addresses the accounting for stripping costs incurred during the production
      phase of a mine and refers to these costs as variable production costs that
      should be included as a component of inventory to be recognized in costs
      applicable to sales in the same period as the revenue from the sale of
      inventory. As a result, capitalization of post-production stripping costs is
      appropriate only to the extent product inventory exists at the end of a
      reporting period. During the development stage of a mine, pre-production
      stripping costs are capitalized and typically are amortized over the productive
      life of the mine. The Company is following this guidance in its accounting
      for
      stripping costs associated with the expansion of the existing mine workings
      at
      Mesquite.




66




Gross
      Revenues





Gross
      revenue for the years ended December 30, 2007, 2006 and 2005 include sales
      to
      the following major customers:




**December 30,**
              **2007**
            
            **December 31,**
              **2006**
            
            **December 31,**
              **2005**Customer
                A
            
            $
            4,665,890
            
            $
            6,946,574
            
            $
            3,911,655Customer
                B
            
            
            —
            
            
            912,640
            
            
            501,350Customer
                C
            
            
            —
            
            
            —
            
            
            1,510,030Customer
                D
            
            
            —
            
            
            —
            
            
            3,875,114$
            4,665,890
            
            $
            7,859,214
            
            $
            9,798,149





**3.**  **RECENT
      ACCOUNTING PRONOUNCEMENTS**





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





In
      September 2006, the 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. However, for some entities, application of the Statement will
      change current practice. 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.
      The Company has evaluated the impact of the adoption of SFAS No. 157 on its
      overall results of operations or financial position and has concluded that
      the
      impact will not be material.





In
      September 2006, the FASB issued Staff Position No. AUG AIR - 1 – Accounting for
      Planned Major Maintenance Activities which amends guidance for the AICPA
      Industry Audit Guide, Audits of Airlines with respect to planned major
      maintenance activities and makes this guidance applicable to entities in all
      industries. The FSP prohibits the use of the accrue-in-advance method of
      accounting for planned major maintenance activities in annual and interim
      financial reporting periods and requires entities to apply the same method
      of
      accounting for planned major maintenance activities in annual and interim
      financial reporting periods. We adopted FSP AIR – 1 on January 1, 2007. The
      implementation of this standard did not have any impact on our financial
      statements. In view of the recent acquisition of its mining fleet and the
      warranty provisions relating to this equipment, the Company’s routine repair and
      maintenance activities are expensed as incurred. In the future, the Company
      will
      capitalize major rebuilds of equipment and amortize the costs over the extended
      useful life of the equipment, and will evaluate the applicability of this Staff
      Position to the circumstances.





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an amendment of FASB Statement No.115”. The Statement permits entities
      to choose to measure many financial instruments and certain other items at
      fair
      value. The objective is to improve financial reporting by providing entities
      with the opportunity to mitigate volatility in reporting earnings caused by
      measuring related assets and liabilities differently without having to apply
      complex hedge accounting provisions. The Statement is expected to expand the
      use
      of fair value measurement and is effective as of the start of the Company’s
      first fiscal year that commences after November 15, 2007. The Company has
      evaluated the impact of adoption of SFAS No.159 on its overall results of
      operations or financial position and has concluded that the impact will not
      be
      material.


67





In
      December 2007, the FASB issued FAS 141(R), “Business Combinations”, which will
      replace FS 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.





**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 $7,500,000 in a Cost Overrun
      Account until Completion of the Mesquite Mine development project, which occurs
      on satisfaction of physical and economic completion tests as set out in the
      credit agreement. At Completion, unused funds will be applied to fund a Debt
      Service Reserve Account, established to hold an amount equal to the debt service
      amounts payable on the next Repayment Date as set out in the credit agreement,
      and thereafter any surplus funds may be returned to the Company. Interest earned
      on restricted cash is for the account of the Company.




**5.** **INVENTORIES**





Inventories
      consist of the following:





**December 31,**
              **2007**
            
            **December 31,**
              **2006**Ore
                on leach pads
            
            $
            7,724,311
            
            $
            —Metal-in-process
            
            
            846,571
            
            
            270,645Bullion
            
            
            994,351
            
            
            —Supplies
            
            
            1,635,556
            
            
            241,018Total
                inventories
            
            $
            11,200,789
            
            $
            511,663





68





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





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





**December 31,**
              **2007**
            
            **December 31,**
              **2006**Buildings
            
            $
            4,213,961
            
            $
            3,550,000Equipment
            
            
            77,317,208
            
            
            4,020,491Mine
                development
            
            
            3,517,418
            
            
            —85,048,587
            
            
            7,570,491Less
                accumulated amortization and depreciation
            
            
            (7,097,432
            )
            
            (3,241,979
            )Net
                Property and Equipment
            
            $
            77,951,155
            
            $
            4,328,512





Capitalized
      interest expense of $503,065 has been recorded in 2007 (2006 – $0), based on the
      interest attributable to borrowings incurred to finance the construction of
      assets intended for the Company’s own use. Capitalization of interest ceases
      when an asset is ready for its intended use.





Mine
      development as at December 31, 2007 includes $1,365,074 in respect of fauna
      relocation costs and $1,923,202 in respect of capitalized development drilling
      costs





Amortization
      and depreciation expense for the year ended December 31, 2007 and 2006 was
      $3,925,395 and $1,087,516 respectively. Depreciation of mobile mining equipment
      and other equipment is calculated using the straight-line method over the
      estimated useful lives of the assets, which range from three to twelve years.
      The great majority of assets acquired under the expansion program are
      depreciated over 12 years. Depreciation of mine development costs, processing
      plant, mine structures and infrastructure is calculated on a units of production
      basis over the estimated life of the ore body based on estimated proven and
      probable reserves.





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





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





**December 31,**
              **2007**
            
            **December 31,**
              **2006**Mining
                fleet and ancillary equipment
            
            $
            —
            
            $
            327,359Leach
                pad expansion
            
            
            12,836,740
            
            
            —Building
                construction and site infrastructure
            
            
            9,026,821
            
            
            2,237,614Development
                drilling
            
            
            —
            
            
            315,802$
            21,863,561
            
            $
            2,880,775





Construction
      in process is accumulated and carried forward at cost until completion of
      construction or until the equipment is placed into service, at which time the
      cost is transferred to property, plant and equipment and is amortized over
      the
      asset’s expected useful life.





Development
      drilling represents drilling costs at Mesquite Mine that have been determined
      will add to previously established proven and probable reserves. On completion
      of the drilling program, the cost is transferred to mine development costs
      in
      property, plant and equipment and is amortized on a units-of-production basis.





69





**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 $5,998,994 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 reserve 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
      $8,700,000 to approximately $11,300,000 and the Company was required to place
      an
      additional $2,090,094 in the reimbursement account with AIG. In addition,
      changes were made to the insurance program as described in note 10.





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
      $349,330 were reimbursed by AIG.





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




**December 31,**
              **2007**
            
            **December 31,**
              **2006**Original
                deposit to reimbursement account
            
            $
            5,998,994
            
            $
            5,998,994Additional
                deposit to reimbursement account
            
            
            2,090,094
            
            
            —Interest
                earned from inception
            
            
            920,826
            
            
            538,8179,009,914
            
            
            6,537,811Reclamation
                costs reimbursed
            
            
            (349,330
            )
            
            (200,805
            )Closing
                balance
            
            $
            8,660,584
            
            $
            6,337,006





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





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




70


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




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





The
      insurance program covers closure and reclamation risk in excess of the amount
      on
      deposit in the Investment - Remediation and Reclamation account ($8,660,584
      at
      December 31, 2007), to an aggregate limit of $17,500,000 (2006 - $14,000,000),
      and expires November 7, 2020. The program limit and term were increased from
      $14,000,000 and November 7, 2014 respectively, effective May 30,
      2007.





The
      program also covers pollution and remediation risk up to $10,000,000 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 program limit was increased from $5,000,000 effective May
      31,
      2007.





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





**December 31,**
                  **2007**
            
            **December 31,**
                  **2006**Original
                Policy Premiums
            
            $
            1,642,621
            
            $
            1,642,621Additional
                Policy Premium
            
            
            724,163
            
            
            —Amortization
                to date
            
            
            (640,865
            )
            
            (481,417
            )Unamortized
                Premium Cost
            
            
            1,725,919
            
            
            1,161,204Current
                Portion
            
            
            (170,978
            )
            
            (151,649
            )Long-Term
                Prepaid Expenses
            
            $
            1,554,941
            
            $
            1,009,555





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





Debt
      issuance costs, primarily bank fees and professional fees and expenses
      associated with the term loan facility (note 13) incurred to December 31, 2007
      were $3,569,812 (2006 - $250,000). These costs are being amortized on a straight
      line basis over the term of the facility to December 31, 2014. Amortization
      for
      the year ended December 31, 2007 was $342,402 (2006 - $0).





