Exhibit 2

LOGO

NEW GOLD INC.

(A Development Stage Company)

FINANCIAL STATEMENTS

December 31, 2006



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LOGO



| |  |  |  |  |  |                             
| |  |  |  |  |  | ----------------------------
| |  |  |  |  |  | PricewaterhouseCoopers LLP  
| |  |  |  |  |  | Chartered Accountants       
| |  |  |  |  |  | PricewaterhouseCoopers Place
| |  |  |  |  |  | 250 Howe Street, Suite 700  
| |  |  |  |  |  | Vancouver, British Columbia 
| |  |  |  |  |  | Canada V6C 3S7              
| |  |  |  |  |  | Telephone +1 604 806 7000   
| |  |  |  |  |  | Facsimile +1 604 806 7806   

AUDITORS REPORT

To the Shareholders of New Gold Inc.

We have audited the balance sheet of
New Gold Inc. as at December 31, 2006 and the statements of operations and deficit and cash flows for the year then ended. 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 audit.

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

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and the results
of its operations and its cash flows for the year then ended, in accordance with Canadian generally accepted accounting principles.

The restated financial
statements as at December 31, 2005, and for the year then ended, were audited by the other auditors who expressed an opinion without reservation on those restated financial statements in their report dated March 15, 2006 except as to note
18, which is as at November 14, 2006.

(signed) PricewaterhouseCoopers LLP

Chartered Accountants

Vancouver, British Columbia

March 28, 2007

PricewaterhouseCoopers refers to the Canadian firm of
PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.



1



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LOGO

COMMENTS BY AUDITORS FOR U.S. READERS

ON CANADA-U.S. REPORTING DIFFERENCES

In the United States, reporting standards for auditors require the addition to 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 restatement of prior periods described in note 16 to the financial statements. Our report to the shareholders dated
March 28, 2007 is expressed in accordance with Canadian reporting standards which do not require a reference to such a restatement in the auditors report when the change is properly accounted for and adequately disclosed in the financial
statements.

(signed) PricewaterhouseCoopers LLP

Chartered Accountants

Vancouver, British Columbia

March 28, 2007



2



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DE VISSER GRAY

CHARTERED ACCOUNTANTS

401 - 905 West Pender Street

Vancouver, BC Canada

V6C 1L6

Tel: (604) 687-5447

Fax:
(604) 687-6737

AUDITORS REPORT

To the
Shareholders of New Gold Inc.

We have audited the balance sheets of New Gold Inc. as at December 31, 2005 and 2004 and the statements of operations
and deficit and cash flows for each of the years in the two-year period ended December 31, 2005. 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.

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

In our opinion, these financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2005 and 2004 and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 2005 in conformity with Canadian generally accepted
accounting principles.

Our previous report in respect to these financial statements, dated March 15, 2006, was withdrawn on November 6, 2006;
the financial statements have now been restated to reflect the changes described in note 18 to these financial statements.

The financial statements as at
and for the year ended December 31, 2003 were audited by other auditors who expressed an opinion without reservation on those financial statements in their report to the shareholders dated February 20, 2004.

De Visser Gray

CHARTERED ACCOUNTANTS

Vancouver, British Columbia

March 15, 2006, except as to Note 18
which is as at November 14, 2006



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New Gold Inc.

(A
Development Stage Company)

BALANCE SHEETS

As at December 31, 2006 and 2005

(In thousands of Canadian dollars)



|                                         |  |      |         |   |                         |   |        |  
|---------------------------------------- |  | ---- | ------- | - | ----------------------- | - | ------ | -
|                                         |  | 2006 |         |   | Restated (Note 16) 2005 |  
|ASSETS                                   |  |      |         |   |                         |   |        |  
|                                         |  |     
|Current assets                           |  |      |         |   |                         |   |        |  
|Cash and cash equivalents                |  | $    | 68,054  |   |                         | $ | 18,179 |  
|Amounts receivable                       |  |      | 1,123   |   |                         |   | 326    |  
|Prepaid expenses                         |  |      | 80      |   |                         |   | 107    |  
|                                         |  |      |         |   |                         |   |        |  
|                                         |  |      | 69,257  |   |                         |   | 18,612 |  
|                                         |  |     
|Mineral Properties  Schedule(Note 3)    |  |      | 61,440  |   |                         |   | 42,441 |  
|Property and Equipment(Note 4)           |  |      | 1,959   |   |                         |   | 578    |  
|                                         |  |      |         |   |                         |   |        |  
|                                         |  | $    | 132,656 |   |                         | $ | 61,631 |  
|                                         |  |      |         |   |                         |   |        |  
|LIABILITIES                              |  |      |         |   |                         |   |        |  
|                                         |  |     
|Current Liabilities                      |  |      |         |   |                         |   |        |  
|Accounts payable and accrued liabilities |  | $    | 3,786   |   |                         | $ | 3,767  |  
|Capital lease payable                    |  |      |        |   |                         |   | 30     |  
|                                         |  |      |         |   |                         |   |        |  
|                                         |  |      | 3,786   |   |                         |   | 3,797  |  
|                                         |  |     
|Future income taxes(Note 6)              |  |      | 10,004  |   |                         |   | 7,347  |  
|                                         |  |      |         |   |                         |   |        |  
|                                         |  |      | 13,790  |   |                         |   | 11,144 |  
|                                         |  |      |         |   |                         |   |        |  
|SHAREHOLDERS EQUITY                     |  |      |         |   |                         |   |        |  
|                                         |  |     
|Share Capital(Note 7)                    |  |      | 117,858 |   |                         |   | 54,752 |  
|Share purchase warrants(Note 8)          |  |      | 5,959   |   |                         |   |       |  
|Stock options(Notes 9 and 11)            |  |      | 4,546   |   |                         |   | 1,728  |  
|Deficit                                  |  |      | (9,497  | ) |                         |   | (5,993 | )
|                                         |  |      |         |   |                         |   |        |  
|                                         |  |      | 118,866 |   |                         |   | 50,487 |  
|                                         |  |      |         |   |                         |   |        |  
|                                         |  | $    | 132,656 |   |                         | $ | 61,631 |  
|                                         |  |      |         |   |                         |   |        |  



|                                                        |  |                        
|------------------------------------------------------- |  | -----------------------
|Commitments and Contingent Liabilities (Notes 3 and 15) |  | See accompanying notes.
|Subsequent Events(Note 17)                              |  |                        

APPROVED BY THE BOARD



|                  |  |  |  |  |  |               
|----------------- |  |  |  |  |  | --------------
|Chris Bradbrook |  |  |  |  |  | Paul Sweeney
|                  |  |  |  |  |  |               
|Chris Bradbrook   |  |  |  |  |  | Paul Sweeney  
|Director          |  |  |  |  |  | Director      



4



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New Gold Inc.

