Exhibit 99.2







Consolidated financial statements of

New Gold Inc.

December 31, 2008

---

New Gold Inc.December 31, 2008

Table of contents

|                                                             |     
|------------------------------------------------------------ | ----
|Auditors'
      reports                                      | 1 -2
|                                                             |     
|Consolidated
      statements of operations                  | 3   
|                                                             |     
|Consolidated
      statements of comprehensive income (loss) | 4   
|                                                             |     
|Consolidated
      balance sheets                            | 5   
|                                                             |     
|Consolidated
      statements of shareholders' equity        | 6   
|                                                             |     
|Consolidated
      statements of cash flows                  | 7   
|                                                             |     
|Notes
      to the consolidated financial statements         | 8-47

---

Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of New Gold Inc.

We have audited the accompanying consolidated balance sheets
of New Gold Inc. and subsidiaries (the "Company") as at December 31, 2008 and
2007, and the related consolidated statements of operations, comprehensive
income (loss), shareholders equity and cash flows for the year ended December
31, 2008 and the thirteen month period ended December 31, 2007. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

With respect to the financial statements for the year ended
December 31, 2008, we conducted our audit in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). With respect to the financial statements for
the thirteen months ended December 31, 2007, we conducted our audit in
accordance with Canadian generally accepted auditing standards. These standards
require that we plan and perform the audit to obtain reasonable assurance about
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
audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of New Gold
Inc. and subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for the year ended December 31, 2008 and the
thirteen month period ended December 31, 2007 in accordance with Canadian
generally accepted accounting principles.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys
internal control over financial reporting as of December 31, 2008, based on the
criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 27, 2009 expressed an unqualified opinion on the Companys
internal control over financial reporting.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants 
Vancouver, Canada 
March 12, 2009 (except for Note 17 which is as of March 27, 2009)

Comments by Independent Registered Chartered Accountants on
Canada-United States of America Reporting Difference

The standards of the Public Company Accounting Oversight
Board (United States) require the addition of an explanatory paragraph
(following the opinion paragraph) when there are changes in accounting
principles that have a material effect on the comparability of the Companys
financial statements, such as the changes described in Note 3 to the
consolidated financial statements. Although we conducted our audits in
accordance with both Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States) our
report to the Board of Directors and Shareholders, dated March 12, 2009 (except
for Note 17 which is as of March 27, 2009), is expressed in accordance with
Canadian reporting standards which do not require a reference to such changes in
accounting principles in the auditors report when the changes are properly
accounted for and adequately disclosed in the financial statements.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants 
Vancouver, Canada 
March 27, 2009

---

Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of New Gold Inc.

We have audited the internal control over financial reporting
of New Gold Inc. and subsidiaries (the "Company") as of December 31, 2008, based
on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As described in Managements Report on Internal Control over Financial
Reporting, management excluded from its assessment the internal control over
financial reporting for the Companys newly acquired Peak Gold Ltd. ("Peak")
business, other than the internal controls over the period end financial close
process. The Peak business , consisting of the Peak mine in Australia and the
Amapari mine in Brazil, constitutes approximately 12% of total assets, 78% of
total revenues, and 82% of loss from operations of the corresponding
consolidated financial statement amounts of the Company as of and for the year
ended December 31, 2008. Accordingly, our audit did not include the internal
control over financial reporting of the Peak business other than the internal
controls over the period end financial close process. The Companys management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a
process designed by, or under the supervision of, the companys principal
executive and principal financial officers, or persons performing similar
functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended December 31, 2008 of the
Company and our report dated March 12, 2009 (except for Note 17 which is as of
March 27, 2009) expressed an unqualified opinion on those financial statements
and included a separate report titled Comments by Independent Registered
Chartered Accountants on Canada-United States of America Reporting Difference
referring to changes in accounting principles.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants 
Vancouver, Canada 
March 27, 2009



---

New Gold Inc.Consolidated statements of
operations(Expressed in thousands of U.S. dollars, except share and
per share amounts)

|                                                                                       |  |              |   |  | Thirteen     |  
|-------------------------------------------------------------------------------------- |  | ------------ | - |  | ------------ | -
|                                                                                       |  | Year ended   |   |  | months ended |  
|                                                                                       |  | December 31, |   |  | December 31, |  
|                                                                                       |  | 2008         |   |  | 2007         |  
|                                                                                       |  | $            |   |  | $            |  
|                                                                                       |  |              |   |  |              |  
|                                                                                       |  |              |   |  |              |  
|Revenues                                                                               |  | 218,135      |   |  | 131,084      |  
|Operating expenses                                                                     |  | (169,694     | ) |  | (80,723      | )
|Depreciation and depletion                                                             |  | (32,961      | ) |  | (18,973      | )
|Earnings from mine operations                                                          |  | 15,480       |   |  | 31,388       |  
|                                                                                       |  |              |   |  |              |  
|Corporation administration (1)                                                         |  | (23,029      | ) |  | (13,295      | )
|Exploration                                                                            |  | (8,489       | ) |  | (3,983       | )
|Write-down of
      mining interests (Note 7 (b))                                      |  | (165,252     | ) |  | -            |  
|                                                                                       |  |              |   |  |              |  
|(Loss) earnings from operations                                                        |  | (181,290     | ) |  | 14,110       |  
|Other income (expense)                                                                 |  |              |   |  |              |  
|Interest and other income                                                              |  | 5,368        |   |  | 4,113        |  
|Interest and finance fees                                                              |  | (3,002       | ) |  | (459         | )
|Gain
      (loss) on foreign exchange                                                  |  | 69,222       |   |  | (2,864       | )
|                                                                                       |  |              |   |  |              |  
|(Loss) earnings from operations before taxes                                           |  | (109,702     | ) |  | 14,900       |  
|Income and mining taxes                                                                |  | 7,023        |   |  | (287         | )
|Net (loss)
      earnings                                                              |  | (102,679     | ) |  | 14,613       |  
|                                                                                       |  |              |   |  |              |  
|(Loss) earnings per share                                                              |  |              |   |  |              |  
|Basic                                                                                  |  | (0.69        | ) |  | 0.27         |  
|Diluted                                                                                |  | (0.69        | ) |  | 0.21         |  
|                                                                                       |  |              |   |  |              |  
|Weighted average number of shares outstanding                                          |  |              |   |  |              |  
|(in thousands)                                                                         |  |              |   |  |              |  
|Basic                                                                                  |  | 148,126      |   |  | 53,428       |  
|Diluted                                                                                |  | 148,126      |   |  | 68,226       |  
|                                                                                       |  |              |   |  |              |  
|(1)Stock option expense (a
      non-cash item included in corporation administration) |  | (7,039       | ) |  | (6,156       | )

|See accompanying notes to the consolidated financial
      statements. | Page 3
|---------------------------------------------------------------------- | ------
|                                                                       |       

---

New Gold Inc.Consolidated statements of comprehensive income (loss)(Expressed in thousands of U.S. dollars)

|                                                                 |  |              |   |  | Thirteen     | 
|---------------------------------------------------------------- |  | ------------ | - |  | ------------ | 
|                                                                 |  | Year ended   |   |  | months ended | 
|                                                                 |  | December 31, |   |  | December 31, | 
|                                                                 |  | 2008         |   |  | 2007         | 
|                                                                 |  | $            |   |  | $            | 
|                                                                 |  |              |   |  |              | 
|                                                                 |  |              |   |  |              | 
|Net (loss) earnings                                              |  | (102,679     | ) |  | 14,613       | 
|Other comprehensive income                                       |  |              |   |  |              | 
|Gain on available-for-sale securities (net of
      tax of $Nil) |  | 1,160        |   |  | -            | 
|Comprehensive
      income (loss)                                |  | (101,519     | ) |  | 14,613       | 

|See accompanying notes to the consolidated financial
      statements. | Page 4
|---------------------------------------------------------------------- | ------
|                                                                       |       