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





**Income
      Taxes**





**December 31,**
              **2007**
            
            **December 31,**
              **2006**Current
            
            $
            —
            
            $
            —Deferred
            
            
            (37,133,460
            )
            
            —Provision
                for (recovery of) income taxes
            
            $
            (37,133,460
            )
            $
            —




71




The
      Company’s effective income tax rate on earnings (loss) has been determined as
      follows:





**December 31,**
              **2007**
            
            **December 31,**
              **2006**United
                States federal statutory income tax rate****
            
            
            35.0
            %
            
            35.0
            %Increase
                (decrease) by the effects of:State
                tax
            
            
            4.0
            %
            
            4.0
            %Change
                in valuation allowance
            
            
            2.3
            %
            
            -39
            %Effective
                tax rate
            
            
            41.3
            %
            
            0.0
            %Loss
                before income taxes
            
            
            (89,843,761
            )
            
            (11,283,265
            )Provision
              for (recovery of) income taxes
            
            
            (37,133,460
            )
            
            —





**Deferred
      Taxes**





The
      significant components of the deferred tax asset at December 31, 2007 and 2006
      are as follows:





**December 31,**
              **2007**
            
            **December 31,**
              **2006****Current
                deferred tax assets**
            
            $
            —
            
            $
            —**Long-term
                deferred tax assets**Unrealized
                loss on mark-to-market of
              gold
                forward sales contracts
            
            
            22,971,486
            
            
            —Net
                operating losses
            
            
            19,131,196
            
            
            5,989,676Mining
                property
            
            
            1,265,351
            
            
            —Reclamation
                cost
            
            
            1,947,751
            
            
            —Exploration
                cost
            
            
            452,805
            
            
            —Stock-based
                compensation
            
            
            1,335,920
            
            
            —Fixed
                assets
            
            
            —
            
            
            738,725Total
                long-term deferred tax assets
            
            
            47,104,509
            
            
            6,728,401**Long-term
                deferred tax liabilities**Fixed
                assets
            
            
            (2,370,624
            )
            
            —**Total
                long-term deferred tax liabilities**
            
            
            (2,370,624
            )
            
            —**Net
                long-term deferred tax asset**
            
            
            44,733,885
            
            
            6,728,401**Valuation
                allowance**
            
            
            (7,600,425
            )
            
            (6,728,401
            )**Net
                deferred tax assets**
            
            $
            37,133,460
            
            $
            —





At
      December 31, 2007, the Company had income tax loss carry-forwards of
      approximately $49.9 million. These losses expire in 2022 to 2027. 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 $19.1 million less a valuation allowance of $5.9 million
      resulting in a net loss of $13.2 million has been recognized in the consolidated
      financial statements with respect to income tax loss
      carry-forwards.




72




**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, 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 December 31, 2007. The cumulative
      unrealized loss of $58,901,246 has been disclosed as a liability as at December
      31, 2007 and the Company has recorded an unrealized loss of $58,901,246 during
      2007.





**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 is for a term of 7.75 years until December 31, 2014 and
      comprises a multiple-draw term loan of which $87,300,000 will be available
      as
      required for the development of the Mesquite Mine; the remainder will be
      available for up to 12 months after completion for corporate purposes.  The
      facility is secured by all of the assets of WMMI and a pledge of the shares
      of
      WMMI owned by the Company. In addition, until Completion, the facility 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 December 31, 2007, WMMI had drawn $76,462,357 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 December 31, 2007, the initial repayment on December 31,
      2008 would be $6,881,612, or 9% of the loan.  In addition to the scheduled
      repayments, mandatory prepayments are required semi-annually based on excess
      cash flow from the Mesquite Mine.




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





**Romarco
      Minerals Inc.**





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




73


**Project
      Financing**





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





**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 at December 31, 2007 and is in conformity with SFAS No.
      143. The increase in the net present value of the liability is recognized for
      accounting purposes as accretion expense during the period under
      review.





The
      feasibility study completed in August 2006 increased the mineral reserves for
      the Mesquite Mine. As a result, the Company completed a review of the
      reclamation plan and the reclamation and remediation liability as at September
      1, 2006. The net present value of these obligations was revised to $4,893,690.
      The difference between this revised estimate and the accreted value up to August
      31, 2006, was accounted for as a recovery of $1,459,859. In May 2007, the
      company announced a further increase in the mineral reserves. The net effect
      of
      the May increase is reflected in an increase of $66,910 in the Company’s
      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 years ended December 31, 2007 and
      2006:





**December
                31,**
              **2007**
            
            **December
                31,**
              **2006**Opening
                Balance
            
            $
            4,805,473
            
            $
            6,196,570Accretion
            
            
            337,176
            
            
            269,568Reclamation
                costs incurred
            
            
            (148,416
            )
            
            (200,805
            )Increase
                (reduction) in the present value of obligations
            
            
            66,910
            
            
            (1,459,859
            )Ending
                Balance
            
            $
            5,061,143
            
            $
            4,805,473





The
      estimated amounts payable within the next 12 months included in the above
      balances as at December 31, 2007 and 2006 were $129,186 and
      $254,274.





74





**15.**  **PREFERRED
      SHARES**




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





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





The
      holders of Series A Preferred were entitled to receive dividends at a rate
      of
      7.5% of the conversion price (as defined) per annum. The Company paid accrued
      dividends in the amount of $51,354 on conversion of the Series A Preferred
      on
      May 31, 2006.





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





The
      warrants issued under the subscription agreement entitled the holder to purchase
      up to 500,000 shares of Series A Preferred, initially at an exercise price
      per
      share of $0.60. The warrants were exercisable for a period of two years at
      any
      time on or after December 31, 2004. Pursuant to the deemed issuance referred
      to
      above, the exercise price of the warrants was reduced to $0.19





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





**16.** **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
      (Cdn. $2.25) under a prospectus supplement to the Company’s shelf prospectus
      dated October 27, 2006. Net proceeds to the Company, after expenses of
      $4,469,104, were $59,191,197.





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 under a Short Form
      Prospectus dated October 2, 2007. Gross proceeds to the Company were
      Cdn.$30,012,000. In addition, the underwriters exercised their over-allotment
      option in respect of 1,476,000 common shares for gross proceeds of $4,501,800.
      Total proceeds, net of underwriter’s commission at 5% and other expenses of the
      issue, were US$33,416,468.





75





**Other
      Issuances of Common Shares**





During
      the year ended December 31, 2007, the Company issued 10,248,052 shares of common
      stock for cash consideration of $4,508,053 upon the exercise of 10,248,052
      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 $1,040,509 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.





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





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





On
      May
      31, 2006 the Company issued 2,941,176 shares of common stock upon the conversion
      by RAB of its holding of 1,000,000 shares of Series A Preferred stock at an
      exercise price of $0.16. At the same date the Company issued 1,470,588 shares
      of
      common stock at a price of $0.19 per share for cash consideration of $300,000,
      upon the exercise by RAB of the warrants, originally to purchase 500,000 shares
      of common stock at $0.60. A further 275,736 common shares were issued to RAB
      in
      respect of these transactions on August 11, 2006.





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





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




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





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





During
      the year ended December 31, 2006, the Company issued 1,135,000 shares of common
      stock for cash consideration of $632,750 upon the exercise of 1,135,000 options
      to purchase common shares.




76





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





**17.** **STOCK
          OPTIONS AND WARRANTS**





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.





**Options**





During
      the year ended December 31, 2007, 1,749,632 options were exercised for cash
      proceeds of $1,040,508. 10,000 options expired during the period. 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 officer 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
      $746,378.





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
      $910,080.





On
      June
      29, 2007, the Company issued 50,000 options to an employee with an exercise
      price of $2.46 per share. The options vest in three equal annual installments
      beginning on June 29, 2007, and were fair valued at $101,529.





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 $1,072,890.





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





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





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




77





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





On
      February 13, 2006, the Company issued 7,600,000 options to certain directors,
      officers and employees, with an exercise price of $0.34. The options vest in
      three equal installments beginning on June 14, 2006 and thereafter on February
      13, 2007 and 2008. The options were valued at $2,500,400.





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 expected term of the option award and stock price
      volatility. Expected volatility is based on the historical volatility of our
      stock. These estimates involve inherent uncertainties and the application of
      management judgement. 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:





**2007**
            
            **2006**
            
            **2005**Weighted-average
                risk-free rate of return (%)
            
            
            5.0%
                - 3.9%
            
            
            5.0%
                - 4.6%
            
            
            4.0%Dividend
                yield
            
            
            0%
            
            
            0%
            
            
            0%Expected
                life in years
            
            
            4
                and 7
            
            
            7
            
            
            3
                - 6Volatility
            
            
            98%
                - 91%
            
            
            107%
                - 102%
            
            
            70%




The
      following is a summary of stock option activity for the years ended December
      31,
      2007 and 2006:




**Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average Fair**
              **Value**Balance
                January 1, 2006
            
            
            6,672,900
            
            $
            0.69Granted
            
            
            8,895,000
            
            
            0.56Exercised
            
            
            (1,135,000
            )
            
            0.56Expired
            
            
            (771,650
            )
            
            0.80Outstanding
                at December 31, 2006
            
            
            13,661,250
            
            
            0.61Exercisable
                at December 31, 2006
            
            
            7,697,922
            
            $
            0.64Weighted
                average fair value of options as ofDecember
                31, 2006
            
            
            
            
            
            
            
            $
            0.43Balance
                January 1, 2007
            
            
            13,661,250
            
            $
            0.61Granted
            
            
            1,400,000
            
            
            2.60Exercised
                / Expired
            
            
            (1,759,632
            )
            
            0.65Outstanding
                at December 31, 2007
            
            
            13,301,618
            
            
            0.82Exercisable
                at December, 2007
            
            
            9,403,291
            
            $
            0.72Weighted
                average fair value of options as of December 31, 2007
            