(A
Development Stage Company)

STATEMENTS OF OPERATIONS AND DEFICIT

For the years ended December 31, 2006, 2005 and 2004

(In thousands of Canadian dollars, except for per share
amounts)



|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | --------------------- | - | ------ | --------------------- |  | - | ------ | -
|                                                          |  | 2006 |        |   | Restated(Note 16)2005 |   |        | Restated(Note 16)2004 | 
|Income                                                    |  |      |        |   |                       |   |        |                       |  |   |        |  
|Interest income                                           |  | $    | 2,746  |   |                       | $ | 488    |                       |  | $ | 561    |  
|Other                                                     |  |      |       |   |                       |   |       |                       |  |   | 41     |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|                                                          |  |      | 2,746  |   |                       |   | 488    |                       |  |   | 602    |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|Expenses                                                  |  |      |        |   |                       |   |        |                       |  |   |        |  
|Amortization                                              |  |      | 139    |   |                       |   | 95     |                       |  |   | 41     |  
|Foreign exchange                                          |  |      | 1      |   |                       |   | 3      |                       |  |   | 37     |  
|Loss on disposal of property and equipment                |  |      | 8      |   |                       |   |       |                       |  |   |       |  
|Administrative, office and miscellaneous                  |  |      | 645    |   |                       |   | 425    |                       |  |   | 484    |  
|Professional and regulatory fees                          |  |      | 944    |   |                       |   | 297    |                       |  |   | 210    |  
|Travel, conferences and promotion                         |  |      | 651    |   |                       |   | 605    |                       |  |   | 165    |  
|Wages, benefits and stock-based compensation (Note 5)     |  |      | 4,449  |   |                       |   | 2,478  |                       |  |   | 868    |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|                                                          |  |      | 6,837  |   |                       |   | 3,903  |                       |  |   | 1,805  |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|Loss before income taxes                                  |  |      | (4,091 | ) |                       |   | (3,415 | )                     |  |   | (1,203 | )
|                                                          |  |      |       
|Income taxes(Note 6)                                      |  |      | 587    |   |                       |   | 556    |                       |  |   |       |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|                                                          |  |      |       
|Loss for the year                                         |  |      | (3,504 | ) |                       |   | (2,859 | )                     |  |   | (1,203 | )
|                                                          |  |      |       
|Deficit, beginning of the year                            |  |      | (5,993 | ) |                       |   | (3,134 | )                     |  |   | (1,931 | )
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|Deficit, end of the year                                  |  | $    | (9,497 | ) |                       | $ | (5,993 | )                     |  | $ | (3,134 | )
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|Weighted average number of shares outstanding (thousands) |  |      | 22,689 |   |                       |   | 14,436 |                       |  |   | 13,391 |  
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  
|Loss per share (basic and diluted)                        |  | $    | (0.15  | ) |                       | $ | (0.20  | )                     |  | $ | (0.09  | )
|                                                          |  |      |        |   |                       |   |        |                       |  |   |        |  

See accompanying notes.



5



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New Gold Inc.

(A
Development Stage Company)

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2006, 2005 and 2004

(In thousands of Canadian dollars)



|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ------- | - | --------------------- | - | ------- | --------------------- |  | - | ------ | -
|                                                                                 |  | 2006 |         |   | Restated(Note 16)2005 |   |         | Restated(Note 16)2004 | 
|Cash provided by (used for)                                                      |  |      |         |   |                       |   |         |                       |  |   |        |  
|                                                                                 |  |      |        
|OPERATING ACTIVITIES                                                             |  |      |         |   |                       |   |         |                       |  |   |        |  
|Loss for the year                                                                |  | $    | (3,504  | ) |                       | $ | (2,859  | )                     |  | $ | (1,203 | )
|Items not involving cash:                                                        |  |      |         |   |                       |   |         |                       |  |   |        |  
|Amortization                                                                     |  |      | 139     |   |                       |   | 95      |                       |  |   | 41     |  
|Stock-based compensation                                                         |  |      | 2,487   |   |                       |   | 811     |                       |  |   | 868    |  
|Loss on disposal of property and equipment                                       |  |      | 8       |   |                       |   |        |                       |  |   |       |  
|Other                                                                            |  |      |        |   |                       |   |        |                       |  |   | (41    | )
|Future income taxes (Note 6)                                                     |  |      | (645    | ) |                       |   | (561    | )                     |  |   |       |  
|Net change in non-cash working capital items                                     |  |      | 16      |   |                       |   | 839     |                       |  |   | 778    |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|                                                                                 |  |      | (1,499  | ) |                       |   | (1,675  | )                     |  |   | 443    |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|INVESTING ACTIVITIES                                                             |  |      |         |   |                       |   |         |                       |  |   |        |  
|Payments for mineral properties and exploration costs                            |  |      | (20,211 | ) |                       |   | (14,911 | )                     |  |   | (2,387 | )
|Acquisition of property and equipment                                            |  |      | (449    | ) |                       |   | (166    | )                     |  |   | (452   | )
|Proceeds on sale of marketable security and investment property                  |  |      |        |   |                       |   |        |                       |  |   | 154    |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|                                                                                 |  |      | (20,660 | ) |                       |   | (15,077 | )                     |  |   | (2,685 | )
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|FINANCING ACTIVITIES                                                             |  |      |         |   |                       |   |         |                       |  |   |        |  
|Payments on capital lease                                                        |  |      |        |   |                       |   | (23     | )                     |  |   | (15    | )
|Cash proceeds from shares and share purchase warrants issued, net of issue costs |  |      | 72,034  |   |                       |   | 9,924   |                       |  |   | 2,550  |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|                                                                                 |  |      | 72,034  |   |                       |   | 9,901   |                       |  |   | 2,535  |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|Increase (Decrease) in cash and cash equivalents                                 |  |      | 49,875  |   |                       |   | (6,851  | )                     |  |   | 293    |  
|                                                                                 |  |      |        
|Cash and cash equivalents, beginning of the year                                 |  |      | 18,179  |   |                       |   | 25,030  |                       |  |   | 24,737 |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  
|Cash and cash equivalents, end of the year                                       |  | $    | 68,054  |   |                       | $ | 18,179  |                       |  | $ | 25,030 |  
|                                                                                 |  |      |         |   |                       |   |         |                       |  |   |        |  

See accompanying notes.

For supplemental disclosure of non-cash investing and financing activities, refer to Note 12.



6



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New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



1. NATURE OF OPERATIONS

New Gold Inc. (the Company), is in the business of exploring and developing mineral prospects in British Columbia, Canada. Its principal
project, the New Afton copper-gold project (the Project), has previously been subject to exploration, an advanced scoping study and is currently the subject of a feasibility study to determine whether the Project has economically viable
copper/gold reserves.

The underlying value of the Companys mineral claims is dependent upon the existence and economic recovery of
mineral reserves, and the ability of the Company to raise financing to complete the development of and operation of the Project. In addition, the Companys projects may be subject to a number of risks, including changes in government relations
related to mining activities, economic instability and access rights disruption.

The Company believes it has adequate funds available to
meet its corporate and administrative obligations plus its funding requirement to complete the feasibility study for the Project, while having surplus funds available for exploration and to commence the initial stages of development of the Project
should a positive decision to develop be made. Management will have to obtain additional financing if a decision to proceed is made based upon the completion of a positive feasibility study to finance the remainder of the Project construction. There
can be no assurance it will be able to raise sufficient funds as and when these funds are required.

2. SIGNIFICANT
ACCOUNTING POLICIES

These financial statements have been prepared in accordance with Canadian generally
accepted accounting principles. As described in note 18, accounting principles generally accepted in Canada differ in certain material respects from accounting principles generally accepted in the United States.



| | a) | Cash and Cash Equivalents
| | -- | -------------------------

Cash and cash
equivalents consist of cash on deposit with banks and highly liquid short-term interest bearing securities with maturities of three months or less at purchase dates.



| | b) | Mineral Properties and Related Deferred Costs
| | -- | ---------------------------------------------

The Company records its interests in mineral properties at cost. Exploration expenditures relating to properties that have resources or significant mineralization requiring additional exploration are deferred and will be amortized against
future production following commencement of commercial production, or written off if the properties are impaired, sold, allowed to lapse, or abandoned.



7



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New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



Management of the Company reviews and evaluates the carrying value of each mineral property for
impairment when events or changes in circumstances indicate that the carrying amounts of the related asset may not be recoverable. Where estimates of future net cash flows are available and the total estimated future cash flows on an undiscounted
basis are less than the carrying amount of the asset, an impairment loss is recognized and assets are written down to fair value which is normally the discounted value of future cash flows. Where estimates of future net cash flows are not available,
management assesses whether the carrying value can be recovered by considering alternative methods of determining fair value. When it is determined that a mineral property is impaired it is written down to its estimated fair value.