---

New Gold Inc.Consolidated balance sheets as at December 31(Expressed in thousands of U.S. dollars)

|                                                              |  | 2008      |   |  | 2007    |  
|------------------------------------------------------------- |  | --------- | - |  | ------- | -
|                                                              |  | $         |   |  | $       |  
|Assets                                                        |  |           |   |  |         |  
|Current assets                                                |  |           |   |  |         |  
|Cash and cash equivalents                                     |  | 185,668   |   |  | 149,924 |  
|Short-term investments                                        |  | -         |   |  | 32,440  |  
|Accounts receivable                                           |  | 11,232    |   |  | 18,123  |  
|Inventories and stockpiled ore (Note 5)                       |  | 39,402    |   |  | 39,792  |  
|Future income and mining taxes                                |  | 2,690     |   |  | -       |  
|Prepaid expenses and other                                    |  | 3,945     |   |  | 1,624   |  
|                                                              |  | 242,937   |   |  | 241,903 |  
|                                                              |  |           |   |  |         |  
|Investments (Note 6)                                          |  | 77,016    |   |  | -       |  
|Mining interests (Note 7)                                     |  | 1,618,761 |   |  | 315,831 |  
|Intangible royalty asset                                      |  | 14,087    |   |  | 14,664  |  
|Reclamation
      deposits and other                          |  | 4,900     |   |  | -       |  
|                                                              |  | 1,957,701 |   |  | 572,398 |  
|                                                              |  |           |   |  |         |  
|Liabilities                                                   |  |           |   |  |         |  
|Current liabilities                                           |  |           |   |  |         |  
|Accounts payable and accrued
      liabilities                |  | 41,382    |   |  | 22,835  |  
|Short-term borrowings                                         |  | 7,193     |   |  | -       |  
|Income and mining taxes payable                               |  | 5,126     |   |  | 4,960   |  
|                                                              |  | 53,701    |   |  | 27,795  |  
|                                                              |  |           |   |  |         |  
|Reclamation and closure cost obligations (Note 11)            |  | 21,949    |   |  | 18,036  |  
|Future income and mining taxes (Note 10)                      |  | 224,068   |   |  | 25,943  |  
|Long-term debt (Note 8)                                       |  | 212,387   |   |  | -       |  
|Employee benefits and other                                   |  | 3,808     |   |  | 3,253   |  
|                                                              |  | 515,913   |   |  | 75,027  |  
|                                                              |  |           |   |  |         |  
|Shareholders' equity                                          |  |           |   |  |         |  
|Common shares                                                 |  | 1,321,110 |   |  | 339,796 |  
|Special warrants (Note 9 (b))                                 |  | -         |   |  | 104,166 |  
|Contributed surplus                                           |  | 65,409    |   |  | 6,166   |  
|Share purchase warrants (Note 9 (f))                          |  | 145,614   |   |  | 57,673  |  
|Equity component of convertible debentures
      (Note 8 (c)) |  | 21,604    |   |  | -       |  
|Accumulated other comprehensive loss                          |  | (406      | ) |  | (1,566  | )
|Deficit                                                       |  | (111,543  | ) |  | (8,864  | )
|                                                              |  | (111,949  | ) |  | (10,430 | )
|                                                              |  | 1,441,788 |   |  | 497,371 |  
|                                                              |  | 1,957,701 |   |  | 572,398 |  

Commitments and contingencies (Note 15)

Approved by the
Board

/s/  Robert GallagherRobert Gallagher, Director

/s/ Craig Nelsen Craig Nelsen, Director

|See accompanying notes to the consolidated financial
      statements. | Page 5
|---------------------------------------------------------------------- | ------
|                                                                       |       

---

NewGold Inc.Consolidated statements of shareholders' equity(Expressed in
thousands of U.S. dollars, except share amounts)

|                                                                           |  |               |  |  |           |  |  |             |   |  |          |   |  |             |   |  | Equity        |  |  | Accumulated |   |  |               |   |  |           |  
|-------------------------------------------------------------------------- |  | ------------- |  |  | --------- |  |  | ----------- | - |  | -------- | - |  | ----------- | - |  | ------------- |  |  | ----------- | - |  | ------------- | - |  | --------- | -
|                                                                           |  |               |  |  |           |  |  |             |   |  |          |   |  | Share       |   |  | component of  |  |  | other       |   |  | (Deficit)     |   |  | Total     |  
|                                                                           |  | Common shares |  |  | Special   |  |  | Contributed |   |  | purchase |   |  | convertible |   |  | comprehensive |  |  | retained    |   |  | shareholders' |  
|                                                                           |  | Shares        |  |  | Amount    |  |  | warrants    |   |  | surplus  |   |  | warrants    |   |  | debentures    |  |  | loss        |   |  | earnings      |   |  | equity    |  
|                                                                           |  |               |  |  | $         |  |  | $           |   |  | $        |   |  | $           |   |  | $             |  |  | $           |   |  | $             |   |  | $         |  
|                                                                           |  |               |  |  |           |  |  |             |   |  |          |   |  |             |   |  |               |  |  |             |   |  |               |   |  |           |  
|                                                                           |  |               |  |  |           |  |  |             |   |  |          |   |  |             |   |  |               |  |  |             |   |  |               |   |  |           |  
|Balance, November 30, 2006                                                 |  | 11,505,140    |  |  | 25,313    |  |  | 104,166     |   |  | 59       |   |  | -           |   |  | -             |  |  | (1,566      | ) |  | (23,477       | ) |  | 104,495   |  
|Issued for cash in private placement (net of issue costs of
      $14,248) |  | 43,500,000    |  |  | 209,689   |  |  | -           |   |  | -        |   |  | 57,673      |   |  | -             |  |  | -           |   |  | -             |   |  | 267,362   |  
|Issued for acquisition                                                     |  | 16,000,000    |  |  | 103,253   |  |  | -           |   |  | -        |   |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 103,253   |  
|Exercise of options                                                        |  | 129,000       |  |  | 175       |  |  | -           |   |  | (49      | ) |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 126       |  
|Exercise of warrants                                                       |  | 1,495,000     |  |  | 1,366     |  |  | -           |   |  | -        |   |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 1,366     |  
|Stock-based compensation                                                   |  | -             |  |  | -         |  |  | -           |   |  | 6,156    |   |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 6,156     |  
|Net loss                                                                   |  | -             |  |  | -         |  |  | -           |   |  | -        |   |  | -           |   |  | -             |  |  | -           |   |  | 14,613        |   |  | 14,613    |  
|Balance, December 31, 2007                                                 |  | 72,629,140    |  |  | 339,796   |  |  | 104,166     |   |  | 6,166    |   |  | 57,673      |   |  | -             |  |  | (1,566      | ) |  | (8,864        | ) |  | 497,371   |  
|Exercise of special warrants                                               |  | 14,772,333    |  |  | 80,448    |  |  | (104,166    | ) |  | -        |   |  | 23,718      |   |  | -             |  |  | -           |   |  | -             |   |  | -         |  
|Exercise of options                                                        |  | 424,090       |  |  | 3,022     |  |  | -           |   |  | (1,664   | ) |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 1,358     |  
|Exercise of warrants                                                       |  | 561,645       |  |  | 3,167     |  |  | -           |   |  | -        |   |  | (1,533      | ) |  | -             |  |  | -           |   |  | -             |   |  | 1,634     |  
|Acquisition of Metallica (Note 4 (a)(i))                                   |  | 87,447,821    |  |  | 605,139   |  |  | -           |   |  | 7,294    |   |  | 46,674      |   |  | -             |  |  | -           |   |  | -             |   |  | 659,107   |  
|Acquisition of NGI (Note 4 (a)(ii))                                        |  | 37,005,717    |  |  | 289,538   |  |  | -           |   |  | 8,241    |   |  | 57,415      |   |  | 21,604        |  |  | -           |   |  | -             |   |  | 376,798   |  
|Expiry of warrants                                                         |  | -             |  |  | -         |  |  |             |   |  | 38,333   |   |  | (38,333     | ) |  |               |  |  | -           |   |  | -             |   |  | -         |  
|Stock-based compensation                                                   |  | -             |  |  | -         |  |  | -           |   |  | 7,039    |   |  | -           |   |  | -             |  |  | -           |   |  | -             |   |  | 7,039     |  
|Other comprehensive income                                                 |  | -             |  |  | -         |  |  | -           |   |  | -        |   |  | -           |   |  | -             |  |  | 1,160       |   |  | -             |   |  | 1,160     |  
|Net loss                                                                   |  | -             |  |  | -         |  |  | -           |   |  | -        |   |  | -           |   |  | -             |  |  | -           |   |  | (102,679      | ) |  | (102,679  | )
|Balance,
      December 31, 2008                                           |  | 212,840,746   |  |  | 1,321,110 |  |  | -           |   |  | 65,409   |   |  | 145,614     |   |  | 21,604        |  |  | (406        | ) |  | (111,543      | ) |  | 1,441,788 |  

|See accompanying notes to the consolidated financial
      statements. | Page 6
|---------------------------------------------------------------------- | ------
|                                                                       |       