            
            
            
            
            
            
            $
            0.
                55




78




The
      following table summarizes information about the stock options outstanding
      at
      December 31, 2007:





**Awards
                Outstanding by Range****Exercise
                Price**
              **$**
            
            **Awards
                Outstanding**
            
            **Awards
                Exercisable****Low**
            
            **High**
            
            **Quantity**
            
            **Weighted**
              **Average**
              **Outstanding**
              **ContractualLife**
            
            **Weighted**
              **Average
                Exercise Price**
              **$**
            
            **Quantity**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Weighted**
              **Average**
              **Exercise Price**0.01
            
            
            0.50
            
            
            8,191,618
            
            
            4.86
            
            
            0.35
            
            
            5,658,287
            
            
            4.74
            
            
            0.350.51
            
            
            1.00
            
            
            2,855,000
            
            
            4.37
            
            
            0.86
            
            
            2,748,334
            
            
            4.33
            
            
            0.861.01
            
            
            1.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —1.51
            
            
            2.00
            
            
            635,000
            
            
            6.26
            
            
            1.96
            
            
            198,335
            
            
            6.26
            
            
            1.962.01
            
            
            2.50
            
            
            925,000
            
            
            5.59
            
            
            2.18
            
            
            566,668
            
            
            5.57
            
            
            2.182.51
            
            
            3.00
            
            
            395,000
            
            
            6.58
            
            
            2.82
            
            
            131,667
            
            
            6.59
            
            
            2.823.01
            
            
            3.50
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —3.51
            
            
            4.00
            
            
            300,000
            
            
            6.94
            
            
            3.96
            
            
            100,000
            
            
            6.94
            
            
            3.9613,301,618
            
            
            4.97
            
            
            0.82
            
            
            9,403,291
            
            
            4.75
            
            
            0.
                72




**Warrants**





On
      February 14, 2006, the Company issued 10,000,000 warrants as part of a private
      placement of 20,000,000 units. Each unit consisted of one share of common stock
      and one half of one warrant to purchase one share of common stock, exercisable
      at $0.45 per share. In addition, on February 18, 2006, the Company issued
      1,000,000 warrants to a consulting firm at an exercise price of $0.30 per share.
      The value of the warrants was estimated on the date of the issue using the
      Black-Scholes option-pricing model. The following assumptions were used:
      risk-free rate of return – 4.7%; dividend yield – 0%; term – 2 years and
      volatility – 104%.





The
      following is a summary of warrant activity for the years ended December 31,
      2007
      and 2006:





**Year
                Ended**
              **December
                31,**
              **2007**
            
            **Year
                ended**
              **December
                31,**
              **2006**Balance,
                start of year
            
            
            17,054,232
            
            
            22,302,849Issued
            
            
            —
            
            
            11,000,000Expired
            
            
            —
            
            
            (2,076,169
            )Exercised
            
            
            (10,248,052
            )
            
            (14,172,448
            )Balance,
                end of year
            
            
            6,806,180
            
            
            17,054,232





Warrants
      outstanding to acquire common shares of the Company at December 31, 2007 are
      as
      follows:





**Warrants Outstanding**
            
            **Exercise****Price**
            
            **Expiry Date**750,000
            
            0.45
            
            February
                13, 20086,056,180
            
            0.76
            
            Note
                (1)6,806,180





(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




79




**18.**   **RELATED
      PARTY TRANSACTIONS**





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





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





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




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





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





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





In
      March
      2006, the Company concluded a cost sharing agreement with Silver Bear Resources
      Inc. (an Ontario corporation) (“Silver Bear”) under which a portion of Silver
      Bear’s office overhead is charged to the Company on the basis of the expected
      time commitment of the staff involved. The Company is related to Silver Bear
      because certain senior executives and directors of Silver Bear also serve as
      senior executives and directors of the Company. During the years ended December
      31, 2007 and 2006 overhead costs o f
      $289,267 and $261,367, respectively, were charged to the Company under this
      agreement. At December 31, 2007 and 2006, $31,150 and $3 1,165,
      respectively, was payable to Silver Bear.




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





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





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





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





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




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





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




80




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





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





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





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





**Mining
      Industry**




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





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





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





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





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





**Mesquite
      Expansion**





The
      Company has made purchase commitments of approximately $73,600,000 in respect
      of
      the mining fleet and ancillary mining equipment required for resumption and
      expansion of mining operations at the Mesquite Mine. Of this total, equipment
      to
      a value of approximately $72,500,000 had been delivered as at December 31,
      2007.





In
      addition, the Company has planned capital spending of approximately $38,400,000
      on other aspects of the mine expansion program, of which approximately
      $26,400,000 had been spent as at December 31, 2007. Purchase commitments
      outstanding at December 31, 2007 were approximately $12,300,000. The
      Company expects to complete the expansion program during the second fiscal
      quarter of 2008.





**Lease
      Agreement**





The
      Company is a party to a cost sharing agreement with Silver Bear under which
      a
      portion of Silver Bear’s office overhead is charged to the Company (Note 18).
      Under this agreement the Company anticipates paying approximately $35,000 in
      respect of the lease of head office premises for the five month period ending
      May 31, 2008.




81





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 $5,385,000. 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
      judgement 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.





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





**Drawdown
      Under Term Loan Facility**





On
      February 7, 2008 the Company received an additional advance of $2,719,162 under
      the term loan facility, bringing total advances to $79,181,519. The Company
      can
      borrow an additional $25,818,481 under the facility of which $17,700,000 is
      available for general corporate purposes and $8,118,481 is available for the
      Mesquite Mine expansion project.


82




**ITEM
      8.****CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





*(a)
      Evaluation of Disclosure Controls and Procedures*





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





*(b)
      Management’s Report on Internal Control over Financial
      Reporting*





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rule 13a-15(f) of the
      Exchange Act and for assessing the effectiveness of internal control over
      financial reporting.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. In addition, projections of any evaluation
      of
      effectiveness of internal control over financial reporting to future periods
      are
      subject to the risk that controls may become inadequate because of changes
      in
      conditions, or that the degree of compliance with the policies or procedures
      may
      deteriorate.





Management,
      including our Chief Executive Officer and Chief Financial Officer, has assessed
      the effectiveness of our internal control over financial reporting as of
      December 31, 2007. In making its assessment of internal control over
      financial reporting, management used the criteria established in *Internal
      Control — Integrated Framework,* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      This assessment included an evaluation of the design of our internal control
      over financial reporting and testing of the operational effectiveness of those
      controls. Based on the results of this assessment, management has concluded
      that
      the Company’s internal control over financial reporting was effective as of
      December 31, 2007.





This
      annual report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      The
      Company’s system of internal control over financial reporting was not subject to
      attestation by the Company’s registered public accounting firm pursuant to
      temporary rules of the SEC that permit the Company to provide only management’s
      report in this annual report.





There
      have been no changes in our internal control over financial reporting (as such
      term is defined in Rule 13a-15(f) under the Exchange Act) during the fourth
      fiscal quarter of 2007 that have materially affected, or are reasonably likely
      to materially affect, our internal control over financial
      reporting.




**ITEM
      8B.**  **OTHER
      INFORMATION**





None




83





**PART
      III**




**ITEM
      9.**  **DIRECTORS,**  ****  **EXECUTIVE**  ****  **OFFICERS,
      PROMOTERS AND CONTROL PERSONS; COMPLIANCE**  **W**  **ITH
      SECTION 16(a) OF THE EXCHANGE ACT**





The
      following table sets forth the name, age and position of each of our executive
      officers and directors as of February 28, 2008;




**Name**
            
            **Age**
            
            **Position(s)
                with the Company**
            
            **Date of Appointment as director**Randall
                Oliphant
            
            48
            
            Chairman
                of the Board
            
            February
                13, 2006Raymond
                Threlkeld
            
            61
            
            President
                and Chief Executive Officer
            
            June
                14, 2006Brian
                Penny
            
            45
            
            Chief
                Financial OfficerPaul
                Semple
            
            47
            
            Vice
                President of ProjectsWesley
                Hanson
            
            47
            
            Vice
                President of Mine DevelopmentGraham
                Desson
            
            61
            
            Controller
                and SecretaryVahan
                Kololian (1) (2)
            
            54
            
            Director
            
            March
                14, 2006Martyn
                Konig  (1) (2)
            
            50
            
            Director
            
            February
                13, 2006Gerald
                Ruth (1) (2)
            
            49
            
            Director
            
            May
                10, 2004




(1)
            member
                of Audit Committee


(2)
            member
                of Compensation, Governance and Environmental
                Committee




**Randall
      Oliphant** ,
      age 48,
      is a Director and the President and Chief Executive Officer of Silver Bear
      Resources Inc. He has been the Chairman and Chief Executive Officer of Rockcliff
      Group Limited, a private corporation actively involved with its shareholdings,
      primarily in the mining sector, including Western Goldfields Inc., since
      September 2004. Mr. Oliphant is on the Advisory Board of Metalmark Capital
      LLC
      (formerly Morgan Stanley Capital Partners), and serves on the boards of
      WesternZagros Resources Ltd. and Franco-Nevada Corporation. Since 2003, Mr.
      Oliphant has served on the boards of a number of public and private companies
      and not-for-profit organizations. From 1999 to 2003, he was the President and
      Chief Executive Officer of Barrick Gold Corporation. Mr. Oliphant is a Chartered
      Accountant.