Managements estimates of mineral prices, mineral resources, and operating, capital and reclamation costs are subject to certain risks and
uncertainties that may affect the determination of the recoverability of deferred mineral property costs. Although management has made its best estimate of these factors, it is possible that material changes could occur which may adversely affect
managements estimate of the cash flows to be generated from its properties.

The acquisition of title to mineral properties is a
complicated and uncertain process. The Company has taken steps, in accordance with industry standards, to verify mineral properties in which it has an interest. Although the Company has made efforts to ensure that legal title to its properties is
properly recorded in the name of the Company, there can be no assurance that such title will ultimately be secured.



| | c) | Property and Equipment
| | -- | ----------------------

Property and
equipment are stated at cost less accumulated amortization. Amortization is calculated using the straight-line method at a rate of 5% per annum for building, 20% per annum for transportation vehicles and 20% per annum for equipment,
office and computer equipment. Amortization is recorded when the asset is put into use.



| | d) | Grant Recoveries
| | -- | ----------------

Grant recoveries represent
British Columbia Mining Exploration Tax Credit claim refunds of 20% of eligible exploration expenditures. These grants are for qualifying exploration expenditures at a grassroots level for mineral properties in the Province of British Columbia.



| | e) | Loss Per Share
| | -- | --------------

Basic loss per common share
is computed by dividing the loss by the weighted average number of common shares outstanding during the period. The treasury stock method is used to determine the dilutive effect of stock options, share purchase warrants and other



8



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New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



dilutive instruments. Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue common shares were
exercised or converted to common shares. The effect of potential issuances of shares under options and share purchase warrants would be anti-dilutive for the periods presented and accordingly basic and diluted loss per share are the same.



| | f) | Use of Estimates
| | -- | ----------------

The preparation of
financial statements in conformity with Canadian generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.
Significant areas where estimates are used relate to the impairment of mineral properties and related deferred exploration costs, determinations as to whether costs are expensed or deferred, stock-based compensation and share purchase warrant
valuation assumptions, future site restoration costs, and the future income tax asset valuation allowance. Actual results could differ from those estimates. By their nature, these estimates are subject to measurement uncertainty, and the impact on
the financial statements of future changes in such estimates could be material.



| | g) | Income and Resource Taxes
| | -- | -------------------------

The Company
recognizes and measures, as assets and liabilities, income and resource taxes currently payable or recoverable as well as future taxes which would arise from the realization of assets or the settlement of liabilities at their carrying amounts to the
extent that these differ from their tax bases. Future income tax (FITs) assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply to taxable income in the years in which such temporary
differences are expected to be recovered or settled. A valuation allowance is recognized to the extent the recoverability of FIT assets is not likely.

To date the Company has not recorded any future tax assets to offset its FIT liabilities. If it were to do so, the Company would report an FIT recovery in its Statement of Operations and Deficit to the extent of the
asset recognized.



| | h) | Flow-Through Shares
| | -- | -------------------

The Company applies the
consensus of Abstract #146 of the Emerging Issues Committee of the CICA in respect to its accounting for all flow-through share renunciations. Under the Canadian Income Tax Actan enterprise may issue securities referred to as flow-through
shares whereby the investor may claim the tax deductions associated with the related resource expenditures. The Company records future income tax liabilities on the date that the Company files the renouncement documents with the tax authorities to
renounce the tax credits associated with the expenditures, provided there is reasonable



9



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New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



assurance that the expenditures will be made. At the time of recognition of the future income tax liability a corresponding reduction to share capital is
made.



| | i) | Asset Retirement Obligations
| | -- | ----------------------------

The Company
recognizes a liability for an asset retirement obligation when it is determinable and calculates the liability based upon discounted future payments to be made. A corresponding amount is added to the carrying amount of the related long-lived asset,
and this amount is subsequently amortized to expense over its expected life. As at December 31, 2006, the Company does not have any material asset retirement obligations.



| | j) | Stock-Based Compensation, Share Purchase Warrants and Compensation Options
| | -- | --------------------------------------------------------------------------

All stock-based awards made to employees and non-employees are measured and recognized using a fair value based method. The fair value of stock options, share purchase warrants and compensation options is determined
by the Black-Scholes option pricing model with assumptions for risk-free interest rates, dividend yields, volatility and an expected life of the options. Forfeitures are recorded based on actual occurrences. The Company charges the costs related to
stock-based compensation to the Statement of Operations or in the case of project-related personnel, the Company capitalizes the related amounts to mineral properties over their vesting periods which ranges between zero and 12 months.

3. MINERAL PROPERTIES



| | a) | Kamloops, B.C. "Afton" Mineral Property
| | -- | ---------------------------------------

Under the terms of two option agreements (Option) dated September 22, 1999 to acquire the Afton Mineral Claims, the Company issued 2 million common shares and completed an aggregate work commitment totaling $6.5
million over a period not to exceed nine years to earn the 100% rights to the mineral claims. The Company completed the work commitment and made the final share payment in 2005 and has a 100% interest in the mineral claims.

Under the terms of the Option agreement to acquire the mineral claims for the Afton Mineral Claims, the optionors retained a 10% net profit royalty
(See Note 15 (a)).



| | b) | Kamloops, B.C., "Ajax" Mineral Property
| | -- | ---------------------------------------

The
Company owns a 100% interest in the Ajax - Python Claim Group, subject to a 2% net smelter royalty (NSR). The Company can purchase the NSR for $100,000, payable in cash or common shares of the Company.



10



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New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



4. PROPERTY AND EQUIPMENT



|                              |  |                |       |                         |   |               |  |   |      
|----------------------------- |  | -------------- | ----- | ----------------------- | - | ------------- |  | - | -----
|                              |  | (in thousands)
|                              |  | Cost           |       | AccumulatedAmortization |   | Net BookValue
|Land                          |  | $              | 57    |                         | $ |              |  | $ | 57   
|Building                      |  |                | 105   |                         |   | 16            |  |   | 89   
|Transportation vehicles       |  |                | 101   |                         |   | 80            |  |   | 21   
|Equipment                     |  |                | 1,662 |                         |   | 124           |  |   | 1,538
|Office and computer equipment |  |                | 345   |                         |   | 91            |  |   | 254  
|                              |  |                |       |                         |   |               |  |   |      
|Balance December 31, 2006     |  | $              | 2,270 |                         | $ | 311           |  | $ | 1,959
|                              |  |                |       |                         |   |               |  |   |      



|                              |  |                |     |                         |   |               |  |   |    
|----------------------------- |  | -------------- | --- | ----------------------- | - | ------------- |  | - | ---
|                              |  | (in thousands)
|                              |  | Cost           |     | AccumulatedAmortization |   | Net BookValue
|Land                          |  | $              | 57  |                         | $ |              |  | $ | 57 
|Building                      |  |                | 105 |                         |   | 11            |  |   | 94 
|Transportation vehicles       |  |                | 130 |                         |   | 58            |  |   | 72 
|Equipment                     |  |                | 304 |                         |   | 44            |  |   | 260
|Office and computer equipment |  |                | 146 |                         |   | 51            |  |   | 95 
|                              |  |                |     |                         |   |               |  |   |    
|Balance December 31, 2005     |  | $              | 742 |                         | $ | 164           |  | $ | 578
|                              |  |                |     |                         |   |               |  |   |    