---

New Gold Inc.Consolidated statements of cash flows(Expressed in thousands of U.S. dollars)

|                                                                               |  |              |   |  | Thirteen     |  
|------------------------------------------------------------------------------ |  | ------------ | - |  | ------------ | -
|                                                                               |  | Year ended   |   |  | months ended |  
|                                                                               |  | December 31, |   |  | December 31, |  
|                                                                               |  | 2008         |   |  | 2007         |  
|                                                                               |  | $            |   |  | $            |  
|                                                                               |  |              |   |  |              |  
|Operating activities                                                           |  |              |   |  |              |  
|Net (loss) earnings                                                            |  | (102,679     | ) |  | 14,613       |  
|Items not involving cash                                                       |  |              |   |  |              |  
|Depreciation and depletion                                                     |  | 32,961       |   |  | 18,973       |  
|Write-down of
      mining interests                                           |  | 165,252      |   |  | -            |  
|Unrealized foreign exchange
      (gain) loss                                  |  | (68,008      | ) |  | 5,062        |  
|Stock option
      expense                                                     |  | 7,039        |   |  | 6,156        |  
|Future income and mining taxes                                                 |  | (13,496      | ) |  | (6,537       | )
|Other                                                                          |  | 1,569        |   |  | 224          |  
|Change in non-cash working capital (Note 12)                                   |  | 2,047        |   |  | (11,871      | )
|                                                                               |  | 24,685       |   |  | 26,620       |  
|                                                                               |  |              |   |  |              |  
|Investing activities                                                           |  |              |   |  |              |  
|Mining interests                                                               |  | (133,868     | ) |  | (27,052      | )
|Reclamation deposits                                                           |  | (1,225       | ) |  | -            |  
|Cash acquired in business combination and
      asset acquisition (Note 4 (a)) |  | 137,718      |   |  | -            |  
|Acquisition, net of cash
      acquired (Note 4 (b))                           |  | -            |   |  | (190,552     | )
|Purchase of short-term investments                                             |  | -            |   |  | (32,440      | )
|Proceeds from short-term investments                                           |  | 32,440       |   |  | -            |  
|                                                                               |  | 35,065       |   |  | (250,044     | )
|                                                                               |  |              |   |  |              |  
|Financing activities                                                           |  |              |   |  |              |  
|Common shares issued on
      exercise of warrants/ options                    |  | 2,991        |   |  | 1,492        |  
|Proceeds from short-term borrowing                                             |  | 8,500        |   |  | -            |  
|Repayment of short-term
      borrowing                                        |  | (11,500      | ) |  | -            |  
|Common shares issued in private placement, net                                 |  | -            |   |  | 267,362      |  
|Special warrants issued in private placement,
      net                        |  | -            |   |  | 104,166      |  
|                                                                               |  | (9           | ) |  | 373,020      |  
|                                                                               |  |              |   |  |              |  
|Effect of exchange rate changes on cash and cash equivalents                   |  | (23,997      | ) |  | -            |  
|                                                                               |  |              |   |  |              |  
|Increase in cash and cash equivalents                                          |  | 35,744       |   |  | 149,596      |  
|Cash and cash
      equivalents, beginning of period                           |  | 149,924      |   |  | 328          |  
|Cash and cash equivalents, end of period                                       |  | 185,668      |   |  | 149,924      |  
|                                                                               |  |              |   |  |              |  
|Cash and cash equivalents are comprised of                                     |  |              |   |  |              |  
|Cash                                                                           |  | 21,398       |   |  | 10,312       |  
|Short-term money market instruments                                            |  | 164,270      |   |  | 139,612      |  
|                                                                               |  | 185,668      |   |  | 149,924      |  
|                                                                               |  |              |   |  |              |  
|Supplemental cash flow information (Note 12)                                   |  |              |   |  |              |  

|See accompanying notes to the consolidated financial
      statements. | Page 7
|---------------------------------------------------------------------- | ------
|                                                                       |       

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|1. | Description of business and nature of
      operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | On June 30, 2008 New Gold Inc. ("NGI"), Metallica
      Resources Inc. ("Metallica") and Peak Gold Ltd. ("Peak Gold" or the
      "Company") completed a business combination and the acquisition of assets
      (the "Transaction" see Note 4). In accordance with the provisions of the
      Canadian Institute of Chartered Accountants ("CICA") Handbook Section
      1581, Business Combinations, Peak Gold has been identified as the
      acquirer for accounting purposes. As such, these consolidated financial
      statements are a continuation of the consolidated financial statements of
      Peak Gold, with the comparative information being that of Peak Gold.
      Following completion of the Transaction, Peak Gold is now known as New
      Gold Inc. ("New Gold"). References to NGI in these consolidated financial
      statements refer to transactions involving the pre-transaction public
      company New Gold Inc.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In connection with the Transaction shareholders of Peak
      Gold exchanged one common share of Peak Gold for 0.1 of a New Gold common
      share and nominal cash consideration. All information related to common
      shares for the current and prior period has been restated to give effect
      to this share exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company is a gold producer engaged in gold mining and
      related activities including acquisition, exploration, extraction,
      processing and reclamation. The Company's assets are comprised of the Amapari mine in Brazil, the Cerro San Pedro mine in Mexico, and the Peak
      mine in Australia. Significant development projects include the New Afton
      copper-gold project in Canada and a 30% interest in an advanced stage
      copper-gold project in Chile.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|2. | Summary of significant accounting
  policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | These consolidated financial statements have been
      prepared in accordance with Canadian generally accepted accounting
      principles ("Canadian GAAP"), and except where described in Note 17,
      conform in all material respects with accounting principles generally
      accepted in the United States ("US GAAP"), using the following significant
      accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Subsidiary
    
    InterestMetallica Resources Inc. (1)
    
    100%Metallica Resources Alaska Inc. (1)
    
    100%Minera Metallica Resources Chile Limitada
      (1)
    
    100%Minera San Xavier, S.A. de C.V. (1)
    
    100%Mineração Pedra Branca do Amapari Ltda
    ("Amapari")
    
    100%Peak Gold Mines Pty
    
    100%Sociedad Contractual Minera El Morro
      (1)
    
    100%


(1)
    These subsidiaries are included in the Company's results
      from June 30, 2008, the date of acquisition, onward (Note 4
  (a)).


Page 8

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (a)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (b)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (c)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   | (d)                                                   
|   |                                                       
|   |                                                       

Page9

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (d)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (e)                                                   
|   |                                                       
|   |                                                       

Page 10

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (e)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       

Page 11

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (f)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   | (g)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (h)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (i)                                                   
|   |                                                       
|   |                                                       

Liabilities recognized in respect of employee benefits which are not expected to be settled within one year are measured at the present value of the estimated future cash outflows to be made by the Company in respect of services provided by
employees up to reporting date.

Page 12

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (j)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (k)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   | (l)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   | (m)                                                   
|   |                                                       
|   |                                                       

Page13

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|2. | Summary of significant accounting policies (continued)
|-- | ------------------------------------------------------
|   |                                                       
|   | (n)                                                   
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   |                                                       
|   | (o)                                                   
|   |                                                       
|   |                                                       

Page14

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|3. | Changes in accounting policies
|-- | ------------------------------
|   |                               
|   | (a)                           
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   |                               
|   | (b)                           
|   |                               
|   |                               

Page 15

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|3. | Changes in accounting policies (continued)
|-- | ------------------------------------------
|   |                                           
|   | (c)                                       
|   |                                           
|   |                                           
|   |                                           
|   | (d)                                       
|   |                                           
|   |                                           
|4. | Business combination and asset acquisition
|   |                                           
|   | (a)                                       
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           
|   |                                           

Page16

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|4. | Business combination and asset acquisition
      (continued)
|-- | ------------------------------------------------------------
|   |                                                             
|   | (a)                                                         
|   |                                                             
|   |                                                             

The final allocation of the purchase price based on the
consideration paid and Metallica's net assets acquired is as follows:

$Issuance of New Gold shares (87,447,821
      common shares)
    
    605,139Fair value of options issued
    
    7,294Fair value of warrants issued
    
    46,674Transaction costs
    
    3,651Purchase consideration
    
    662,758Net assets acquiredNet working capital acquired (including cash
      of $34,154)
    
    35,340Mineral property, plant and
      equipment
    
    814,352Other long-term assets
    
    2,214Long-term liabilities
    
    (3,684
    )Future income tax liability
    
    (185,464
    )662,758


|(ii) | NGI                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | This element of the Transaction has been accounted for as
      a purchase of assets and assumption of liabilities of NGI by Peak
    Gold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | In accordance with the determination that Peak Gold is
      the accounting acquirer in this Transaction, the deemed consideration is
      the market value of the 37,005,717 NGI common shares and the fair value of
      options, warrants and convertible or exchangeable securities of NGI
      currently outstanding. As at June 30, 2008, there were options, warrants,
      convertible or exchangeable securities and other rights to acquire an
      aggregate of 30,678,500 common shares of NGI. The common shares of NGI
      have been valued at $7.82 per share, the share price of NGI as of June 30,
      2008, the closing date of the Transaction.