**Raymond
      Threlkeld** ,
      age 61,
      has over 30 years of mineral industry experience ranging from discovery,
      feasibility study, development management, operations management, and corporate
      officer. Since 2005, Mr. Threlkeld has been the Chief Operating Officer of
      Silver Bear Resources Inc. From 1996 to 2005 Mr. Threlkeld held various senior
      management positions in precious metal mine development with Barrick Gold
      Corporation and Coeur d’Alene Mines Corporation including the development of the
      Pierina Mine in Peru, the Bulyanhulu Mine in Tanzania and the Veladero Mine
      in
      Argentina. Mr. Threlkeld has had exploration acquisition success in the Western
      United States in addition to the management and project development experience
      cited above.





**Brian
      Penny** ,
      age 45, has over 20 years of experience in mine finance and
      accounting.  Since 2005,  Mr. Penny has been the Chief Financial
      Officer of Silver Bear Resources Inc. Since 2004, Mr. Penny has been a Director
      of, and chairs the Audit Committees of Equinox Minerals Limited and Baffinland
      Iron Mines Corporation and since 2005, has been a Director of, and chairs the
      Audit Committee of Alamos Gold Inc. While serving as Chief Financial Officer
      with Kinross Gold Corporation from 1993 to 2004, Mr. Penny was responsible
      for
      all finance, banking, hedging and financial reporting activities including
      the
      financial due diligence surrounding a U.S. $1.3 billion merger with TVX Gold
      Inc. and Echo Bay Mines Ltd. Mr. Penny is a Certified Management
      Accountant.




**Paul
      Semple** ,
      age 47,
      has 23 years of experience in the mining industry and has focused on feasibility
      studies, project development and operations of precious and base metals
      deposits. From 2001 to 2007 Mr. Semple has been President of PG Semple
      Consulting and President of Penguin Automated Systems Inc. Mr. Semple has spent
      much of his time with Kilborn (later SNC-Lavalin) where he was involved in
      all
      aspects of project development from initial studies through to construction
      and
      operations. During this time, Mr. Semple held various positions including Vice
      President and General Manager, SNC Lavalin Engineers and Constructors. Mr.
      Semple is a Professional Engineer.




84




**Wesley
      Hanson** ,
      age 47,
      has over 24 years of mining experience including exploration, mine geology,
      mine
      engineering, mine operations, consulting geology and corporate management.
      Mr.
      Hanson joined Western Goldfields in 2006. From 2002 to 2006, Mr. Hanson held
      various supervisory positions with Kinross Gold Corporation, the most recent
      being Vice President of Technical Services where he supervised resource and
      reserve disclosure and managed the company's technical staff supporting Kinross'
      mining operations and corporate development activities. Mr. Hanson is a
      Professional Geologist.





**Graham
      Desson** ,
      age 61,
      served as Controller of Silver Bear Resources Inc., publicly traded Canadian
      company engaged in mining exploration in the Russian Federation from 2005 to
      2007. From 2004 to 2005, Mr. Desson was an independent consultant. From 2001
      to
      2004 Mr. Desson was engaged as a financial consultant and then served as
      Director - Treasury of Biovail Corporation, a public pharmaceutical company.
      Mr.
      Desson is a Chartered Accountant.




**Vahan
      Kololian** ,
      age 54,
      is the founder and Managing Partner of TerraNova Partners LP, which invests
      in
      the industrial, services and resource sectors. Since 2002 Mr. Kololian has
      been
      Chairman of Precinda Corporation, a private manufacturing company. Mr. Kololian
      started his career in investment banking in 1980 with Burns Fry Limited (now
      BMO
      Nesbitt Burns). Since 1990 he has held leadership positions in private equity
      partnerships. Mr. Kololian also serves on the boards of the following public
      companies, Clear Point Business Resources Inc. and Manicouagan Minerals Inc.
      Mr.
      Kololian is a Member of the Law Society of Upper Canada.





**Martyn
      Konig** ,
      age 50,
      has 25 years experience in investment banking and the commodity markets. Since
      2005 Mr. Konig has served as Chief Executive Officer of Blackfish Capital,
      managing the Blackfish Capital Resources Fund. He is also Chief Executive
      Officer of AIM listed Latitude Resources, a resource focused investment group.
      He has extensive experience in the natural resource sector, which includes
      senior management responsibility in resource finance and commodity trading
      operations at various international investment banks. Mr. Konig was a main
      Board
      Director of NM Rothschilds and Sons Ltd. for 15 years and held senior positions
      at Goldman Sachs and UBS. Mr. Konig is a Barrister and Fellow of the Chartered
      Institute of Bankers.





**Gerald
      Ruth** ,
      age 49,
      has served as a Director since May 2004. Since 2003, Mr. Ruth has operated
      an
      independent corporate finance consulting business. Mr. Ruth is currently a
      Director and Chief Financial Officer of Greenwich Global Capital Inc., a capital
      pool company that trades on NEX, a Director and Chief Executive Officer of
      Yonge
      Street Capital Corp., a capital pool company listed on the TSX Venture Exchange,
      and President and Chief Executive Officer of Gersan Capital Corp., a limited
      market dealer involved in corporate finance, capital markets activities and
      strategic advisory services. From 1988 to 2003, Mr. Ruth held various positions
      at the Toronto Stock Exchange, where he served as Head of Listings from 1997
      to
      2003. Mr. Ruth is a Chartered Accountant.




To
      our
      knowledge, none of our directors, officers or affiliates, and no owner of record
      or beneficial owner of more than five percent (5%) of our securities, and no
      associate of any such director, officer or security holder, is a party adverse
      to us or has a material interest adverse to us in reference to pending
      litigation.





**Independence
      of the Board**




Three
      out
      of the five members of the Board are independent within the meaning of the
      Governance Guidelines. Each of Messrs. Kololian, Konig and Ruth are independent.
      Mr. Threlkeld is not independent as he is an officer of the Company. Mr.
      Oliphant is also not independent as he acts as executive Chairman of the
      Company.




The
      independent directors meet at the end of each Board meeting without management
      and non-independent directors being present, if deemed necessary.





85




**Meetings
      of the Board and Committees of the Board**




The
      Board
      meets a minimum of four times per year, usually every quarter and following
      the
      annual meeting of the Company's shareholders. Each committee of the Board meets
      at least once each year or more frequently as deemed necessary by the applicable
      committee, and at least four times a year in the case of the Audit Committee.
      The frequency of the meetings and the nature of the meeting agendas are
      dependent upon the nature of the business and affairs which the Company faces
      from time to time. During 2007, the Board met 8 times, the Audit Committee
      met 4 times
      and the Compensation, Governance and Environmental Committee met 3 times.
      The following table provides details regarding director attendance at Board
      and
      Committee meetings held during their tenure on their respective committees
      during 2007.


**Meetings
                  Attended out of Meetings
                  Held**
  **Director**
              
              **Board**
              
              **Audit Committee**
              
              **Compensation**
                **Governance and**
                **Environmental**
                **Committee**Randall
                  Oliphant
              
              8out
                  of 8Raymond
                  Threlkeld
              
              7
                  out of 8Vahan
                  Kololian
              
              7
                  out of 8
              
              4
                  out of 4
              
              3
                  out of 3Martyn
                  Konig
              
              7
                  out of 8
              
              4
                  out of 4
              
              3
                  out of 3Gerald
                  Ruth
              
              8
                  out of 8
              
              4
                  out of 4
              
              3
                  out of 3




**Nomination
      for Directors**




The
      Board
      has established the Compensation, Governance and Environmental Committee which
      has assumed responsibility for the appointment and assessment of directors.
      The
      Compensation, Governance and Environmental Committee is comprised of Messrs.
      Kololian, Konig and Ruth, all of whom are independent of the
      Company.





While
      there are no specific criteria for Board membership, the Company attempts to
      attract and retain directors with business knowledge and a particular knowledge
      of mineral exploration, development and mining or other areas (such as finance)
      which provide knowledge which would assist in guiding the officers of the
      Company. As such, nominations would normally be the result of recruitment
      efforts and discussions amongst the Compensation, Governance and Environmental
      Committee, prior to the consideration of the Board as a whole.





**Code
      of Ethics**





The
      Board
      has adopted a Code of Business Conduct and Ethics (the “Code”) for its
      directors, officers and employees. The Board, acting through Audit Committee
      has
      responsibility for monitoring compliance with the Code by ensuring all
      directors, officers and employees receive and become thoroughly familiar with
      the Code and acknowledge their support and understanding of the Code. Any
      non-compliance with the Code is to be reported to the appropriate person. A
      copy
      of the Code may be accessed under the Company’s profile at www.sedar.com.





The
      Board
      takes steps to ensure that directors, officers and employees exercise
      independent judgment in considering transactions and agreements in respect
      of
      which a director, officer or employee of the Company has a material interest,
      which include ensuring that directors, officers and employees are thoroughly
      familiar with the Code and, in particular, the rules concerning reporting
      conflicts of interest and obtaining direction regarding any potential conflicts
      of interest.