5. WAGES, BENEFITS AND STOCK-BASED
COMPENSATION

The following table details the amounts included:



|                             |  |                |       |      |   |       |  |   |    
|---------------------------- |  | -------------- | ----- | ---- | - | ----- |  | - | ---
|                             |  | (in thousands)
|                             |  | 2006           |       | 2005 |   | 2004 
|Salaries, wages and benefits |  | $              | 1,962 |      | $ | 1,667 |  | $ |   
|Stock-based compensation     |  |                | 2,487 |      |   | 811   |  |   | 868
|                             |  |                |       |      |   |       |  |   |    
|Total                        |  | $              | 4,449 |      | $ | 2,478 |  | $ | 868
|                             |  |                |       |      |   |       |  |   |    



11



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



6. INCOME TAXES AND GRANT RECOVERIES

The difference between the income tax expense and the provision obtained by applying the statutory rate is as follows:



|                                                            |  |                   |        |   |                         |   |        |                         |  |   |      |  
|----------------------------------------------------------- |  | ----------------- | ------ | - | ----------------------- | - | ------ | ----------------------- |  | - | ---- | -
|                                                            |  | (in thousands)    |       
|                                                            |  | As at December 31 |       
|                                                            |  | 2006              |        |   | Restated (Note 16) 2005 |   |        | Restated (Note 16) 2004 | 
|Combined federal and provincial income tax rate             |  |                   | 34.1   | % |                         |   | 35.1   | %                       |  |   | 36.5 | %
|Expected income tax expense at Canadian statutory tax rates |  | $                 | 1,396  |   |                         | $ | 1,199  |                         |  | $ | 439  |  
|Increase (decrease) in taxes resulting from:                |  |                   |        |   |                         |   |        |                         |  |   |      |  
|Reduction in tax rates                                      |  |                   | 645    |   |                         |   | 561    |                         |  |   |     |  
|Non-capital loss carryforward not tax effected              |  |                   | (1,014 | ) |                         |   | (1,035 | )                       |  |   | (167 | )
|Stock-based compensation                                    |  |                   | (848   | ) |                         |   | (285   | )                       |  |   | (317 | )
|Other temporary and non-temporary differences               |  |                   | 467    |   |                         |   | 121    |                         |  |   | 45   |  
|Ontario Capital Tax                                         |  |                   | (46    | ) |                         |   | (5     | )                       |  |   |     |  
|Other                                                       |  |                   | (12    | ) |                         |   |       |                         |  |   |     |  
|                                                            |  |                   |        |   |                         |   |        |                         |  |   |      |  
|Income tax expense                                          |  | $                 | 587    |   |                         | $ | 556    |                         |  | $ |     |  
|                                                            |  |                   |        |   |                         |   |        |                         |  |   |      |  

The temporary differences comprising the future income tax assets and liabilities are as follows:



|                                               |  |                   |         |   |                         |   |        |  
|---------------------------------------------- |  | ----------------- | ------- | - | ----------------------- | - | ------ | -
|                                               |  | (in thousands)    |        
|                                               |  | As at December 31 |        
|                                               |  | 2006              |         |   | Restated (Note 16) 2005 |  
|Future income tax assets:                      |  |                   |         |   |                         |   |        |  
|Non-capital loss carry forward                 |  | $                 | 2,474   |   |                         | $ | 1,851  |  
|Share issue costs                              |  |                   | 1,344   |   |                         |   | 429    |  
|Valuation allowance                            |  |                   | (3,818  | ) |                         |   | (2,280 | )
|                                               |  |                   |         |   |                         |   |        |  
|Future income tax assets                       |  | $                 |        |   |                         | $ |       |  
|                                               |  |                   |         |   |                         |   |        |  
|Future income tax liabilities:                 |  |                   |         |   |                         |   |        |  
|Mineral property option agreement              |  | $                 | (5,639  | ) |                         | $ | (6,003 | )
|Deferred exploration expenditures flow-through |  |                   | (4,365  | ) |                         |   | (1,344 | )
|                                               |  |                   |         |   |                         |   |        |  
|Future income tax liabilities                  |  |                   | (10,004 | ) |                         |   | (7,347 | )
|                                               |  |                   |         |   |                         |   |        |  
|Net long term future income tax liability      |  | $                 | (10,004 | ) |                         | $ | (7,347 | )
|                                               |  |                   |         |   |                         |   |        |  



12



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



As at December 31, 2006 the Company has income tax loss carryforwards of $8.0 million which are
available to reduce future years taxable income and expire as follows:



|     |  |                   
|---- |  | ------------------
|     |  | (in thousands)    
|     |  | Non-capital losses
|2007 |  | 63                
|2008 |  | 38                
|2009 |  | 499               
|2010 |  | 918               
|2014 |  | 861               
|2015 |  | 2,629             
|2026 |  | 2,972             

In addition, the Company has incurred resource expenditures, net of flow-through renouncements, of
$28.3 million (2005 - $10.1 million) which may be carried forward indefinitely and used to reduce taxable income in future years.

During
2006, the Company realized a tax recovery of $645,448 (2005 - $561,148; 2004 - nil) as a result of a reduction in the federal income tax rates from 31% to 29% (2005  provincial 13.5% to 12%). In addition, in 2006 the Company renounced $10.0
million in expenditures related to flow-through equity raisings completed in 2005 which resulted in an increase in future income tax liabilities of $3.3 million and a corresponding reduction to share capital.

Included as a reduction in mineral properties is an amount totaling $593,316 (2004  nil) related to an amount receivable for the British Columbia
Mineral Exploration Tax Credit program. This amount is subject to audit by the tax authorities and should there be any subsequent adjustments as a result of the audit, the adjustment will be made to mineral properties.



13



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



7. SHARE CAPITAL

Authorized

Effective
June 1, 2005, the Company increased the authorized share capital to an unlimited number of common shares without par value from 40,000,000 common shares without par value.

Issued and Outstanding



|                                                      |  |                 |  |                         |         |  
|----------------------------------------------------- |  | --------------- |  | ----------------------- | ------- | -
|                                                      |  | (in thousands)  | 
|                                                      |  | Number ofShares |  | Restated(Note 16)Amount |        
|Balance, December 31, 2003                            |  | 12,902          |  | $                       | 39,944  |  
|For cash - exercise of stock options                  |  | 840             |  |                         | 2,550   |  
|Issued for mineral properties(a)                      |  | 200             |  |                         | 1,260   |  
|                                                      |  |                 |  |                         |         |  
|Balance, December 31, 2004                            |  | 13,942          |  | $                       | 43,754  |  
|For cash  pursuant to private placements, net (b)    |  | 1,330           |  |                         | 9,254   |  
|Issued for finders fee (b)                           |  | 104             |  |                         | 670     |  
|Issued for mineral properties (a)                     |  | 200             |  |                         | 1,074   |  
|                                                      |  |                 |  |                         |         |  
|Balance, December 31, 2005                            |  | 15,576          |  | $                       | 54,752  |  
|For cash - pursuant to a prospectus offering, net (c) |  | 8,334           |  |                         | 64,608  |  
|For cash - exercise of stock options                  |  | 235             |  |                         | 1,467   |  
|Tax effect for flow-through shares (See note 7)       |  |                |  |                         | (3,303  | )
|Transfer from stock options (See note 11)             |  |                |  |                         | 334     |  
|                                                      |  |                 |  |                         |         |  
|Balance, December 31, 2006                            |  | 24,145          |  | $                       | 117,858 |  
|                                                      |  |                 |  |                         |         |  
|                                                      |  |                 |  |                         |         |  

| | a) | During 2005 and 2004 the Company issued 200,000 common shares at the fair market value of 2005- $5.37 and 2004- $6.30 per share in accordance with the Afton
mineral claim agreement.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | On April 22, 2005, the Company completed a non-brokered private placement by issuing 400,000 flow-through common shares at a price of $7.50 per share for gross
proceeds of $3 million (net proceeds $3.0 million). The Company issued 29,000 common shares, at a market value of $6.20 per share, as a finders fee for the placement of common shares.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On October 6, 2005, the Company completed a non-brokered private placement by issuing 430,000 flow-through common shares at a price of $7.00 per
share for gross proceeds of $3.01 million (net proceeds $3.0 million). The Company issued 36,331 common shares, at a market value of $5.78 per share, as a finders fee for placement of the common shares.