Page17

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|4. | Business combination and asset acquisition
      (continued)
|-- | ------------------------------------------------------------
|   |                                                             
|   | (a)                                                         
|   |                                                             
|   |                                                             

The final allocation of the purchase price based on the
consideration paid and NGI's net assets acquired is as follows:

$Issuance of New Gold shares (37,005,717
      common shares)
    
    289,538Fair value of options issued
    
    8,241Fair value of warrants issued
    
    57,415Transaction costs
    
    4,011Purchase consideration
    
    359,205Net working capital (including cash of
      $103,564)
    
    85,687Mineral property, plant and equipment
    
    537,720Other assets
    
    94,631Long-term liabilities
    
    (252,892
    )Future income tax liability
    
    (84,337
    )Convertible
      debentures
    
    (21,604
    )359,205


| |     | For the purposes of these consolidated financial
      statements, the purchase consideration has been allocated to the fair
      value of assets acquired and liabilities assumed, including allocation of
      mining interests to depletable and non-depletable properties, based on
      management's best estimates and all available information at the time of
      the Transaction.                                                                                                                                                                                                                       
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (b) | Acquisition of Amapari and Peak Mines                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | On February 15, 2007, the Company entered into an
      agreement with Goldcorp Inc. ("Goldcorp"), a company related by a director
      in common, to acquire Goldcorp's Amapari mine in Brazil and Peak mine in
      Australia (the "Acquisition"). The Company completed the acquisition of
      the Amapari mine and the Peak mine on April 3, 2007 and April 27, 2007,
      respectively. In consideration for the acquisition of the Amapari and Peak
      Mines, the Company issued to Goldcorp 155 million common shares with a
      value of $100 million and paid $200 million in cash,
  respectively.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | Upon completion of the Acquisition, Goldcorp held
      approximately 22% ownership in Peak Gold and a position on the Board of
      Directors of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The business combination has been accounted for as a
      purchase transaction, with the Company as the acquirer and the Amapari and
      Peak Mines as the acquiree. The results of the operations of the acquired
      assets are included in the consolidated financial statements of the
      Company from the dates of the Acquisition.                                                                                                                                                                                                                                                                      

Page 18

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|4. | Business combination and asset acquisition
      (continued)
|-- | ------------------------------------------------------------
|   |                                                             
|   | (b)                                                         
|   |                                                             
|   |                                                             

$Purchase priceCash
    
    200,000Common shares
    
    100,000Acquisition costs
    
    5,032305,032Net assets acquiredCash and cash equivalents
    
    11,212Accounts receivable
    
    4,391Inventories and stockpiled ore
    
    40,286Mining interests
    
    299,535Intangible asset
    
    14,664Other
    
    5,091Current liabilities
    
    (23,618
    )Reclamation and closure cost
      obligations
    
    (16,662
    )Future income tax liabilities, net
    
    (29,867
    )305,032


|5. | Inventories and stockpiled
ore
|-- | ------------------------------

2008
    
    
    2007$
    
    
    $Supplies
    
    12,179
    
    
    15,092Work-in-process (a)
    
    5,008
    
    
    7,505Heap leach ore (b)
    
    19,141
    
    
    12,254Stockpiled ore (c)
    
    112
    
    
    1,106Finished goods
    
    2,962
    
    
    3,83539,402
    
    
    39,792


| | (a) | Work-in-process                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                           
| |     | Work-in-process is the stage between the product (gold,
      silver and copper) as it sits as a raw material (mined or stockpiled) and
      when it has been converted into the finished product (doré or
      concentrate).                                                                           
| |     |                                                                                                                                                                                                                                                                                                           
| | (b) | Heap leach ore                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                           
| |     | The recovery of gold from certain oxide ores is achieved
      through the heap leaching process used at the Amapari and Cerro San Pedro
      mines. Under this method, ore is placed on leach pads where it is treated
      with a chemical solution which dissolves the gold contained in the
    ore.

Page 19

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|5. | Inventories and stockpiled ore (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The amount of inventories recognized in operating expenses for the year is $116 million, which includes a $1.3 million write-down related to inventories at Amapari. There were no reversals of write-downs during the
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|6. | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | As at December 31, 2008, the Company had $139 million (Cdn$169 million) invested in ABCP which was rated R1-high by Dominion Bond Rating Service when it was initially acquired by NGI. In mid-August 2007, a number of
non-bank sponsors of ABCP, including those with which NGI had invested, announced that they could not place ABCP due to unfavourable conditions in the Canadian capital markets. As a result, there is presently no active market for the ABCP held by
the Company.                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | As at December 31, 2008, the non-bank ABCP market remained the subject of a restructuring process with the expressed intention of replacing the ABCP with a number of long-term floating rate notes ("New Notes"). The
restructuring plan, which was completed on January 21, 2009, pooled all of the underlying assets from all the ABCP trusts with the exception of those assets designated as ineligible for pooling ("Ineligible Assets") and those series of
assets backed exclusively by traditional financial assets ("Traditional Series"). Upon completion of the restructuring, income which had been accumulating from the underlying assets was distributed to investors.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | ABCP relating to the pooled assets was replaced with four classes of asset backed notes named A1, A2, B and C in declining order of seniority. ABCP relating to Ineligible Assets and Traditional Series was replaced with new
tracking notes whose characteristics are designed to track the performance of the particular assets of the series to which they correspond.                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company has designated these new notes as held-for-trading.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Page 20

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|6. | Investments (continued)
|-- | -----------------------
|   |                        
|   | (a)                    

Base caseRestructuring
    
    Face
    
    
    fair value
    
    
    Expectedcategories
    
    value
    
    
    estimate*
    
    
    maturity datemillions $
    
    
    millions $MAV 2 notesA1 (rated A)
    
    81.2
    
    
    46.6
    
    
    December 31, 2016A2 (rated A)
    
    27.9
    
    
    14.9
    
    
    December 31, 2016B
    
    5.0
    
    
    0.9
    
    
    December 31, 2016C
    
    3.5
    
    
    0.3
    
    
    December 31, 2016Traditional asset tracking notesMAV3 - Class 9
    
    7.8
    
    
    7.6
    
    
    September 12, 2015Ineligible asset tracking notesMAV2 - Class 3/13/15
    
    13.0
    
    
    2.0
    
    
    December 20, 2012to October 24, 2016Accrued interest income
    
    -
    
    
    4.7
    
    
    January 2, 2009Total original
      investment
    
    138.4
    
    
    77.0


| |     | *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | the range of fair values estimated by the Company varied
      between $76 million and $99 million
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                   
| | (b) | The A1, A2 and traditional asset tracking notes comprise
      the major categories of the notes contemplated to be received totalling
      79% of the face value of the original investments made and 85% of the fair
      value estimate of the Company's holdings excluding accrued income. In the
      case of the A1 and A2 notes, it is estimated that they will pay interest
      at a rate 0.5% less than the bankers' acceptance ("BA") rate and it is
      estimated that prospective buyers of these notes will require premium
      yields between 7% and 8% over the BA rate.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                   
| | (c) | The traditional asset notes are estimated to generate
      interest income of 0.5% above the BA rate and a prospective buyer of those
      notes is estimated to require a premium of 5% over the BA
  rate.                                                                                                                                                                                                                                                                                                                                                                                  

The Company has applied its best estimate of prospective
buyers' required yield and calculated the present value of the New Notes using
required yield as the discount factor. Using a range of potential discount
factors allows the Company to estimate a range of recoverable values.

The Class B notes are not expected to pay any current interest
until the Class A1 and A2 notes are paid in full, which is not anticipated until
December 31, 2016. These notes, which will be subordinate to the Class A1 and A2
notes, will not receive a credit rating.

The Class C notes also will not pay any current interest and
are subordinate to the Class B notes. In light of this subordination, the Class
C notes are viewed as highly speculative with regard to ultimate payment of
principal at maturity in 2016.