86




The
      Board
      encourages and promotes an overall culture of ethical business conduct by
      promoting compliance with applicable laws, rules and regulations; providing
      guidance to directors, officers and employees to help them recognize and deal
      with ethical issues; promoting a culture of open communication, honesty and
      accountability; and ensuring awareness of disciplinary action for violations
      of
      ethical business conduct.





Our
      code
      of ethics is available on our website at
      www.westerngoldfields.com.





**SECTION
      16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section
      16(a) of the Securities Exchange Act of 1934 requires certain defined persons
      to
      file reports of and changes in beneficial ownership of a registered security
      with the Securities and Exchange Commission and the National Association of
      Securities Dealers in accordance with the rules and regulations promulgated
      by
      the Commission to implement the provisions of Section 16. Under the regulatory
      procedure, officers, directors, and persons who own more than ten percent of
      a
      registered class of a company’s equity securities are also required to furnish
      the Company with copies of all Section 16(a) forms they file. **** To
      the
      best of our knowledge, based solely on a review of the copies of Forms 3, 4
      and
      5 furnished to us during the fiscal year ended December 31, 2007, our officers,
      directors and greater than 10% beneficial owners complied with all Section
      16(a)
      filing requirements.





**ITEM
      10.****EXECUTIVE
      COMPENSATION**




The
      following table sets forth the annual and long-term compensation for services
      in
      all capacities to us for the fiscal year ended December 31, 2007, paid to our
      Chief Executive Officer and executive officers who were serving at December
      31,
      2007.




**SUMMARY
      COMPENSATION TABLE**


**(in
      Canadian dollars)**




**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
              **(1)($)**
            
            **Bonus**
              **(1)
                ($)**
            
            **Option**
              **Awards**
              **(2)
                $)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total($)**Randall
                Oliphant (3)
            
            
            2007
            
            
            250,000
            
            
            500,000
            
            
            —
            
            
            —
            
            
            750,000Chairman
                of the Board
            
            
            2006
            
            
            68,269
            
            
            —
            
            
            949,823
            
            
            —
            
            
            1,018,092Raymond
                Threlkeld
            
            
            2007
            
            
            250,000
            
            
            400,000
            
            
            —
            
            
            —
            
            
            650,000President
                and Chief Executive Officer
            
            
            2006
            
            
            208,333
            
            
            —
            
            
            474,912
            
            
            —
            
            
            683,245Brian
                Penny
            
            
            2007
            
            
            200,000
            
            
            300,000
            
            
            —
            
            
            —
            
            
            500,000Chief
                Financial Officer
            
            
            2006
            
            
            166,667
            
            
            —
            
            
            379,929
            
            
            —
            
            
            546,596Paul
                Semple
            
            
            2007
            
            
            150,000
            
            
            75,000
            
            
            —
            
            
            —
            
            
            225,000Vice
                President – Projects
            
            
            2006
            
            
            125,000
            
            
            20,000
            
            
            265,950
            
            
            —
            
            
            410,950Wesley
                Hanson
            
            
            2007
            
            
            150,000
            
            
            75,000
            
            
            —
            
            
            —
            
            
            225,000Vice
                President – Mine Development
            
            
            2006
            
            
            68,750
            
            
            10,000
            
            
            983,185
            
            
            —
            
            
            1,061,935





(1)
            Salary
                and bonus was paid in Canadian dollars. The average exchange rate
                per US
                dollar for 2007 and 2006 was 1.075 and 1.134, respectively.


(2)
            The
                fair value of option awards was determined using the Black-Scholes
                Option
                Pricing Model, based on assumptions as set out in Note 17 to our
                Consolidated Financial Statements. The fair value of option awards
                has
                been converted to Canadian dollars at the exchange rate applicable
                at the
                date of award. For Messrs. Oliphant, Threlkeld, Penny and Semple,
                the rate
                applied was 1.1548, and for Mr. Hanson the rate applied was 1.1122.






87




(3)
            Mr.
                Oliphant assumed executive duties effective September 23, 2006. Prior
                to
                that date he was compensated as Chairman of the Board of
                Directors.




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**




**NAME**
            
            **Number of**
              **Securities**
              **Underlying Options**
              **Granted**
              (
                #)
              **Exercisable**
            
            **Number of**
              **Securities**
              **Underlying**
              **Options Granted**
              (
                #)
              **Unexercisable**
            
            **Exercise**
              **Price**
              **$**
            
            **Expiration**
              **Date**Randall
                Oliphant (1)
            
            
            1,666,667
            
            
            833,333
            
            
            0.34
            
            
            2/12/2013Raymond
                Threlkeld (1)
            
            
            833,333
            
            
            416,667
            
            
            0.34
            
            
            2/12/2013Brian
                Penny (1)
            
            
            666,667
            
            
            333,333
            
            
            0.34
            
            
            2/12/2013Paul
                Semple (1)
            
            
            246,667
            
            
            233,333
            
            
            0.34
            
            
            2/12/2013Wesley
                Hanson (2)
            
            
            233,333
            
            
            166,667
            
            
            2.01
            
            
            6/14/2014





(1)
            Options
                were awarded on February 13, 2006. One third of the award vested
                immediately on February 13, 2006 and became exercisable on June 24,
                2006,
                a further one third vested and became exercisable on February 13,
                2007 and
                the final one third vests and became exercisable on February 13,
                2008.(2)
            Options
                were awarded on June 14, 2006. One third of the award vested immediately
                on June 14, 2006, a further one third vested and became exercisable
                on
                June 14, 2007 and the final one third vests and becomes exercisable
                on
                June 14, 2008.




**Compensation
      of Directors**




**DIRECTOR
      COMPENSATION**





**Name**
            
            **Fees Earned or**
              **Paid in Cash (1)**
              **$**
            
            **Option**
              **Awards (2)**
              **$**
            
            **All Other**
              **Compensation**
              **$**
            
            **Total**
              **$**Randall
                Oliphant (3)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Raymond
                Threlkeld (4)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Vahan
                Kololian (5)
            
            
            24,933
            
            
            —
            
            
            —
            
            
            24,933Martyn
                Konig (6)
            
            
            24,933
            
            
            —
            
            
            —
            
            
            24,933Gerald
                Ruth (7)
            
            
            24,933
            
            
            437,710
            
            
            —
            
            
            462,643





(1) Fees
      were
      paid in U.S. dollars for the period January 1 – June 30, 2007 and in Cdn.
      dollars thereafter. Payments in Cdn. dollars have been translated at quarter-end
      exchange rates.


(2) The
      fair
      value of option awards was determined using the Black-Scholes Option Pricing
      Model, based on assumptions as set out in Note 17 to our Consolidated Financial
      Statements.


(3) 2,500,000
      options held at December 31, 2007.


(4) 1,250,000
      options held at December 31, 2007.


(5) 750,000
      options held at December 31, 2007.


(6) 750,000
      options held at December 31, 2007.


(7) 800,000
      options held at December 31, 2007.




88




We
      have
      in the past compensated our directors in cash and in shares of our Common Stock,
      and have generally in the past granted options to Directors upon joining the
      Board. We have established a compensation plan for our non-management directors.
      Non-management directors receive compensation at a rate of Cdn. $30,000 per
      annum. We reimburse the Directors for out of pocket expenses.





During
      the fiscal year ended December 31, 2007, Gerald Ruth received options to
      purchase 200,000 shares of our common stock at an exercise price of Cdn. $2.80
      per share, exercisable over a 7 year period from August 2, 2007.





**Bonuses
      and Deferred Compensation**





We
      do not
      have any bonus, deferred compensation or retirement plan. Bonuses earned in
      respect of 2007 of $1,361,848 were paid in 2008.





**Stock
      Options**





Our
      Board
      of Directors chose to make option awards to select officers, directors,
      consultants, or shareholder/investors in order to induce them to assist it
      in
      implementing its business plan and to provide long term additional incentive.
      These options were not awarded pursuant to a plan but were specific individual
      awards with varying terms and conditions. In some instances, our Board of
      Directors reserved the right to cancel these awards for non-performance or
      other
      reasons, or established a vesting schedule pursuant to which the award is
      earned.





**Employment
      Contracts, Termination of Employment and Change of Control
      Arrangements**





Randall
      Oliphant, Raymond Threlkeld, Brian Penny, Paul Semple and Wesley Hanson have
      Severance and Indemnification Agreements with the Company which provide for
      compensation to be paid, under certain circumstances, in the event of
      termination of their employment or in the event of change of control of the
      Company. Reference is made to Exhibit 10.35(10) and 10.36(10) to Amendment
      No.1
      to FORM SB-2 dated August 18, 2006




**Composition
        of the Compensation, Governance and Environmental
        Committee**
 
 The
        Company’s Compensation, Governance and Environmental Committee (“the CGE
        Committee”) reviews and makes recommendations regarding the compensation of
        executive officers of the Company. Messrs. Kololian, Konig and Ruth were
        members
        of the committee during the year ended December 31, 2007. All members of
        the CGE
        Committee are independent directors. The CGE Committee periodically reviews
        the
        compensation paid to directors and management based on factors including
        time
        commitment, comparative fees paid by similar companies in the industry,
        performance and level of responsibility.
 
 
 **Committee
        Report on Compensation**
 
 The
        compensation of the Company’s senior officers is reviewed annually by the CGE
        Committee. The Company’s executive compensation program consists of an annual
        base salary, performance bonus and a longer term component, consisting of
        stock
        options.
 