14



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



On December 22, 2005, the Company completed a non-brokered private placement by issuing 500,000
flow-through common shares at a price of $8.00 per share for gross proceeds of $4.0 million (net proceeds $3.97 million). The Company issued 38,620 common shares, at a market value of $7.25 per share, as a finders fee for placement of the
common shares.

| | c) | On February 28, 2006, the Company completed a short form prospectus filing in Canada to issue, through a syndicate of underwriters, 8,334,000 units at $9.00 per
unit for gross cash proceeds of $75.0 million (net proceeds $70.6 million, prior to allocation of the fair value to the share purchase warrants (Note 8)). A commission of 5.25% was paid to the underwriters. Each unit consisted of one common
share and one-half of a share purchase warrant. The gross proceeds have been allocated $8.285 to each common share and $0.715 to each one-half of a share purchase warrant. The share purchase warrants were valued using a Black-Scholes pricing model
using the following assumptions: weighted average risk free interest rate of 3.9%; volatility factor of the expected market price of the Companys common stock of 40%; and a weighted average expected life of the warrants of 2 years.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8. SHARE PURCHASE WARRANTS

As at December 31, 2006, the following share purchase warrants were issued and outstanding:



|                                               |  |                                  |  |                                       |      
|---------------------------------------------- |  | -------------------------------- |  | ------------------------------------- | -----
|                                               |  | Number ofWarrants (in thousands) |  | Restated(Note
16)Amount(in thousands)
|Balance, December 31, 2004, and 2005           |  |                                 |  |                                       |     
|Issued for cash                                |  |                                  |  |                                       |      
|Pursuant to a prospectus offering (Note 7 (c)) |  | 4,167                            |  | $                                     | 5,959
|                                               |  |                                  |  |                                       |      
|Balance, December 31, 2006                     |  | 4,167                            |  | $                                     | 5,959
|                                               |  |                                  |  |                                       |      

Each whole warrant is exercisable to purchase one common share at a price of $12.00 per share
until February 28, 2008. The warrants have been listed for trading on the Toronto Stock Exchange.

The exercise of the outstanding
share purchase warrants in the loss calculation would be anti-dilutive.



15



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



9. STOCK-BASED COMPENSATION



| | a) | On May 4, 2005, at the Companys Annual General Meeting, the disinterested shareholders approved a change to the Companys Stock Option Plan
(Plan). The approved change increased the number of options issuable from a fixed amount of 1,000,000 options to 10% of the outstanding capital of the Company on a reloading basis.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The reloading basis allows the number of options eligible to be issued to increase to the current 10% level of the then present outstanding capital of the
Company. In addition, exercised options are also automatically reloaded into the Plan. The Plan also requires disinterested shareholders to renew their approval every three years.

In addition, the Company has issued under the 2% inducement rules available under the TSX regulations, a total of 500,000 stock options to two senior
officers which are in addition to the 10% allowable issuable amount.

The options are priced at the closing price of the Companys
share on the day prior to the grant date. The maximum term of all options is 10 years, however, all current outstanding stock option agreements have been issued with five year expiry terms.

As at December 31, 2006, the stock options held by directors, consultants and employees are as follows:



|                           |  |                                  |   |  |                              |        |   |                                      |    
|-------------------------- |  | -------------------------------- | - |  | ---------------------------- | ------ | - | ------------------------------------ | ---
|                           |  | OptionsOutstanding(in thousands) |   |  | WeightedAverageExercisePrice |        |   | WeightedAverageRemainingLife (Years)
|Balance, December 31, 2004 |  | 700                              |   |  | $                            | 4.87   |   |                                      | 4.3
|Granted                    |  | 1,042                            |   |  |                              | 6.82   |   |                                      | 4.5
|Terminated                 |  | (15                              | ) |  |                              | (6.40  | ) |                                      |   
|                           |  |                                  |   |  |                              |        |   |                                      |    
|Balance, December 31, 2005 |  | 1,727                            |   |  | $                            | 6.04   |   |                                      | 4.5
|Granted                    |  | 715                              |   |  |                              | 10.64  |   |                                      | 4.0
|Exercised                  |  | (185                             | ) |  |                              | (6.69  | ) |                                      |   
|Terminated                 |  | (4                               | ) |  |                              | (11.00 | ) |                                      |   
|                           |  |                                  |   |  |                              |        |   |                                      |    
|Balance, December 31, 2006 |  | 2,253                            |   |  | $                            | 7.43   |   |                                      | 3.6
|                           |  |                                  |   |  |                              |        |   |                                      |    



16



---

|                    |  |                        |  |                                      |  |                        |  |                                     
|------------------- |  | ---------------------- |  | ------------------------------------ |  | ---------------------- |  | ------------------------------------
|                    |  | Exercisable            |  | Outstanding                         
|Option Strike Price |  | Options (in thousands) |  | WeightedAverageRemainingLife (Years) |  | Options (in thousands) |  | WeightedAverageRemainingLife (Years)
|$4.60               |  | 600                    |  | 2.8                                  |  | 600                    |  | 2.8                                 
|$4.61 to $5.99      |  | 12                     |  | 3.7                                  |  | 12                     |  | 3.7                                 
|$6.00 to $6.99      |  | 665                    |  | 3.6                                  |  | 665                    |  | 3.6                                 
|$7.00 to $7.99      |  | 265                    |  | 3.4                                  |  | 265                    |  | 3.4                                 
|$8.00 to $11.00     |  | 310                    |  | 3.8                                  |  | 711                    |  | 4.4                                 
|                    |  |                        |  |                                      |  |                        |  |                                     
|                    |  | 1,852                  |  | 3.3                                  |  | 2,253                  |  | 3.6                                 
|                    |  |                        |  |                                      |  |                        |  |                                     

The compensation cost recorded for the period ended December 31, 2006 in respect of options
granted in 2006 and prior periods that was expensed to the Statement of Operations was $2,486,635 (2005 - $811,481) and capitalized to mineral properties was $665,927 (2005 - $47,913).

The current period valuation was calculated with the following assumptions: weighted average risk free interest rate of 3.86% to 4.42% (2005 - 3.44%);
volatility factor of the expected market price of the Companys common stock of 40% (2005 - 44%); and a weighted average expected life of the options of 2.5 years (2005 - 2.5 years).

The resulting weighted average cost per option granted was $3.07 (2005 - $2.00). The estimated fair value of the options is expensed over the vesting
period which ranges from zero to 12 months.

The fair value of options issued has been estimated at the date of grant using a Black-Scholes
option pricing model. The Black-Scholes pricing model requires the input of highly subjective assumptions that can materially affect the fair value estimate.

The exercise of the outstanding options in the loss per share calculation would be anti- dilutive.



| | b) | Compensation Options
| | -- | --------------------

As at
December 31, 2006, the following compensation options were issued and outstanding:



|                           |  |                                  |   |  |                              |     
|-------------------------- |  | -------------------------------- | - |  | ---------------------------- | ----
|                           |  | OptionsOutstanding(in thousands) |   |  | WeightedAverageExercisePrice
|Balance, December 31, 2004 |  | 50                               |   |  | $                            | 4.60
|                           |  |                                  |   |  |                              |     
|Balance, December 31, 2005 |  | 50                               |   |  |                              | 4.60
|Exercised                  |  | (50                              | ) |  |                              | 4.60
|                           |  |                                  |   |  |                              |     
|Balance, December 31, 2006 |  |                                 |   |  |                              |    
|                           |  |                                  |   |  |                              |     



17



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



The compensation options were valued initially in 2004 using a Black-Scholes pricing model and the
resultant amount expensed during that period.