Page21

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|6. | Investments (continued)                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The Company will also receive three classes of ineligible
      tracking notes, two of which have direct exposure to the U.S. sub-prime
      mortgage market and one of which is backed by a leveraged super senior ("LSS") credit default swap. The fair value of the sub-prime backed notes
      is less than 10% of par value while the LSS backed note has a fair value
      of less than 20% of par value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Restructuring costs are excluded from this valuation as
      it has been stated that the costs will be deducted from the accrued
      interest that the Company will receive shortly after the completion of the
      restructuring.                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Based upon a sensitivity analysis of the assumptions
      used, the expected yield required by a potential investor remains the most
      significant assumption included in the fair value estimate. There can be
      no assurance that this estimate will be realized. Subsequent adjustments,
      which could be material, may be required in future reporting
    periods.                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   
|7. | Mining interests                                                                                                                                                                                                                                                                                                                                                                                                  

2008Accumulateddepreciation,depletion and
    
    
    Net bookCost
    
    
    write-downs
    
    
    value$
    
    
    $
    
    
    $Mining properties
    
    1,540,195
    
    
    98,518
    
    
    1,441,677Plant and
      equipment
    
    280,720
    
    
    103,636
    
    
    177,0841,820,915
    
    
    202,154
    
    
    1,618,761


The Company capitalized $10.6 million of interest in 2008 (2007
-$Nil) related to the New Afton Project.

2007Accumulateddepreciation
    
    
    Net bookCost
    
    
    and
      depletion
    
    
    value$
    
    
    $
    
    
    $Mining properties
    
    190,163
    
    
    2,687
    
    
    187,476Plant and
      equipment
    
    144,641
    
    
    16,286
    
    
    128,355334,804
    
    
    18,973
    
    
    315,831


Page 22

---

New Gold Inc.Notes to the consolidated financial
statements December 31, 2008(Tabular amounts expressed in thousands of
U.S. dollars, except share and per share amounts)

|7. | Mining interests (continued)                              
|-- | ----------------------------------------------------------
|   |                                                           
|   | A summary of net book value by property is as
    follows:

MiningpropertiesNon-
    
    
    
    
    
    Plant and
    
    
    Total
    
    
    TotalDepletable
    
    
    depletable
    
    
    Total
    
    
    equipment
    
    
    2008
    
    
    2007$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Amapari (b)
    
    -
    
    
    5,000
    
    
    5,000
    
    
    4,537
    
    
    9,537
    
    
    174,744Cerro San Pedro
    
    260,305
    
    
    84,822
    
    
    345,127
    
    
    54,503
    
    
    399,630
    
    
    -El Morro project
    
    -
    
    
    377,430
    
    
    377,430
    
    
    -
    
    
    377,430
    
    
    -New Afton project
    
    -
    
    
    567,358
    
    
    567,358
    
    
    64,727
    
    
    632,085
    
    
    -Peak Mines
    
    3,036
    
    
    116,980
    
    
    120,016
    
    
    52,694
    
    
    172,710
    
    
    140,497Other projects (a)
    
    -
    
    
    26,746
    
    
    26,746
    
    
    -
    
    
    26,746
    
    
    -Corporate
    
    -
    
    
    -
    
    
    -
    
    
    623
    
    
    623
    
    
    590263,341
    
    
    1,178,336
    
    
    1,441,677
    
    
    177,084
    
    
    1,618,761
    
    
    315,831


| | (a) | (i) Chile - El Morro Project                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The El Morro copper-gold project consists of the La
      Fortuna and El Morro areas. Xstrata has a 70% interest in the El Morro
      project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The Company has other projects in Chile that consist of
      copper-gold exploration concessions that are contiguous to the El Morro
      project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (b) | During the third quarter of 2008, the Company recorded an
      impairment charge of $165.3 million before tax recoveries of $8.4 million
      on its investment in the Amapari Mine. On January 2, 2009, the Company
      placed the mine on temporary care and maintenance. Mining at Amapari has
      been suspended and leaching of stacked material is expected to continue
      until it is no longer economical to do so. The Company is currently
      preparing a preliminary economic assessment to exploit the underlying
      sulphide resource with a conventional crush/grind/carbon in leaching mill.
      Commitments related to placing Amapari Mine on temporary care and
      maintenance total approximately $2.2 million.

Page 23

---

New Gold Inc.Notes to the consolidated financial
statements December 31, 2008(Tabular amounts expressed in thousands of
U.S. dollars, except share and per share amounts)

|8. | Long-term debt                             
|-- | -------------------------------------------
|   |                                            
|   | Long-term debt consists of the
  following:

$Senior secured notes (a)
    
    182,553Embedded early redemption feature at fair value (b)
    
    -Subordinated convertible debentures (c)
    
    29,834212,387


| | (a) | Senior secured notes                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The face value of the Notes at December 31, 2008 was
      Cdn$237 million.                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Notes, originally issued by NGI pursuant to a note
      indenture dated June 28, 2007, mature and become due and payable on June
      28, 2017 and bear interest at the rate of 10% per annum. Under the terms
      of the Notes, the Company has agreed to certain additional restrictions on
      its business as it relates to the New Afton assets. In particular, the
      Company has agreed:
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Interest is payable in arrears in equal semi-annual
      instalments on January 1 and July 1 in each year.                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Subsequent to year end, the Company acquired Cdn$50
      million face value of its senior secured notes for consideration of Cdn$30
      million from the noteholders. This results in a reduction of approximately
      $5 million per year in interest payments.                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| | (b) | Embedded early redemption feature at fair
    value                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The Company has the right to redeem the Notes in whole or
      in part at any time and from time to time prior to June 27, 2017 at a
      price ranging from 120% to 100% (decreasing based on the length of time
      the Notes are outstanding) of the principal amount of the Notes to be
      redeemed.                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | The early redemption feature in the Notes qualifies as an
      embedded derivative that must be bifurcated for reporting purposes. As of
      December 31, 2008, the fair value of the derivative asset is determined to
      be $Nil.                                                                                                                                                                   

Page24

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|8. | Long-term debt (continued)
|-- | --------------------------
|   |                           
|   | (c)                       
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           
|   |                           

Page25

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|9. | Share capital
|-- | -------------
|   |              
|   | (a)          
|   |              
|   |              
|   |              
|   | (b)          
|   |              
|   |              
|   |              
|   |              
|   |              
|   | (c)          

The Company has established a "rolling" stock option plan (the
"Plan") in compliance with the TSX Exchange's policy for granting stock options.
Under the Plan, the maximum number of shares reserved for issuance may not
exceed 10% of the total number of issued and outstanding common shares. The
exercise price of each option shall not be less than the market price of the
Company's stock at the date of grant. Options generally vest over three years,
and have a maximum term of seven years from date of grant.

WeightedaverageNumber of
    
    
    exerciseoptions
    
    
    priceCdn$Balance, November 30, 2006
    
    160,000
    
    
    1.00Exercised
    
    (129,000
    )
    
    1.00Cancelled
    
    (40,900
    )
    
    9.30Granted
    
    2,159,500
    
    
    9.30Balance, December 31, 2007
    
    2,149,600
    
    
    9.10Granted
    
    3,084,700
    
    
    6.92Options assumed on acquisition of Metallica
    
    1,930,095
    
    
    4.07Options assumed on acquisition of NGI
    
    2,828,500
    
    
    7.03Exercised
    
    (424,090
    )
    
    3.39Forfeited
    
    (578,917
    )
    
    8.44Balance, December 31, 2008
    
    8,989,888
    
    
    6.94


Page26

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|9. | Share capital (continued)
|-- | -------------------------
|   |                          
|   | (c)                      

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

Options
    
    
    
    
    
    
    
    
    Optionsoutstanding
    
    
    
    
    
    
    
    
    exercisableWeightedWeighted
    
    
    average
    
    
    
    
    
    WeightedNumber of
    
    average
    
    
    remaining
    
    
    Number of
    
    
    averagestock options
    
    exercise
    
    
    contractual
    
    
    options
    
    
    exerciseoutstanding
    
    price
    
    
    life
    
    
    exercisable
    
    
    priceCdn$
    
    
    
    
    
    
    