 *Compensation
        Philosophy.* The
        philosophy of our CGE Committee for the fiscal year ended December 31, 2007
        was
        to provide competitive levels of compensation that are appropriate given
        the
        performance and commitment of our executive officers compared with similarly
        situated executives in the gold mining industry; link management’s pay to the
        achievement of our annual and long-term performance goals, and assist us
        in
        attracting and retaining qualified management. However, because of the limited
        number of companies that can be compared to us in terms of stage of resource
        development, net income, and similar items, a significant amount of subjectivity
        was involved in the decisions of the CGE Committee. 2007 was a successful
        year
        for our Company and its shareholders as management delivered on its commitment
        to bring the Mesquite Mine back into full production. Accordingly, during
        2007,
        executive compensation was weighted towards bonus awards, reflecting the
        successful implementation of the Mesquite Mine expansion program and the
        resultant significant increase in shareholder value. The expansion program
        included, amongst other things, the development of a talented and experienced
        management team, equity and debt financings and a major capital expenditure
        program, all of which ultimately led to the resumption of full mining operations
        by year-end 2007. During 2006, executive compensation was weighted towards
        option awards, reflecting the early-stage risk attaching to the expansion
        program, the need to recruit high caliber individuals to the management team
        and
        the substantial challenges anticipated in bringing the Mesquite Mine back
        into
        production.
 
 *Base
        Salaries.* Base
        salaries for management employees are determined initially by evaluating
        the
        responsibilities of the position held and the experience of the individual,
        and
        by reference to the competitive marketplace for management services, including
        a
        comparison of base salaries for comparable positions at comparable companies
        within the gold industry. Annual salary adjustments are determined by evaluating
        the competitive marketplace, the performance of the Company, the performance
        of
        the executive, and any increased responsibilities assumed by the executive.
        We
        believe the base salaries of executive officers are at or below those of
        similarly situated executives in the gold industry.
 
 *Bonus
        Arrangement.* To
        encourage and reward outstanding corporate and individual performance, the
        Company from time to time considers awarding merit bonuses to its executive
        officers, based on the Company’s operating results and the achievement of
        certain defined major business objectives. In 2006 nominal bonuses was paid
        to
        two of the top five highest paid executives and no bonuses was paid to the
        three
        highest paid executives. In 2007, based on the increased market capitalization
        of the Company, the successful listing of the Company’s common stock on the
        Toronto and American Stock Exchanges, the completion of the feasibility study
        and financing of the Mesquite development plan, which ultimately led to the
        resumption of full mining operations by year-end 2007, significant bonuses
        were
        declared in 2007 in respect of the top five executives.
  
  
 
 
 
 *Stock
        Options.* The
        Company’s stock option plan is designed to give each option holder an interest
        in maximizing shareholder value in the longer-term, to enable the Company
        to
        attract and retain personnel with experience and ability, and to reward
        individuals for current performance and expected future performance. The
        CGE
        Committee considers stock option grants when reviewing senior officer
        compensation packages as a whole.
 
 C *ompensation
        of Chief Executive Officer.* The
        compensation of the Chief Executive Officer (“CEO”) of the Company consists of
        an annual base salary, incentive bonus related to corporate performance,
        and
        incentive stock options. The amount of our CEO’s base salary for the years 2006
        and 2007 was approved by the Board of Directors on March 29, 2006. The amount
        of
        our CEO’s full compensation for the fiscal year ended December 31, 2007 was
        determined in accordance with the principles discussed in the foregoing
        paragraphs but was also based upon a subjective evaluation by the CGE Committee
        of the leadership demonstrated by Raymond Threlkeld during the fiscal year
        in
        achieving the objectives of the Company. The unusual circumstances of the
        Company, involving financing and resumption of operations at the Mesquite
        Mine
        that had been out of production for several years, meant that peer group
        comparison was of limited assistance in determining compensation levels.
        The CGE
        Committee attached significant weight to the fact that a major capital
        expenditure program was effectively financed, managed and came in on time
        and
        within budget and the fact that full production at Mesquite was started three
        months ahead of original schedule. The CGE Committee reviewed the CEO’s
        compensation for 2007 at a meeting on December 6, 2007. At the same meeting
        the
        CGE Committee recommended to the Board of Directors that a 10% increase in
        the
        CEO’s annual base salary for the fiscal year 2008 be implemented. These
        recommendations were accepted by the Board at a meeting held on the same
        date.






89




**Audit
      Committee**





Our
      Audit
      Committee is comprised of Messrs. Kololian, Konig and Ruth, all of whom are
      independent and financially literate under Canadian governance requirements.
      Our
      Audit Committee’s principal responsibilities consist of: (i) recommending the
      selection of independent auditors; (ii) reviewing the scope of the audit
      conducted by the auditors, as well as the audit itself; (iii) reviewing matters
      concerning financial reporting, accounting and audit procedures, and policies
      generally, and (iv) monitoring the independence and performance of our
      independent auditors.





The
      primary function of the Audit Committee is to assist our Board of Directors
      in
      fulfilling its oversight responsibilities by:





·
            reviewing
                our financial statements, financial reports and other financial
                information provided by us to any governmental body or the public
                and
                other relevant documents;·
            recommending
                the appointment and reviewing and appraising the audit efforts of
                our
                independent registered accounting firm and providing an open avenue
                of
                communication among the independent auditor, financial and senior
                management and the Board of Directors;·
            serving
                as an independent and objective party to monitor our financial reporting
                process and internal controls, our processes to manage business and
                financial risk, and our compliance with legal, ethical and regulatory
                requirements; and·
            encouraging
                continuous improvement of, and fostering adherence to, our policies,
                procedures and practices at all
                levels.




The
      Board
      of Directors has adopted a written charter setting out responsibilities of
      the
      audit committee. A copy of the charter is available on our website,
      www.westerngoldfields.com




**ITEM
      11.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth certain information with respect to the beneficial
      ownership of our equity securities as of Februa ry
      28, 2 008
      by:





·
            each
                security holder known by us to be the beneficial owner of more than
                5% of
                the Company’s outstanding
                securities;





·
            each
                of our directors;





·
            each
                of our executive officers; and





·
            all
                directors and executive officers as a
                group.





Unless
      otherwise specified, the address of each of the persons set forth below is
      in
      care of Western Goldfields, Inc., 2 Bloor Street West, Suite 2102, PO Box 110,
      Toronto, Ontario M4W 3E2





90





**Name
                and Address****of
                Beneficial Owner**
            
            **Amount and**
              **Nature of**
              **Beneficial**
              **Ownership(1)**
            
            **Percent of**
              **Outstanding**
              **Shares**Randall
                Oliphant
            
            
            6,750,000
            (2)
            
            4.87
            %Raymond
                Threlkeld
            
            
            1,750,001
            (3)
            
            1.27
            %Brian
                Penny
            
            
            1,499,999
            (4)
            
            1.09
            %Paul
                Semple
            
            
            480,000
            (5)
            
            0.35
            %Wesley
                Hanson
            
            
            233,333
            (6)
            
            0.20
            %Graham
                Desson
            
            
            500,000
            (7)
            
            0.37
            %Vahan
                Kololian
            
            
            2,000,000
            (8)
            
            1.46
            %Martyn
                Konig
            
            
            1,250,001
            (9)
            
            0.91
            %Gerald
                Ruth
            
            
            2,001,252
            (10)
            
            1.46
            %All
                executive officers and directors as a group (9 persons)
            
            
            16,464,586
            
            
            11.43
            %




(1)
            
            A
                person is deemed to be the beneficial owner of a security if such
                person
                has or shares the power to vote or direct the voting of such security
                or
                the power to dispose or direct the disposition of such security.
                A person
                is also deemed to be a beneficial owner of any securities if that
                person
                has the right to acquire beneficial ownership within 60 days of the
                date
                hereof. Except as otherwise indicated the named entities or individuals
                have sole voting and investment power with respect to the shares
                of Common
                Stock beneficially owned.(2)
            
            Includes
                options to purchase 2,500,000 shares of Common Stock and 4,250,000
                shares
                of Common stock owned by Rockcliff Group Limited.(3)
            
            Includes
                options to purchase 1,250,000 shares of Common Stock and 500,001
                shares of
                Common Stock.(4)
            
            Includes
                options to purchase 1,000,000 shares of Common Stock and 499,999
                shares of
                Common Stock.(5)
            
            Includes
                options to purchase 480,000 shares of Common Stock.(6)
            
            Includes
                options to purchase 233,333 shares of our Common Stock.(7)
            
            Includes
                options to purchase 500,000 shares of Common Stock.(8)
            
            Includes
                options to purchase 750,000 shares of Common Stock and 1,250,000
                shares of
                Common Stock owned by TerraNova Partners L.P.(9)
            
            Includes
                options to purchase 750,000 shares of Common Stock and 500,001 shares
                of
                Common Stock(10)
            
            Includes
                options to purchase 666,667 shares of Common Stock, 507,668 shares
                of
                Common Stock Shares of Common Stock owned by Muriel Ruth (mother)
                and
                826,917 shares of Common Stock owned by Sandra Meddick-Ruth
                (spouse).





