Exhibit 2

LOGO

NEW GOLD INC.

(formerly DRC Resources Corporation)

(an Exploration Stage Company)

FINANCIAL STATEMENTS

December 31, 2005



---

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.

The financial statements as at and for the year ended December 31, 2003 was audited by other auditors who expressed opinions
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



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

BALANCE SHEETS

As at December 31, 2005 and 2004

(Canadian dollars)



|                                                  |  |      |                         |   |                |   |            |  
|------------------------------------------------- |  | ---- | ----------------------- | - | -------------- | - | ---------- | -
|                                                  |  | 2005 |                         |   | (Note 15) 2004 |  
|ASSETS                                            |  |      |                         |   |                |   |            |  
|Current assets                                    |  |      |                         |   |                |   |            |  
|Cash and cash equivalents                         |  | $    | 18,178,820              |   |                | $ | 25,029,585 |  
|Accrued interest receivable                       |  |      | 19,763                  |   |                |   | 71,912     |  
|Amounts receivable                                |  |      | 305,810                 |   |                |   | 170,636    |  
|Prepaid expenses                                  |  |      | 107,686                 |   |                |   | 81,442     |  
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  |      | 18,612,079              |   |                |   | 25,353,575 |  
|Mineral Properties  Schedule(Note 3)             |  |      | 22,561,015              |   |                |   | 5,933,932  |  
|Property and Equipment(Note 4)                    |  |      | 578,499                 |   |                |   | 508,138    |  
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  | $    | 41,751,593              |   |                | $ | 31,795,645 |  
|                                                  |  |      |                         |   |                |   |            |  
|LIABILITIES                                       |  |      |                         |   |                |   |            |  
|Current Liabilities                               |  |      |                         |   |                |   |            |  
|Accounts payable and accrued liabilities          |  | $    | 3,767,475               |   |                | $ | 1,164,350  |  
|Current portion of capital lease payable (Note 5) |  |      | 30,228                  |   |                |   | 22,671     |  
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  |      | 3,797,703               |   |                |   | 1,187,021  |  
|Capital lease payable(Note 5)                     |  |      |                        |   |                |   | 30,228     |  
|Future income taxes(Note 6)                       |  |      | 4,384,680               |   |                |   | 922,675    |  
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  |      | 8,182,383               |   |                |   | 2,139,924  |  
|                                                  |  |      |                         |   |                |   |            |  
|SHAREHOLDERS EQUITY                              |  |      |                         |   |                |   |            |  
|Share capital(Note 7)                             |  |      | 39,461,796              |   |                |   | 33,008,361 |  
|Contributed surplus(Note 10)                      |  |      | 1,727,584               |   |                |   | 868,190    |  
|Deficit                                           |  |      | (7,620,170              | ) |                |   | (4,220,830 | )
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  |      | 33,569,210              |   |                |   | 29,655,721 |  
|                                                  |  |      |                         |   |                |   |            |  
|                                                  |  | $    | 41,751,593              |   |                | $ | 31,795,645 |  
|                                                  |  |      |                         |   |                |   |            |  
|Commitments and Contingent Liabilities(Note 13)   |  |      | See accompanying notes. |  



|                      |  |  |  |               
|--------------------- |  |  |  | --------------
|APPROVED BY THE BOARD |  |  |  |               
|                      |  | 
|Chris Bradbrook     |  |  |  | Paul Sweeney
|Chris Bradbrook       |  |  |  | Paul Sweeney  
|Director              |  |  |  | Director      



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

STATEMENTS OF OPERATIONS AND DEFICIT

For the years ended December 31, 2005, 2004 and 2003

(Canadian dollars)