10. RELATED PARTY TRANSACTIONS



|                                                                                                                                                                         |  |                |   |                       |   |    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | - | --------------------- | - | ---
|                                                                                                                                                                         |  | (in thousands)
|                                                                                                                                                                         |  | 2006           |   | Restated(Note 16)2005
|a)      For wages and consulting services charged by a related person of a Director. Effective January, 2006,
these services ceased to be provided by the related party. |  | $              |  |                       | $ | 96 
|b)      For 100,000 shares issued in payment pursuant to the Afton mineral claim option agreement to a Director
of the Company.                                          |  | $              |  |                       | $ | 537

These related party transactions occurred at the exchange amount which is the amount of the
consideration agreed to by both parties.

11. STOCK OPTIONS

The following table identifies the changes in the stock options category within shareholders equity for the years presented:



|                                               |  |                |       |  
|---------------------------------------------- |  | -------------- | ----- | -
|                                               |  | (in thousands) |      
|Balance, December 31, 2003                     |  | $              | -     |  
|Stock-based compensation                       |  |                | 868   |  
|                                               |  |                |       |  
|Balance, December 31, 2004                     |  | $              | 868   |  
|Stock-based compensation                       |  |                | 860   |  
|                                               |  |                |       |  
|Balance, December 31, 2005                     |  | $              | 1,728 |  
|Stock-based compensation                       |  |                | 3,152 |  
|Transfer of exercised options to share capital |  |                | (334  | )
|                                               |  |                |       |  
|Balance, December 31, 2006                     |  | $              | 4,546 |  
|                                               |  |                |       |  

12. SUPPLEMENTARY CASH FLOW INFORMATION

The Company conducted non-cash investing and financing activities as follows:



|                                                                          |  |                |        |   |                       |   |        |  
|------------------------------------------------------------------------- |  | -------------- | ------ | - | --------------------- | - | ------ | -
|                                                                          |  | (in thousands) |       
|                                                                          |  | 2006           |        |   | Restated(Note 16)2005 |  
|Investing Activities                                                      |  |                |        |   |                       |   |        |  
|Mineral property expenditures included in accounts receivable and payable |  | $              | 1,878  |   |                       | $ | (1,656 | )
|Property and equipment expenditures included in accounts payable          |  |                | (1,109 | ) |                       |   |       |  
|Financing Activities                                                      |  |                |        |   |                       |   |        |  
|Shares issued for mineral properties                                      |  |                |       |   |                       |   | 1,074  |  
|Shares issued for finders fee                                            |  |                |       |   |                       |   | 670    |  



18



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



13. FINANCIAL INSTRUMENTS

The Companys financial instruments consist of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities. Unless
otherwise noted, it is managements opinion that the Company is not exposed to significant interest, currency, or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying
values due to the relatively short period to maturity of these instruments.

14. SEGMENTED INFORMATION

The Company operates in one industry segment, namely metals development in one geographic region, Canada.

15. COMMITMENTS AND CONTINGENT LIABILITIES



| | a) | Under the terms of the Option agreements to acquire the mineral properties for the Afton Mineral Claims, the optionors retained a 10% net profit royalty which can be
purchased on or before December 1, 2010 for $2,000,000 in cash or common shares of the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Under the terms of the Ajax - Python Claim option agreement the property is subject to a 2% net smelter royalty (NSR). The Company can purchase the NSR for
$100,000, payable in cash or common shares of the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | In 2006 the Company completed two arms length agreements with the owners (collectively, the optionors) of two mineral claim groups, whereby for an
aggregate payment to them of $28,965 in cash, the Company acquired the exclusive right to explore the properties for one year. The exclusive exploration rights may, at the Companys option, be extended for two further one-year periods by making
payments of $65,000 to one optionor and $71,700 to the other. Any further payments to the optionors are payable in cash or equivalent value in shares of the Company at the optionors discretion in one case and at the discretion of the Company
in the other.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



The Company may at any time during the option period purchase the properties by paying the first
optionor $100,000 and reserving a 1.5% net smelter return royalty on the production from the property and paying the second optionor $93,400 and reserving a 1% net smelter return royalty on the production from the property. The Company received
transfer of title to both properties, which will be retransferred if the Company does not exercise the purchase option.



| | d) | During the fourth quarter of 2006 the Company entered into a number of contractual commitments to advance the development of the Project. These commitments are either
short term Letters of Intent (LOI), put in place as an interim measure until long-term arrangements can be completed, or equipment orders to purchase long lead items or critical equipment pieces of mining equipment necessary to commence
development of the Project. These commitments include the following outstanding commitments as at December 31, 2006:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



|                                               |  |                   |        |                                                   |   |      
|---------------------------------------------- |  | ----------------- | ------ | ------------------------------------------------- | - | -----
|                                               |  | LOI(in thousands) |        | Long lead items andequipment orders(in thousands)
|Surface and underground development activities |  | $                 | 16,051 |                                                   | $ |     
|Processing plant                               |  |                   |       |                                                   |   | 1,553
|Other                                          |  |                   |       |                                                   |   | 984  

All LOI commitments permit the Company to terminate them for convenience upon payment to the other
party of amounts owing up to the date and termination and, in some cases, demobilization charges.



| | e) | The Company is committed to an operating lease for office premise rentals in the aggregate of $109,804. The future minimum lease payments as at December 31, 2006
are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     |  |                |    
|---- |  | -------------- | ---
|     |  | (in thousands)
|2007 |  | $              | 63 
|2008 |  |                | 41 
|2009 |  |                | 6  
|     |  |                |    
|     |  | $              | 110
|     |  |                |    

16. RESTATEMENT OF PRIOR YEARS

During 2006 the Company undertook a review of its previously-issued financial statements for: the accounting treatment for the recognition of future
income taxes related to flow-through share offerings, the valuation method used for assigning value for share payments, stock-based compensation costs related to project personnel and the reporting of non-cash working capital changes reported in the
Statement of Cash Flows. Management thereafter determined that amendments should be reflected in the previously issued financial statements which were adjusted and re-issued. The comparative amounts included in these financial statements reflect the
impact of these adjustments.

The effect of the restatement on the restated financial statements incorporated in these financial statements
is summarized as:



|                            |  |                       |        |   |            |   |            |  |   |        |  
|--------------------------- |  | --------------------- | ------ | - | ---------- | - | ---------- |  | - | ------ | -
|                            |  | (in thousands)        |       
|Balance sheet 2005          |  | As previouslyreported |        |   | Adjustment |   | Asrestated | 
|Mineral properties          |  | $                     | 22,561 |   |            | $ | 19,880     |  | $ | 42,441 |  
|Future income tax liability |  |                       | 4,385  |   |            |   | 2,962      |  |   | 7,347  |  
|Share capital               |  |                       | 39,462 |   |            |   | 15,290     |  |   | 54,752 |  
|Deficit                     |  |                       | (7,620 | ) |            |   | 1,627      |  |   | (5,993 | )



21



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



|                                                      |  |                       |         |   |            |   |        |             |  |   |         |  
|----------------------------------------------------- |  | --------------------- | ------- | - | ---------- | - | ------ | ----------- |  | - | ------- | -
|Statements of Operations and deficit                  |  | As previouslyreported |         |   | Adjustment |   |        | As restated | 
|Loss for the year 2005                                |  | $                     | (3,399  | ) |            | $ | 540    |             |  | $ | (2,859  | )
|Loss for the year 2004                                |  |                       | (1,250  | ) |            |   | 47     |             |  |   | (1,203  | )
|Deficit ending of 2003                                |  |                       | (2,971  | ) |            |   | 1,040  |             |  |   | (1,931  | )
|                                                      |  |                       |        
|Statement of Cash Flows 2005                          |  | As previouslyreported |         |   | Adjustment |   |        | As restated | 
|Net change in non-cash working capital items          |  | $                     | 2,495   |   |            | $ | (1,656 | )           |  | $ | 839     |  
|Payments for mineral properties and exploration costs |  |                       | (16,567 | ) |            |   | 1,656  |             |  |   | (14,911 | )

17. SUBSEQUENT EVENTS



| | a) | On January 9, 2007, the Company announced that it had signed a Letter of Intent (LOI) with Teck Cominco Limited (Teck), to acquire the surface
rights to more than 4000 acres of land, encompassing its Project. The LOI contemplates the Company paying Teck $10 million upon closing, with an additional $6 million to be paid (with applicable interest) any time within 2 years of closing. Teck
will also be granted a 2% Net Smelter Return over the Project, which the Company has the option to repurchase for $12 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As part of the LOI, the Company has agreed to honour all pre-existing agreements made between Teck and any third parties regarding access and rights of way over this land, and access to water.