91




**Equity
      compensation plan information**





The
      following table presents information relating to the Company’s equity
      compensation plans as of December 31, 2007:





**Plan
                Category**
            
            **Number of Securities to be**
              **Issued Upon Exercise of**
              **Outstanding Options,**
              **Warrants and Rights**
            
            **Weighted-Average**
              **Exercise Price of**
              **Outstanding Options,**
              **Warrants and Rights**
            
            **Number of**
              **Securities**
              **Remaining**
              **Available for**
              **Future Issuance**Equity
                compensation plans approved by security holders
            
            
            2,255,000
            
            $
            2.43
            
            
            2,625,000Equity
                compensation plans not approved by security holders (1)
            
            
            11,046,618
            
            $
            0.49
            
            
            NilTotal
            
            
            13,301,618
            
            $
            0.
                82
            
            
            2,625,000





(1)  Consists
      of individual compensation arrangements covered by stock option agreements
      entered into prior to the approval of the Company’s 2006 Stock Incentive Plan on
      June 14, 2006, and includes both vested and unvested stock options.




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




**Exercises
      of warrants**





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





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





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




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





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





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




This
      transaction did not involve any underwriters, underwriting discount or
      commissions, or any public offering, and we believe that the transaction was
      exempt from the registration by virtue of Section 4(2) of the Securities Act
      of
      1933, as amended. The investor represented its intention to acquire the
      securities for investment purposes only and not with a view to or for sale
      in
      connection with any distribution thereof. The investor had adequate access,
      through its relationship with us, to information about us.




**Issuances
      of stock options**





In
      April
      2007, we issued 655,000 options to eight 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 $1,072,890.





In
      June
      2007, we issued 50,000 options to an employee with an exercise price of $2.46
      per share. The options vest in three equal annual installments beginning on
      June
      29, 2007, and were fair valued at $101,529.




92




In
      August
      2007, we issued 195,000 options to two employees and 200,000 options to Gerald
      Ruth, one of our directors, 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 $910,080.





In
      December 2007, we issued 300,000 options to Cory Atiyeh, an officer of the
      Company, with an exercise price of Cdn $3.94 per share. The options vest in
      three equal annual installments beginning on December 10, 2007, and were fair
      valued at $947,400.





**Director
      Independence**





Each
      of
      Vahan Kololian, Martyn Konig and Gerald Ruth is independent, as independence
      is
      defined in the listing standards of the American Stock Exchange and Canadian
      governance requirements.





**ITEM
      13.**  **EXHIBITS**





The
      exhibits listed on the accompanying Exhibit Index are filed as part of this
      Report.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      following table presents the fees for professional audit services rendered
      and
      fees billed for other services rendered by PricewaterhouseCoopers LLP (“PWC”),
      our independent registered public accounting firm. PWC were engaged by us
      effective September 21, 2007.





**Fees
      billed for services rendered by PricewaterhouseCoopers LLP**





**2007**
            
            **2006**Audit
                fees (1)
            
            $
            100,000
            
            $
            —Audit-related
                fees
            
            $
            —
            
            $
            —Tax
                fees
            
            $
            55,350
            
            $
            —




The
      following table presents the fees for professional audit services rendered
      and
      fees billed for other services rendered by HJ Associates LLC (“HJ”), our
      independent registered public accounting firm, for the fiscal years ended
      December 31, 2007 and 2006. HJ resigned as our independent public accountants
      effective September 19, 2007.





**Fees
      billed for services rendered by HJ & Associates LLC**





**2007**
            
            **2006**Audit
                fees (1)
            
            $
            60,676
            
            $
            107,000Audit-related
                fees
            
            $
            —
            
            $
            —Tax
                fees
            
            $
            9,720
            
            $
            3,325





(1)
            Fees
                charged for audit services in respect of the fiscal years noted and
                for
                review of quarterly financial statements and other regulatory filings
                for
                these years.





93




**Audit
      Fees**





This
      category includes fees paid for the audit of our annual financial statements
      and
      review of financial statements included in our quarterly reports on Form 10-QSB.
      In addition to fees for services necessary to perform an audit or review in
      accordance with Generally Accepted Auditing Standards, this category includes
      services that generally only the independent accountant reasonably can provide,
      such as comfort letters, statutory audits, attest services, consents, and
      assistance or review of documents filed with the SEC.





**Audit-Related
      Fees**





This
      category covers assurance and related services that traditionally are performed
      by the independent accountant. More specifically, these services would include,
      among others: employee benefit plan audits, due diligence related to mergers
      and
      acquisitions, accounting consultations and audits in connection with
      acquisitions, internal control reviews, attest services that are not required
      by
      statute or regulation and consultation concerning financial and reporting
      standards.





**Tax
      Fees**





This
      category consists of professional services rendered for tax compliance and
      tax
      advice. The services for the fees disclosed under this category include tax
      advisory services associated with our ongoing business.




**All
      Other Fees**





This
      category consists of fees for services not reported in the other
      categories





**Audit
      Committee Pre-Approval Policies**




The
      Audit
      Committee reviews and approves audit and permissible non-audit services
      performed by our independent auditors, as well as the fees charged for such
      services. In its review of non-audit service fees and the appointment of its
      independent auditors as our independent accountants, the Audit Committee
      considered whether the provision of such services is compatible with maintaining
      its auditors’ independence. All of the services provided and fees charged by its
      independent auditors in 2007 and 2006 were pre-approved by the Audit
      Committee.





94




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed its behalf by the undersigned, thereunto duly
      authorized.




WESTERN
                GOLDFIELDS, INC.Dated:
                March 28, 2008
            By:
            /s/ Raymond
                ThrelkeldRaymond
                Threlkeld, President and Chief Executive
                Officer




Pursuant
      to the requirements of the Exchange Ac, this report has been signed by the
      following persons on behalf of the Registrant and in the capacities and on
      the
      dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                Raymond Threlkeld
            
            President, Chief Executive Officer, and Director
            
            March
                28, 2008Raymond
                Threlkeld
            
            (Principal
                Executive Officer)/s/
                Brian Penny
            
            Chief
                Financial Officer (Principal Financial
            
            March
              28, 2008Brian
                Penny
            
            and
                Accounting Officer)/s/
                Randall Oliphant
            
            Chairman
                of the Board
            
            March
              28, 2008Randall
                Oliphant/s/
                Vahan Kololian
            
            Director
            
            March
              28, 2008Vahan
                Kololian/s/
                Martyn Konig
            
            Director****
            
            March
              28, 2008Martyn
                Konig/s/
                Gerald Ruth
            
            Director
            
            March
              28, 2008Gerald
                Ruth





95




**INDEX
      TO EXHIBITS**




Exhibit
              No.
            
            Document
                Description3.1(11)
            
            Articles
                of Incorporation of Western Goldfields Inc. (Annex II)3.2(11)
            
            Bylaws
                of Western Goldfields Inc. (Annex III)4.1(1)
            
            Form
                of Stock Purchase Warrant by Western Goldfields, Inc. in favor of
                the
                Investors in the November-December 2003 Private
                Placement4.2(1)
            
            Warrant,
                dated November 5, 2003, by Western Goldfields, Inc. in favor of RMB
                Resources Limited (included in Schedule 5 to Exhibit
                10.2)4.3(12)
            
            Warrant,
                dated November 7, 2003, by Western Goldfields, Inc. in favor of Hospah
                Coal Company4.4(12)
            
            Warrant,
                dated March 16, 2004, by Western Goldfields, Inc. in favor of Hospah
                Coal
                Company4.4
                (12)
            
            Warrant,
                dated March 16, 2004, by Western Goldfields Inc. in favour of Hospah
                Coal
                Company4.5
                (7)
            
            Form
                of Warrant relating to the February 2006 private placement (Exhibit
                10.2)4.6
                (8)
            
            Form
                of Warrant relating to the February 2006 private placement (Exhibit
                10.2)4.7
                (13)
            
            Form
                of Stock Certificate for Western Goldfields Inc. common
                shares4.8(11)
            
            Shareholder
                Rights Plan of Western Goldfields Inc. (Annex IV)10.1(110.1(1)
            
            Registration
                Rights Agreement between Western Goldfields, Inc. and the Investors
                in the
                November-December 2003 Private Placement10.2(1)
            
            Facility
                Agreement, dated as of November 5, 2003, between Western Mesquite
                Mines,
                Inc., Each party listed in schedule 1 as a Guarantor, RMB International
                (Dublin) Limited and RMB Resources Limited10.3(1)
            
            Security
                Agreement, dated as of November 5, 2003, between Western Mesquite
                Mines,
                Inc., RMB International (Dublin) Limited and RMB Resources
                Limited10.4(1)
            
            Mortgage,
                Security Agreement, Assignment and Financing Statement, dated as
                of
                November 7, 2003, from Western Mesquite Mines, Inc. to RMB International
                (Dublin) Limited and RMB Resources Limited10.5(1)
            
            Pledge
                Agreement, dated as of November 5, 2003, between Western Goldfields,
                Inc.,
                RMB International (Dublin) Limited and RMB Resources
                Limited10.6(1)
            
            Deposit
                Account Control Agreement, dated as of November 5, 2003, by and between
                RMB International (Dublin) Limited, RMB Resources Limited, Western
                Mesquite Mines, Inc. and Baker Boyer National Bank10.7(1)
            
            Deed
                of Guarantee and Indemnity, dated as of November 5, 2003, between
                RMB
                Resources Limited, RMB International (Dublin) Limited and The companies
                described in the schedule as Guarantors10.8(1)
            