    
    Cdn$75,000
    
    1.29
    
    
    6.9 years
    
    
    -
    
    
    1.29184,500
    
    1.70
    
    
    0.9 years
    
    
    184,500
    
    
    1.70103,500
    
    2.74
    
    
    0.8 years
    
    
    103,500
    
    
    2.74520,187
    
    3.44
    
    
    1.3 years
    
    
    520,187
    
    
    3.44600,000
    
    4.60
    
    
    0.8 years
    
    
    600,000
    
    
    4.601,167,768
    
    5.52
    
    
    3.3 years
    
    
    901,102
    
    
    5.551,849,400
    
    6.42
    
    
    3.2 years
    
    
    1,062,467
    
    
    6.552,262,700
    
    7.66
    
    
    4.1 years
    
    
    839,233
    
    
    7.371,749,333
    
    9.29
    
    
    3.2 years
    
    
    633,111
    
    
    9.27477,500
    
    11.00
    
    
    1.3
      years
    
    
    477,500
    
    
    11.008,989,888
    
    6.94
    
    
    3.0 years
    
    
    5,321,600
    
    
    6.47


| |     | On February 17, 2009, the Company granted 2,306,000 stock
      options to employees. These options have an exercise price of Cdn$2.71.
      The options vest over a three year period and have a contractual life of
      seven years from date of grant.                                                                                                                                                                                                                                                                                                                                 
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (d) | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     | For the year ended December 31, 2008, the Company
      recorded $7.0 million as stock- based compensation expense (2007 - $6.2
      million). The Company recorded this amount in contributed surplus. The
      value was determined using the Black-Scholes pricing model. A weighted
      average grant-date fair value of Cdn$7.38 (2007 - $0.37) was calculated
      using the following assumptions: no dividends are to be paid, volatility
      of 50% (2007 - 60%), risk free interest rate of 3.35% (2007 - 4.00%), and
      expected life of 4.62 years (2007 - 3.50 years).

Page27

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|9. | Share capital (continued)
|-- | -------------------------
|   |                          
|   | (e)                      
|   |                          
|   |                          

WeightedaverageNumber of
    
    
    exercisewarrants
    
    
    priceCdn$Balance, November 30, 2006
    
    1,495,000
    
    
    1.00Exercised
    
    (1,495,000
    )
    
    1.00Issued
    
    21,750,000
    
    
    15.00Balance, December 31, 2007
    
    21,750,000
    
    
    15.00Issued
    
    7,386,167
    
    
    9.00Metallica share purchase warrants exercisable into New Gold
      shares
    
    17,196,115
    
    
    3.93NGI share purchase warrants
    
    27,825,352
    
    
    15.00Expired
    
    (14,046,115
    )
    
    3.44Balance, December 31, 2008
    
    60,111,519
    
    
    13.80


The following table summarizes information about outstanding
share purchase warrants at December 31, 2008:

Number
    
    Exerciseof warrants
    
    prices
    
    
    Expiry dateCdn$3,150,000
    
    6.11
    
    
    December 20, 200921,750,000
    
    15.00
    
    
    April 3, 20127,386,167
    
    9.00
    
    
    November 28, 20124,150,000
    
    15.00
    
    
    June 28, 201723,675,352
    
    15.00
    
    
    June 28, 201760,111,519


Page28

---

New Gold Inc.Notes to the consolidated financial
statements December 31, 2008(Tabular amounts expressed in thousands of
U.S. dollars, except share and per share amounts)

|9. | Share capital (continued)
|-- | -------------------------
|   |                          
|   | (f)                      
|   |                          
|   |                          

2008
    
    
    2007(Loss) earnings available to common shareholders
    $
    (102,679
    )
    $
    14,613(in thousands)Basic weighted average number of shares
      outstanding
    
    148,126
    
    
    53,428Effect of dilutive securitiesSpecial warrants
    
    -
    
    
    14,772Stock options
    
    -
    
    
    26Diluted weighted average number of shares
      outstanding
    
    148,126
    
    
    68,226(Loss) earnings per shareBasic
    
    (0.69
    )
    
    0.27Diluted
    
    (0.69
    )
    
    0.21


The following lists the equity securities excluded from the
computation of diluted earnings per share because the exercise prices exceeded
the average market value of the common shares of Cdn$5.48 (2007 - Cdn$0.63) for
the year. The warrants related to Special Warrants (Note (9 b)) were issued
subsequent to the year end.

2008
    
    
    2007(in thousands)Stock options
    
    7,271
    
    
    2,119Share purchase warrants
    
    60,136
    
    
    21,750Convertible debentures
    
    55,000
    
    
    -


| | (g) | Share capital of NGI
| | --- | --------------------

Number ofshares
    
    
    AmountCdn$Balance, December 31, 2007
    
    36,945,727
    
    
    213,278Exercise of stock options
    
    56,000
    
    
    469Tax effect for flow-through shares
    
    -
    
    
    (5,209
    )Balance, June 30,
      2008
    
    37,001,727
    
    
    208,538


Page 29

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|10. | Income and mining
taxes
|--- | -----------------------

2008
    
    
    2007$
    
    
    $Current income and mining tax expense
    
    6,473
    
    
    6,824Future
      income and mining tax recovery
    
    (13,496
    )
    
    (6,537
    )(7,023
    )
    
    287Income tax expense differs from
      the amount that would result from applying the Canadian federal and
      provincial income tax rates to earnings before taxes. These differences
      result from the following items:2008
    
    
    2007$
    
    
    $(Loss) earnings before income taxes
    
    (109,702
    )
    
    14,900Canadian federal and provincial income tax rates
    
    31.00%
    
    
    34.12%Income tax (recovery) expense based
      on above rates
    
    (34,008
    )
    
    5,084Increase (decrease) due toNon-taxable income
    
    (27,786
    )
    
    -Non-deductible expenditures
    
    8,192
    
    
    2,486Lower statutory tax rates on earnings of
      foreign subsidiaries
    
    (992
    )
    
    (1,183
    )Adjustment of prior year provision to statutory tax returns
    
    (872
    )
    
    -Benefit of losses not
      recognized in period
    
    4,589
    
    
    2,137Change in valuation allowance and other
    
    43,854
    
    
    (8,237
    )(7,023
    )
    
    287


Page30

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|10. | Income and mining taxes (continued)                      
|--- | ---------------------------------------------------------
|    |                                                          
|    | The components of future income taxes are as
    follows:

2008
    
    
    2007$
    
    
    $Future income and mining tax assetsTax loss carryforwards
    
    18,904
    
    
    11,308Deductible temporary differences and other
    
    43,840
    
    
    13,601Deferred financing costs and other
    
    14,620
    
    
    -Value of future income tax and mining assets
    
    77,364
    
    
    24,909Valuation allowance
    
    (49,381
    )
    
    (8,399
    )Future income and mining tax assets
    
    27,983
    
    
    16,510Future income and mining tax liabilitiesAccumulated cost base differences on assets
    
    (249,361
    )
    
    (42,453
    )Future income and
      mining tax liabilities, net
    
    (221,378
    )
    
    (25,943
    )Presented on the consolidated balance sheets asFuture income and mining tax
      assets
    
    2,690
    
    
    -Future income and mining tax liabilities
    
    (224,068
    )
    
    (25,943
    )Future income and mining tax liabilities, net
    
    (221,378
    )
    
    (25,943
    )


| | Deductible temporary differences are
      comprised primarily of book to tax differences relating to the Company's
      reclamation liabilities. Taxable temporary differences are comprised
      primarily of book to tax differences relating to the value of the
      Company's mining interests acquired from corporate acquisitions.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                              
| | Tax loss carryforwards                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                              
| | At December 31, 2008, the Company has:                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                              
| | (i)                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                              
| | (ii)                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                              
| | (iii)                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                              
| | (iv)                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                              
| | (v)                                                                                                                                                                                                                                                                                                                                          

Page31

---

New Gold Inc.Notes to the consolidated financial
statements December 31, 2008(Tabular amounts expressed in thousands of
U.S. dollars, except share and per share amounts)

|11. | Reclamation and closure cost obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company's asset retirement obligations consist of
      reclamation and closure costs for Amapari Mine, Cerro San Pedro Mine, New
      Afton development project and Peak Mines. Significant reclamation and
      closure activities include land rehabilitation, demolition of buildings
      and mine facilities, ongoing care and maintenance and other
  costs.                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The liability for reclamation and closure cost
      obligations at December 31, 2008 is $22.0 (2007 - $18.0 million). The
      undiscounted value of this liability is $35.5 million (2007 - $28.8
      million). An inflation rate assumption ranging from 1.6% to 5.0% has been
      used. An accretion expense component of $1.0 million (2007 - $2.0 million)
      has been charged to operations in 2008 to reflect an increase in the
      carrying amount of the asset retirement obligation which has been
      determined using a discount rate ranging from 8.0% to 10.0%. Changes to
      the reclamation and closure cost balance during the year are as
      follows:

2008
    2007$
    $Reclamation and closure cost obligations,
      opening balance
    18,036
    -Arising on acquisition of Amapari (Note 4)
    -
    10,312Arising on acquisition of Peak Mines (Note
      4)
    -
    6,349Arising on acquisition of Metallica (Note 4)
    3,228
    -Reclamation expenditures
    (98)
    -Accretion expense, included in depreciation and depletion
    1,077
    2,025Revisions in estimates and liabilities
      incurred
    3,400
    (650)Foreign exchange
    (3,694)
    -Reclamation and closure cost obligations,
      closing balance
    21,949
    18,036


Page32

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|12. | Supplemental cash flow
  information
|--- | ------------------------------------

ThirteenYear ended
    
    
    months endedDecember 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Change in non-cash working capitalAccounts receivable
    
    8,664
    
    
    (17,554
    )Inventories and stockpiled ore
    
    24,684
    
    
    2,279Accounts payable and accrued liabilities
    
    (28,016
    )
    
    5,400Other
    
    (3,285
    )
    
    (1,996
    )2,047
    
    
    (11,871
    )Non-cash financing and investing activitiesShares/options/warrants issued on
      acquisition (Note 4 (a) and 4 (b))
    
    894,677
    
    
    103,253Operating activities included the following
      paymentsInterest paid
    
    3,075
    
    
    -Income taxes paid
    
    12,223
    
    
    3,092


|    |                      
|--- | ---------------------
|13. | Segmented information

The Company manages its operations by geographical location.
These reportable operating segments are summarized in the table below:

Year ended December 31, 2008(Loss)Depletion
    
    
    earnings
    
    
    
    
    
    Expendituresand
    
    
    from
    
    
    Total
    
    
    for miningRevenues
    
    
    depreciation
    
    
    operations
    
    
    assets
    
    
    interest$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Brazil
    
    75,052
    
    
    14,408
    
    
    (177,053
    )
    
    44,857
    
    
    7,077Chile (2)
    
    -
    
    
    -
    
    
    -
    
    
    377,430
    
    
    -Canada (2)
    
    -
    
    
    9
    
    
    (4,901
    )
    
    640,133
    
    
    87,466Mexico (2)
    
    47,285
    
    
    8,788
    
    
    (12,549
    )
    
    444,555
    
    
    9,812Australia
    
    95,798
    
    
    9,665
    
    
    28,595
    
    
    198,477
    
    
    29,389Other
      (1)
    
    -
    
    
    91
    
    
    (15,382
    )
    
    252,249
    
    
    124218,135
    
    
    32,961
    
    
    (181,290
    )
    
    1,957,701
    
    
    133,868


(1)
    Other includes corporate balances and intercompany
      eliminations and exploration properties(2)
    Segments acquired on June 30, 2008 (Note
  1)


Page33

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|13. | Segmented information
(continued)
|--- | ---------------------------------

Thirteen months ended December 31, 2007(Loss)Depletion
    
    
    earnings
    
    
    
    
    
    Expendituresand
    
    
    from
    
    
    Total
    
    
    for miningRevenues
    
    
    depreciation
    
    
    operations
    
    
    assets
    
    
    interest$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Brazil
    
    48,369
    
    
    9,129
    
    
    (321
    )
    
    215,971
    
    
    6,108Australia
    
    82,715
    
    
    9,805
    
    
    25,786
    
    
    184,056
    
    
    20,315Other (1)
    
    -
    
    
    39
    
    
    (11,355
    )
    
    172,371
    
    
    629131,084
    
    
    18,973
    
    
    14,110
    
    
    572,398
    
    
    27,052


(1) Other includes corporate balances and
intercompany eliminations

The Company sells all of its concentrate production to one
customer under an off-take contract. The loss of this customer or unexpected
termination of the off-take contract could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. The Company
is in the process of renegotiating the terms of the existing agreement for the
period commencing January 1, 2009. The Company is currently evaluating its
alternatives for a new contract which will commence when the existing contract
terminates. The Company has not experienced any bad debts with this customer.

The Company is not economically dependent on a limited number
of customers for the sale of its gold because gold can be sold through numerous
commodity market traders worldwide.

The Company has four customers that account for 100% of the
concentrate and doré sales revenue.

Metal salesThirteenmonthsYear ended
    
    
    endedDecember 31,
    
    
    December 31,Customer
    
    2008
    
    
    2007$
    
    
    $1
    
    75,052
    
    
    48,3692
    
    56,649
    
    
    47,0903
    
    47,285
    
    
    -4
    
    39,149
    
    
    35,625Total
    
    218,135
    
    
    131,084% of total metal
      sales
    
    100%
    
    
    100%


Page 34

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|14. | Financial instruments                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                               
|    | The Company thoroughly examines the various financial instrument risks to which it is exposed and assesses the impact and likelihood of those risks. These risks may include credit risk, liquidity risk, market risk and other price
risks. Where material, these risks are reviewed and monitored by the Board of Directors.
|    |                                                                                                                                                                                                                                                                                                                               
|    | (a)                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               

Page35

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (b)                              
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  

The historical level of customer defaults is minimal and, as a
result, the credit risk associated with gold and copper concentrate trade
receivables at December 31, 2008 is not considered to be high.

The Company's maximum exposure to credit risk at December 31,
is as follows:

2008
    
    
    2007$
    
    
    $Cash and cash equivalents
    
    185,668
    
    
    149,924Short-term investments
    
    -
    
    
    32,440Accounts receivable
    
    11,232
    
    
    18,123196,900
    
    
    200,487


The aging of accounts receivable at
      the reporting date was as follows:0-30
    
    
    31-60
    
    
    61-90
    
    
    91-120
    
    
    Over
    
    
    2008
    
    
    2007days
    
    
    days
    
    
    days
    
    
    days
    
    
    120
      days
    
    
    Total
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Corporate
    
    305
    
    
    42
    
    
    50
    
    
    25
    
    
    391
    
    
    813
    
    
    723Amapari
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Peak Mines
    
    3,440
    
    
    -
    
    
    2
    
    
    -
    
    
    13
    
    
    3,455
    
    
    17,400New Afton
    
    2,148
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    2,148
    
    
    -Cerro San Pedro
    
    2,024
    
    
    583
    
    
    1,669
    
    
    280
    
    
    260
    
    
    4,816
    
    
    -7,917
    
    
    625
    
    
    1,721
    
    
    305
    
    
    664
    
    
    11,232
    
    
    18,123


A significant portion of the Company's cash and cash
equivalents are held in large Canadian financial institutions. Short term
investments (including those presented as part of cash and cash equivalents) are
composed of financial instruments issued by Canadian banks and government with
high investment-grade ratings.

The Company employs a restrictive investment policy as detailed
in the capital risk management section (Note 14 (a)).

Page36

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (c)                              
|    |                                  
|    |                                  

The following are the contractual maturities of debt
commitments. The amounts presented represent the future undiscounted principal
and interest cash flows and therefore do not equate to the carrying amounts on
the consolidated balance sheet.

Less than
    
    
    
    
    
    
    
    
    After
    
    
    2008
    
    
    20071 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 years
    
    
    Total
    
    
    Total$
    
    
    $
    
    
    $
    
    
    $
    
    
    $Accounts payable and accrued liabilities
    
    41,382
    
    
    -
    
    
    -
    
    
    -
    
    
    41,382
    
    
    22,835Short-term borrowings
    
    7,193
    
    
    -
    
    
    -
    
    
    -
    
    
    7,193
    
    
    -Long-term debt
    
    -
    
    
    -
    
    
    -
    
    
    238,447
    
    
    238,447
    
    
    -Interest payable on long-term debt
    
    21,599
    
    
    43,198
    
    
    43,198
    
    
    79,659
    
    
    187,654
    
    
    -70,174
    
    
    43,198
    
    
    43,198
    
    
    318,106
    
    
    474,676
    
    
    22,835


In the opinion of management, the working capital of $189
million at December 31, 2008, together with cash flows from operations, are
sufficient to support the Company's normal operating requirements through its
current reporting period. However, taking into consideration the Company's
current cash position, volatile equity markets, global uncertainty in the
capital markets and increasing cost pressures, the Company is continuing to
review expenditures in order to ensure adequate liquidity and flexibility to
support its growth strategy while maintaining production levels at its current
operations.