Completion of the final agreement described in the LOI is subject to definitive documentation, receipt of any necessary regulatory approvals and customary
conditions of closing. The Company and Teck have agreed to work towards the completion of a definitive agreement as expeditiously as possible.



| | b) | Subsequent to December 31, 2006 and in addition to those commitments included in note 15(d), the Company entered into a number of contractual commitments to advance the
development of the Project. These commitments are comprised of engineering services for long lead items or critical equipment pieces of mining equipment necessary to commence development of the Project. The equipment may be financed under operating
or capital leases or purchases outright at the Companys option. These commitments include the following:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                               |  |                                     |    
|---------------------------------------------- |  | ----------------------------------- | ---
|                                               |  | (in thousands)                     
|                                               |  | Long lead items andequipment orders
|Surface and underground development activities |  | $                                   | 793



22



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



18. DIFFERENCES BETWEEN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES

These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP). Material
variations in the accounting principles, practices and methods are used in preparing financial statements under generally accepted practices in the United States ("U.S. GAAP"). The effects of the principal differences on the Companys financial
statements under U.S. GAAP are quantified below and described in the accompanying notes:



|                                                            |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|----------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------------------- | - | ------- | --------------------- |  | - | ------ | -
|                                                            |  | Year ended December 31 (in thousands) |        
|Statements of Operations                                    |  | 2006                                  |         |   | Restated(Note 16)2005 |   |         | Restated(Note 16)2004 | 
|Loss for the year under Canadian GAAP                       |  | $                                     | (3,504  | ) |                       | $ | (2,859  | )                     |  | $ | (1,203 | )
|Add/(deduct):                                               |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Issue of flow-through shares under US GAAP (b)              |  |                                       | 1,518   |   |                       |   |         |                       |  |   |        |  
|Property costs expenditures expensed under US GAAP (a)      |  |                                       | (19,000 | ) |                       |   | (17,689 | )                     |  |   | (3,646 | )
|Future income taxes (b)                                     |  |                                       | (645    | ) |                       |   | (561    | )                     |  |   |       |  
|                                                            |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Loss and comprehensive income for the year under US GAAP    |  | $                                     | (21,631 | ) |                       | $ | (21,109 | )                     |  | $ | (4,849 | )
|                                                            |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Weighted average number of share outstanding - in thousands |  |                                       | 22,689  |   |                       |   | 14,436  |                       |  |   | 13,391 |  
|Basic and diluted loss per share under US GAAP              |  | $                                     | (0.95   | ) |                       | $ | (1.46   | )                     |  | $ | (0.36  | )
|                                                            |  |                                       |         |   |                       |   |         |                       |  |   |        |  



|                                                              |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------------------- | - | ------- | --------------------- |  | - | ------ | -
|                                                              |  | Year ended December 31 (in thousands) |        
|Statements of Cash Flows                                      |  | 2006                                  |         |   | Restated(Note 16)2005 |   |         | Restated(Note 16)2004 | 
|Cash flows from operating activities under Canadian GAAP      |  | $                                     | (1,499  | ) |                       | $ | (1,675  | )                     |  | $ | 443    |  
|Add/(deduct):                                                 |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Mineral property interests and deferred exploration costs (a) |  |                                       | (20,212 | ) |                       |   | (14,911 | )                     |  |   | (2,387 | )
|                                                              |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Cash flows from operating activities under US GAAP            |  | $                                     | (21,711 | ) |                       | $ | (16,586 | )                     |  | $ | (1,944 | )
|                                                              |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Cash flows from investing activities under Canadian GAAP      |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Add/(deduct):                                                 |  | $                                     | (20,660 | ) |                       | $ | (15,077 | )                     |  | $ | (2,685 | )
|Mineral property interests and deferred exploration costs (a) |  |                                       | 20,212  |   |                       |   | 14,911  |                       |  |   | 2,387  |  
|                                                              |  |                                       |         |   |                       |   |         |                       |  |   |        |  
|Cash flows from investing activities under US GAAP            |  | $                                     | (449    | ) |                       | $ | (166    | )                     |  | $ | (298   | )
|                                                              |  |                                       |         |   |                       |   |         |                       |  |   |        |  



23



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



|                                                              |  |                                  |         |   |                       |   |         |  
|------------------------------------------------------------- |  | -------------------------------- | ------- | - | --------------------- | - | ------- | -
|Balance Sheets                                                |  | As at December 31 (in thousands) |        
|                                                              |  | 2006                             |         |   | Restated(Note 16)2005 |  
|Shareholders equity reported under Canadian GAAP             |  | $                                | 118,866 |   |                       | $ | 50,487  |  
|Add/(Deduct):                                                 |  |                                  |         |   |                       |   |         |  
|Mineral property interests and deferred exploration costs (a) |  |                                  | (61,440 | ) |                       |   | (42,441 | )
|Flow-through shares (b)                                       |  |                                  |        |   |                       |   | (975    | )
|Future income taxes (b)                                       |  |                                  | 10,004  |   |                       |   | 7,347   |  
|                                                              |  |                                  |         |   |                       |   |         |  
|Shareholders equity reported under US GAAP                   |  | $                                | 67,430  |   |                       | $ | 14,418  |  
|                                                              |  |                                  |         |   |                       |   |         |  
|Total assets reported under Canadian GAAP                     |  | $                                | 132,656 |   |                       | $ | 61,631  |  
|Add/(Deduct):                                                 |  |                                  |         |   |                       |   |         |  
|Mineral property interests and deferred exploration costs (a) |  |                                  | (61,440 | ) |                       |   | (42,441 | )
|                                                              |  |                                  |         |   |                       |   |         |  
|Total assets reported under US GAAP                           |  | $                                | 71,216  |   |                       | $ | 19,190  |  
|                                                              |  |                                  |         |   |                       |   |         |  
|Total liabilities reported under Canadian GAAP                |  | $                                | 13,790  |   |                       | $ | 11,144  |  
|Add/(Deduct):                                                 |  |                                  |         |   |                       |   |         |  
|Flow-through shares (b)                                       |  |                                  |        |   |                       |   | 975     |  
|Future income taxes (b)                                       |  |                                  | (10,004 | ) |                       |   | (7,347  | )
|                                                              |  |                                  |         |   |                       |   |         |  
|Total liabilities reported under US GAAP                      |  | $                                | 3,786   |   |                       | $ | 4,772   |  
|                                                              | 

| | a) | Mineral property interests and deferred exploration costs
| | -- | ---------------------------------------------------------