            Management
                Side Agreement, dated as of November 5, 2003, between RMB Resources
                Limited, RMB International (Dublin) Limited, Western Mesquite Mines,
                Inc.
                and Harrison Western Construction Corporation10.9(1)
            
            Agreement,
                dated as of September 1, 2003, between Western Mesquite Mines, Inc.
                and
                Harrison Western Construction Corporation10.10(1)
            
            Asset
                Purchase Agreement, dated effective November 7, 2003, among Western
                Mesquite Mines, Inc., Western Goldfields, Inc., Hospah Coal Company,
                and
                Newmont USA Limited dba Newmont Mining Corporation10.11(1)
            
            Registration
                Rights Agreement, dated as of November 7, 2003, between Western
                Goldfields, Inc. and Hospah Coal Company10.11.1(1)
            
            Agreement
                Regarding Return of Shares, dated January 20, 2004, by and between
                Western
                Goldfields, Inc. and Hospah Coal Company10.12(1)
            
            Net
                Operating Cash Flow Royalty Agreement, dated November 7, 2003, between
                Western Mesquite Mines, Inc. and Hospah Coal Company10.13(1)
            
            Royalty
                Agreement, dated November 7, 2003, between Western Mesquite Mines,
                Inc.
                and Hospah Coal Company10.14(1)
            
            Guaranty,
                dated November 7, 2003, by Western Goldfields, Inc. in favor of Newmont
                USA Limited and Hospah Coal Company10.15(1)
            
            Exploration
                and Mining Lease Agreement, dated December 23, 2002, between Mountain
                Gold
                Exploration, Inc, Lane A. Griffin and Western Goldfields,
                Inc.10.16(1)
            
            Agreement,
                dated April 25, 2003, by and among Western Goldfields, Inc. and Electrum
                L.L.C.10.17(1)
            
            Business
                Consultant Agreement, dated September 28, 2003, between MGI Fund-Raising
                Consultants and Western Goldfields, Inc.10.18(1)
            
            Mineral
                Lease and Landfill Facilities Lease Agreement, dated as of June 11,
                1993,
                by and between Hanson Natural Resources Company, Hospah Coal Company
                and
                Santa Fe Pacific Minerals
                Corporation




96




10.19(1)
            
            Refining
                Agreement, dated December 1, 2003, by and between Western Goldfields,
                Inc.
                and Johnson Matthey Inc.10.20.1(1)
            
            Statement
                of Intent and Confidentiality Agreement, dated January 23, 2004,
                by and
                between the Selnek-is Tem-Al Corporation on behalf of the Torres
                Martinez
                Desert Cahuilla Indians and Western Goldfields, Inc.10.20.2(1)
            
            Letter
                Agreement, dated April 7, 2004, from Western Goldfields, Inc. and
                accepted
                and agreed to by the Torres Martinez Desert Cahuilla Indian
                Tribe10.20.3(1)
            
            Letter
                Agreement dated July 12, 2004, from Western Goldfields, Inc. and
                accepted
                and agreed to by Selnek-is Tem-Al Corp.10.20.4(6)
            
            Letter
                Agreement dated January 10, 2005 from Western Goldfields, Inc. and
                accepted and agreed to by Selnek-is Tem-Al Corporation10.21(1)
            
            Lease
                Agreement, dated April 1, 2004, between Matley Plaza Limited Partnership
                and Western Goldfields10.22(1)
            
            Letter
                Agreement, dated April 28, 2004 from Western Goldfields, Inc. and
                accepted
                and agreed to by 321gold10.23(1)
            
            Letter
                Agreement, dated April 8, 2004, from Western Goldfields, Inc. and
                agreed
                and accepted by Coolcharm Ltd.10.24.1(1)
            
            Letter
                Agreement, dated January 7, 2004, by Western Goldfields, Inc. and
                La
                Cuesta International, Inc.10.24.2(1)
            
            Mining
                Lease, dated as of June 19, 2003, between Neil Johnson and La Cuesta
                International, Inc.10.24.3(1)
            
            Mining
                Lease, dated as of July 1, 2003, between Edwin C. Mealy and Mary
                C. Mealy
                and La Cuesta International, Inc.10.25(2)
            
            Exploration
                and Mining Lease Agreement, dated as of October 20, 2004, between
                Mountain
                Gold Exploration, Inc., IW Exploration Co. and Western Goldfields,
                Inc.
                (Exhibit 10.1)10.26(3)
            
            Mining
                Venture Agreement, dated November 28, 2004, between Western Goldfields,
                Inc. and 321Gold, Inc. (Exhibit 10.1)10.27(5)
            
            Subscription
                Agreement, dated December 31, 2004, between Western Goldfields, Inc.
                and
                RAB Special Situations, LP (Exhibit 10.1)10.28(5)
            
            Stock
                Purchase Warrant, dated December 31, 2004, by Western Goldfields,
                Inc. in
                favor of RAB Special Situations, LP (Exhibit 10.2)10.29(5)
            
            Registration
                Rights Agreement, dated December 31, 2004, by and among Western
                Goldfields, Inc. and RAB Special Situations, LP (Exhibit
                10.3)10.30(6)
            
            Officer
                Employer Agreement, dated effective as of January 1, 2004, by and
                between
                Western Goldfields, Inc. and Thomas Mancuso10.31(6)
            
            Officer
                Employer Agreement, dated effective as of January 1, 2004, by and
                between
                Western Goldfields, Inc. and Thomas Callicrate10.32(6)
            
            Officer
                Employer Agreement, dated effective as of January 1, 2004, by and
                between
                Western Goldfields, Inc. and Lawrence O’Connor10.33(7)
            
            Form
                of Securities Purchase Agreement relating to the February 2006 private
                placement (Exhibit 10.1)10.33(8)
            
            Form
                of Securities Purchase Agreement relating to the February 2006 private
                placement (Exhibit 10.1)10.34
            
            Underwriting
                Agreement, dated as of January 18, 2007, among Western Goldfields,
                Inc.,
                Wellington West Capital Markets (USA) Inc., BMO Capital Markets Corp.,
                RBC
                Capital Markets Corporation, GMP Securities L.P. and Research Capital
                USA
                Inc., as underwriters.10.35
                (14)
            
            Amendment
                and Restatement Agreement, including Amended and Restated Credit
                Agreement, between Western Goldfields, Inc., Investec Bank (UK) Limited,
                and the financial institutions party thereto dated May 31, 2007 (Exhibit
                10.2)10.36
                (14)
            
            Rights
                Agreement between Western Goldfields, Inc. and Computershare Investor
                Services Inc., dated as of June 29, 2007 (Exhibit 10.1)10.37
                (14)
            
            Development
                Plan Amendment relating to the credit facility agreement, between
                Western
                Goldfields, Inc., Investec Bank (UK) Limited and Commonwealth Bank
                of
                Australia dated June 29, 2007 (Exhibit 10.3)14.1(10)
            
            Code
                of Ethics21.1(10)
            
            List
                of Subsidiaries23.1*
            
            Consent
                of HJ & Associates, LLC23.2*
            
            Consent
                of PricewaterhouseCoopers LLP31.1
                *
            
            Certification
                of principal executive officer pursuant to Section 302 of the Sarbanes
                -
                Oxley Act of 200231.2
                *
            
            Certification
                of principal financial and accounting officer pursuant to Section
                302 of
                the Sarbanes - Oxley Act of 200232.1
                *
            
            Certification
                of principal executive officer pursuant to Section 302 of the Sarbanes
                -
                Oxley Act of 200232.2
                *
            
            Certification
                of principal financial officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002







97





(1)
            Incorporated
                by reference from the Registration Statement on Form SB-2, as amended,
                of
                Western Goldfields, Inc., Registration No. 333-112036(2)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K, filed with the Securities
                and Exchange Commission on November 12, 2004(3)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K, filed with the Securities
                and Exchange Commission on December 2, 2004(4)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K, filed with the Securities
                and Exchange Commission on December 16, 2004(5)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K, filed with the Securities
                and Exchange Commission on January 6, 2005(6)
            Incorporated
                by reference from the Registration Statement on Form SB-2 of Western
                Goldfields, Inc., Registration No. 333-122426(7)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on February 17, 2006(8)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfield, Inc.’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on February 13, 2006(9)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfields, Inc.’s Current Report on Form 8-K filed with the Securities
                and Exchange Commission on June 20, 2006(10)
            Incorporated
                by reference from Western Goldfields, Inc.’s Annual Report on Form 10-K
                for the year ended December 31, 2005 filed with the Securities and
                Exchange Commission on April 13, 2006(11)
            Incorporated
                by reference to the annex shown in parenthesis included in Western
                Goldfields Inc.’s Registration Statement on Form S-4, Registration
                Statement No. 333-141595, as amended(12)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfields Inc.’s Registration Statement on Form S-3, Registration
                Statement No. 333-144685, filed with the Securities and Exchange
                Commission on July 19, 2007(13)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfields Inc.’s Amendment No. 1 to Registration Statement on Form S-3,
                Registration Statement No. 333-144685, filed with the Securities
                and
                Exchange Commission on August 6, 2007(14)
            Incorporated
                by reference to the exhibit shown in parenthesis included in Western
                Goldfields Inc.’s Current Report on Form 10KSB filed with the Securities
                and Exchange Commission on August 7,
                2007




*
            Filed
                herewith.




98