The Company believes that external financing (which may include
bank borrowings and future debt and equity offerings) will be required to
complete its major development projects; however, these development projects are
not likely to commence full construction until the second half of 2010 at the
earliest. Continuing low copper prices may necessitate the deferral of capital
expenditures which may impact production from mining operations. In addition,
the Company may need external financing to repay its long-term debt in 2017.

Page37

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (d)                              
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  

A 10% strengthening (weakening) of the U.S. dollar against the
following currencies would have decreased (increased) the Company's net loss
from these financial instruments by the amounts shown below.

December 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Canadian dollar
    
    14,226
    
    
    66Australian dollar
    
    1,673
    
    
    2,736Mexican peso
    
    7,580
    
    
    -Brazilian real
    
    2,929
    
    
    1,877Chilean peso
    
    6,594
    
    
    -33,002
    
    
    4,679


Page38

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (d)                              
|    |                                  
|    |                                  

The Company is exposed to currency risk through the following
assets and liabilities denominated in currencies other than the U.S. dollar:
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities and short-term and long-term debt. The currencies of the Company's
financial instruments and other foreign currency denominated liabilities, based
on notional amounts, were as follows:

2008Canadian
    Australian
    Mexican
    Brazilian
    Chileandollar
    dollar
    peso
    real
    pesoCash and cash equivalents
    88,977
    15,213
    531
    3,655
    -ABCP
    77,017
    -
    -
    -
    -Accounts receivable
    2,667
    -
    5,228
    
    -Accounts payable and accruals
    (14,414)
    (7,980)
    (3,028)
    (12,756)
    -Future income tax liabilities
    (72,375)
    (18,518)
    (75,020)
    -
    (65,939)ARO
    (182)
    (5,449)
    (3,270)
    (13,000)
    -Short-term and long-term debt
    (223,951)
    -
    (238)
    (7,193)
    -Gross balance sheet exposure
    (142,261)
    (16,734)
    (75,797)
    (29,294)
    (65,939)2007Canadian
    Australian
    Mexican
    Brazilian
    Chileandollar
    dollar
    peso
    real
    pesoCash and cash equivalents
    2,804
    8,988
    -
    2,120
    -Accounts receivable
    149
    -
    -
    10,806
    -Accounts payable and accruals
    (2,291)
    (8,139)
    -
    (10,894)
    -Future income tax liabilities
    -
    (21,683)
    -
    (7,135)
    -ARO
    -
    (6,530)
    -
    (13,670)
    -Short-term and long-term debt
    -
    -
    -
    -
    -Gross balance sheet exposure
    662
    (27,364)
    -
    (18,773)
    -


Page 39

---

New Gold Inc.Notes to the consolidated financial statements December 31, 2008(Tabular amounts expressed in thousands of U.S. dollars, except share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (e)                              
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    | (f)                              
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  
|    |                                  

Page 40

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|14. | Financial instruments (continued)
|--- | ---------------------------------
|    |                                  
|    | (f)                              

A 10% change in commodity prices would impact the Company's net
earnings as follows:

ThirteenYear ended
    
    
    months endedDecember 31,
    
    
    December 31,2008
    
    
    2007$
    
    
    $Gold price
    
    16,322
    
    
    11,203Copper price
    
    969
    
    
    2,604


|15. | Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|16. | Subsequent event                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | On March 4, 2009, the Company announced that it had
      entered into a definitive agreement to acquire all of the outstanding
      common shares of Western Goldfields Inc. ("Western Goldfields"). Under the
      agreement, the Company will exchange one common share and Cdn$0.0001 in
      cash for each common share of Western Goldfields (the "Transaction"). Upon
      completion of the Transaction, existing New Gold and Western Goldfields
      shareholders will own approximately 58% and 42% of the combined company,
      respectively, subject to approval of both companies and regulatory
      approval.

Page41

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting
      principles in Canada and the United States                                                                                                                                                                                                                                                                                                                                                               
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | These consolidated financial statements have been
      prepared in accordance with Canadian GAAP. Material variations in the
      accounting principles, practices and methods are used in preparing
      financial statements under generally accepted practices in the US GAAP.
      The effects of the principal differences on the Company's financial
      statements under US GAAP are quantified below and described in the
      accompanying notes:



Statements of operations2008
    
    
    2007$
    
    
    $Net (loss) earnings under Canadian GAAP
    
    (102,679
    )
    
    14,613Mark-to-market on derivative liability
      (a)
    
    1,999
    
    
    200Convertible debentures
      (b)
    
    3,633
    
    
    -Commercial production adjustment (c)
    
    284
    
    
    -Net (loss) earnings under US GAAP
    
    (96,763
    )
    
    14,813Other comprehensive income under Canadian and US GAAP
    
    1,160
    
    
    -Comprehensive income (loss) under US GAAP
    
    (95,603
    )
    
    14,813Weighted average number of shares
      outstandingBasic under US GAAP
    
    148,126
    
    
    53,428Diluted under US GAAP
    
    148,126
    
    
    68,226Basic loss per share under US GAAP
    
    (0.65
    )
    
    0.28Diluted loss per share under US GAAP
    
    (0.65
    )
    
    0.22Statements of cash flows2008
    
    
    2007$
    
    
    $Cash flows from operating activities under Canadian GAAP
    
    24,685
    
    
    26,620Commercial production adjustment (c)
    
    282
    
    
    -Cash flows from
      operating activities under US GAAP
    
    24,967
    
    
    26,620Cash flows from investing activities under Canadian GAAP
    
    35,065
    
    
    (250,044
    )Commercial production adjustment (c)
    
    (282
    )
    
    -Cash flows from
      investing activities under US GAAP
    
    34,783
    
    
    (250,044
    )Cash flows from financing activities under Canadian and US
      GAAP
    
    (9
    )
    
    373,020


Page 42

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting
      principles in Canada and the United States
  (continued)
|--- | ----------------------------------------------------------------------------------------------------------------



Balance sheets2008
    
    
    2007$
    
    
    $Total assets reported under Canadian GAAP
    
    1,957,701
    
    
    572,398Commercial production adjustment (c)
    
    284
    
    
    -Convertible debentures (b)
    
    (1,198
    )
    
    -Total assets
      reported under US GAAP
    
    1,956,787
    
    
    572,398Total liabilities reported under Canadian GAAP
    
    515,913
    
    
    75,027Derivative liability
      (a)
    
    8,128
    
    
    864Convertible debentures (b)
    
    16,773
    
    
    -Total liabilities reported under US GAAP
    
    540,814
    
    
    75,891Shareholders' equity reported under
      Canadian GAAP
    
    1,441,788
    
    
    497,371Reclassification of
      stock options (a)
    
    (8,128
    )
    
    (864
    )Commercial production adjustment (c)
    
    284
    
    
    -Convertible debentures (b)
    
    (17,971
    )
    
    -Shareholders'
      equity reported under US GAAP
    
    1,415,973
    
    
    496,507Total liabilities and shareholders' equity
      reported under US GAAP
    
    1,956,787
    
    
    572,398


Under US GAAP, the components of shareholders' equity would be
as follows:

2008
    
    
    2007$
    
    
    $Common shares
    
    1,321,110
    
    
    339,796Special warrants
    
    -
    
    
    104,166Contributed surplus
    
    55,082
    
    
    5,102Share purchase warrants
    
    145,614
    
    
    57,673Accumulated other comprehensive loss
    
    (406
    )
    
    (1,566
    )Deficit
    
    (105,427
    )
    
    (8,664
    )1,415,973
    
    
    496,507


Page 43

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting principles in Canada and the United States (continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (a)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (b)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         

Page 44

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting principles in Canada and the United States (continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (c)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (d)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         

| |                                                   |             
| | ------------------------------------------------- | ------------
| | Canada Revenue Agency                             | 2004 to 2008
| | Australian Taxation Office                        | 2004 to 2008
| | Receita Federal (Brazil)                          | 2004 to 2008
| | Servicio de Impuestos Internos
    (Chile)        | 2002 to 2008
| | Sistema de Administratión
    Tributaria (Mexico) | 2003 to 2008

Page 45

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting principles in Canada and the United States (continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (d)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (e)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    | (f)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         

Page 46

---

New Gold Inc.Notes to the consolidated financial statements December 31,
2008(Tabular amounts expressed in thousands of U.S. dollars, except
share and per share amounts)

|17. | Differences between generally accepted accounting principles in Canada and the United States (continued)
|--- | --------------------------------------------------------------------------------------------------------
|    |                                                                                                         
|    | (f)                                                                                                     
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         
|    |                                                                                                         

Page 47

---