Under Canadian GAAP, costs to acquire property rights, including future income taxes related to shares issued to acquire mineral properties (2006  $ nil, 2005 - $534,093, 2004 - $663,933), including any related future income tax
liabilities capitalized, and related exploration costs incurred on those properties, may be deferred and subsequently carried at cost prior to a company having obtained the necessary data to complete a positive feasibility study, including the
preparation of a cash flow projection in respect of the recoverability of those costs. Accordingly, while the Project remains at a feasibility stage of development, management has elected under Canadian GAAP to defer all costs incurred on it until
the property is abandoned, sold, or upon management determining there to be an impairment in value. Under U.S. GAAP, prior to the point in time that a positive feasibility report has been completed in respect to a property, such costs are expensed
as incurred.

| | b) | Flow-through shares
| | -- | -------------------

Under Canadian income tax
legislation, the Company is permitted to issue shares whereby the Company agrees to incur qualifying expenditures (as defined



24



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



under the Canadian Income Tax Act) and renounce the related income tax deductions to the investors. Under Canadian GAAP, flow-through shares are
accounted for as part of the issuance of capital stock at the price paid for the shares, net of any future income tax liability. Under U.S. GAAP, SFAS 109, Accounting for Income Taxes (SFAS109), the proceeds should be allocated between
the offering of the shares and the sale of tax benefits when the shares are offered. The allocation is made based on the difference between the quoted price of the shares and the amount the investor pays for the flow-through shares. A liability is
recognized initially for the premium paid by the investors.

Upon renouncing the income tax deductions, the Company records a future income
tax liability with a corresponding reduction in share capital under Canadian GAAP. For U.S. GAAP purposed, the difference between the future income tax liability on renunciation and the premium is recorded as a future income tax expense. For
US GAAP purposes as a result of expensing costs related to mineral properties, the Company reports an income tax expense.

During
December 31, 2005, the Company issued an aggregate of 1,330,000 flow-through shares at an average premium of approximately $1.14 per share relative to the closing market prices of the Companys shares on the dates that the directors set
the flow-through share issue prices. In 2006 the Company renounced the expenditures related to these financings.

The reconciling items
disclosed herein are in respect to both the recognition of the tax benefit sale under U.S. GAAP and to the reversal of the required Canadian GAAP treatment of flow-through share issuances and renunciations.



| | c) | Stock-based Compensation
| | -- | ------------------------

In 2004, the Company
adopted FAS 123R which is consistent with the treatment under Canadian GAAP. The Company has determined the amount of stock options forfeited is not material, therefore there are no differences on accounting for stock-based compensation under
Canadian and US GAAP.



| | d) | Recent accounting pronouncements
| | -- | --------------------------------

Handbook
Section 3855 of the CICA Handbook (the Handbook) entitled Financial Instruments  Recognition and Measurement, applies to interim financial periods beginning on or after October 1, 2006 and establishes
standards for recognizing and measuring financial assets, financial liabilities and non-



25



---

New Gold Inc.

(A
Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In Canadian
dollars except as indicated)



financial derivatives. All financial assets, with the exception of those classified as held to maturity, and derivative financial instruments, must be
measured at fair value. All financial liabilities must be measured at fair value when they are classified as held for trading; if not, they are measured at cost. As at December 31, 2006 the adoption of this Section will not have a material
impact on the financial statements.

Handbook Section 1530 of the Handbook entitled Comprehensive Income, and
Section 3251 entitled Equity, apply to interim financial periods beginning on or after October 1, 2006. Comprehensive income is the change in the net assets of an enterprise during a period and resulting from transactions and
other events and circumstances from non-owner sources. It includes items that would normally not be included in net earnings, such as the effective portion of changes in fair values of cash flow hedging instruments. Section 3251,
Equity, replaces Section 3250, Surplus, and describes the changes in how to report and disclose equity and changes in equity as a result of the new requirements of Section 1530, Comprehensive Income.
Upon adoption of this Section, the financial statements will include a statement of comprehensive income.

Section 3865 of the Handbook
entitled Hedges, applies to interim financial periods beginning on or after October 1, 2006 and describes when hedge accounting is appropriate. Hedge accounting ensures that all gains, losses, revenue and expenses from the
derivative the item it hedges, are recorded in the statement of earnings in the same period.

The adoption of these Sections of the Handbook
is not expected to have a material impact on the financial statements.

In early July 2006, the Financial Accounting Standards Board in the
United States issued Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 was issued to address financial statement recognition and measurement by an enterprise of a tax position taken or expected to be
taken in a tax return. The new standard will require several new disclosures in annual financial statements, including: (a) the income statement classification of income tax-related interest and penalties and (b) a reconciliation of the
total amount of unrecognized tax benefits. As at December 31, 2006, the Company has not yet determined the impact that this interpretation will have on the financial statements.



26



---

New Gold Inc.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2006, 2005 and 2004

(In
Canadian dollars except as indicated)



|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|-------------------------------------------- |  | ----- | ------ | -------------------------- | - | ---- |  | --------------------- | ------ |  | - | ------
|                                             |  |       |        |                            |   | 2006 |  | Restated(Note 16)2005
|ACQUISITION COSTS                            |  |       |        |                            |   |      |  |                       |        |  |   |       
|                                             |  |       |        |                           
|Kamloops Afton                               |  |       |        |                            |   |      |  | $                     | 18,841 |  | $ | 18,841
|Kamloops Ajax                                |  |       |        |                            |   |      |  |                       | 49     |  |   | 49    
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|                                             |  |       |        |                            |   |      |  | $                     | 18,890 |  | $ | 18,890
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|                                             |  |       |        |                           
|                                             |  | Afton |        | Ajax andOptionedProperties |   |      |  |                      
|DEFERRED EXPLORATION COSTS                   |  |       |        |                            |   |      |  |                       |        |  |   |       
|Balance, beginning                           |  | $     | 23,323 |                            | $ | 228  |  | $                     | 23,551 |  | $ | 6,936 
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Aboveground Exploration Costs                |  |       |        |                            |   |      |  |                       |        |  |   |       
|Option payment                               |  |       |       |                            |   | 29   |  |                       | 29     |  |   |      
|Assaying and testing                         |  |       | 105    |                            |   | 48   |  |                       | 153    |  |   | 13    
|Drilling                                     |  |       | 1,974  |                            |   | 253  |  |                       | 2,227  |  |   | 218   
|Overhead and general                         |  |       | 152    |                            |   | 59   |  |                       | 211    |  |   | 322   
|Wages and benefits                           |  |       | 310    |                            |   | 72   |  |                       | 382    |  |   | 121   
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|                                             |  |       | 2,541  |                            |   | 461  |  |                       | 3,002  |  |   | 674   
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Underground Exploration Costs                |  |       |        |                            |   |      |  |                       |        |  |   |       
|Assaying and testing                         |  |       | 325    |                            |   |     |  |                       | 325    |  |   | 307   
|Drilling                                     |  |       | 5,264  |                            |   |     |  |                       | 5,264  |  |   | 1,943 
|Overhead and general                         |  |       | 790    |                            |   |     |  |                       | 790    |  |   | 1,280 
|Tunneling and decline costs                  |  |       |       |                            |   |     |  |                       |       |  |   | 11,982
|Wages, benefits and stock-based compensation |  |       | 1,749  |                            |   |     |  |                       | 1,749  |  |   | 429   
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|                                             |  |       | 8,128  |                            |   |     |  |                       | 8,128  |  |   | 15,941
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Feasibility Study                            |  |       | 7,859  |                            |   |     |  |                       | 7,859  |  |   |      
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Infrastructure                               |  |       | 10     |                            |   |     |  |                       | 10     |  |   |      
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Balance, end                                 |  | $     | 41,861 |                            | $ | 689  |  | $                     | 42,550 |  | $ | 23,551
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       
|Mineral Properties                           |  |       |        |                            |   |      |  | $                     | 61,440 |  | $ | 42,441
|                                             |  |       |        |                            |   |      |  |                       |        |  |   |       



27