|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|--------------------------------------------- |  | ---- | ---------- | - | -------------- | - | ---------- | -------------- |  | - | ---------- | -
|                                              |  | 2005 |            |   | (Note 15) 2004 |   |            | (Note 15) 2003 | 
|Income                                        |  |      |            |   |                |   |            |                |  |   |            |  
|Interest and other income                     |  | $    | 487,893    |   |                | $ | 560,615    |                |  | $ | 182,839    |  
|Gain on sale of marketable security           |  |      |           |   |                |   | 8,290      |                |  |   |           |  
|Gain on sale of investment property           |  |      |           |   |                |   | 32,801     |                |  |   |           |  
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|                                              |  |      | 487,893    |   |                |   | 601,706    |                |  |   | 182,839    |  
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Expenses                                      |  |      |            |   |                |   |            |                |  |   |            |  
|Amortization                                  |  |      | 95,496     |   |                |   | 40,518     |                |  |   | 12,536     |  
|BC capital tax                                |  |      |           |   |                |   |           |                |  |   | 30,945     |  
|Consulting and management fees                |  |      | 58,032     |   |                |   | 270,848    |                |  |   | 118,155    |  
|Foreign exchange                              |  |      | 2,950      |   |                |   | 36,689     |                |  |   | 74,929     |  
|Insurance                                     |  |      | 157,031    |   |                |   | 36,794     |                |  |   | 14,000     |  
|Office and miscellaneous                      |  |      | 105,808    |   |                |   | 131,667    |                |  |   | 83,163     |  
|Professional fees                             |  |      | 185,805    |   |                |   | 116,328    |                |  |   | 109,007    |  
|Regulatory and filing fees                    |  |      | 98,508     |   |                |   | 84,088     |                |  |   | 66,871     |  
|Rent                                          |  |      | 83,967     |   |                |   | 39,631     |                |  |   | 22,103     |  
|Stock-based compensation (Note 8(a))          |  |      | 859,394    |   |                |   | 868,190    |                |  |   |           |  
|Telephone                                     |  |      | 19,730     |   |                |   | 5,114      |                |  |   | 4,541      |  
|Transfer agent                                |  |      | 12,583     |   |                |   | 9,632      |                |  |   | 9,031      |  
|Travel, conferences and promotion             |  |      | 604,638    |   |                |   | 165,012    |                |  |   | 53,259     |  
|Wages and benefits                            |  |      | 1,666,958  |   |                |   |           |                |  |   |           |  
|Write-off of mineral property                 |  |      |           |   |                |   |           |                |  |   | 1          |  
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|                                              |  |      | 3,950,900  |   |                |   | 1,804,511  |                |  |   | 598,541    |  
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Loss before income taxes                      |  |      | (3,463,007 | ) |                |   | (1,202,805 | )              |  |   | (415,702   | )
|Income taxes(Note 6)                          |  |      | 63,667     |   |                |   | (46,740    | )              |  |   | (802,669   | )
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Loss for the year                             |  |      | (3,399,340 | ) |                |   | (1,249,545 | )              |  |   | (1,218,371 | )
|Deficit, beginning of year                    |  |      | (4,220,830 | ) |                |   | (2,971,285 | )              |  |   | (1,752,914 | )
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Deficit, end of year                          |  | $    | (7,620,170 | ) |                | $ | (4,220,830 | )              |  | $ | (2,971,285 | )
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Weighted average number of shares outstanding |  |      | 14,435,573 |   |                |   | 13,390,604 |                |  |   | 9,746,722  |  
|                                              |  |      |            |   |                |   |            |                |  |   |            |  
|Loss per share (basic and diluted)            |  | $    | (0.24      | ) |                | $ | (0.09      | )              |  | $ | (0.13      | )
|                                              |  |      |            |   |                |   |            |                |  |   |            |  

See accompanying notes.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2005, 2004 and 2003

(Canadian dollars)



|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|----------------------------------------------------- |  | ---- | ----------- | - | -------------- | - | ---------- | -------------- |  | - | ---------- | -
|                                                      |  | 2005 |             |   | (Note 15) 2004 |   |            | (Note 15) 2003 | 
|Cash provided by (used for)                           |  |      |             |   |                |   |            |                |  |   |            |  
|OPERATING ACTIVITIES                                  |  |      |             |   |                |   |            |                |  |   |            |  
|Loss for the year                                     |  | $    | (3,399,340  | ) |                | $ | (1,249,545 | )              |  | $ | (1,218,371 | )
|Items not involving cash:                             |  |      |             |   |                |   |            |                |  |   |            |  
|Amortization                                          |  |      | 95,496      |   |                |   | 40,518     |                |  |   | 12,536     |  
|Stock-based compensation                              |  |      | 859,394     |   |                |   | 868,190    |                |  |   |           |  
|Gain on sale of marketable security                   |  |      |            |   |                |   | (8,290     | )              |  |   |           |  
|Gain on sale of investment property                   |  |      |            |   |                |   | (32,801    | )              |  |   |           |  
|Write-off of mineral properties                       |  |      |            |   |                |   |           |                |  |   | 1          |  
|Future income taxes                                   |  |      | (68,667     | ) |                |   | 46,740     |                |  |   | 762,169    |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|                                                      |  |      | (2,513,117  | ) |                |   | (335,188   | )              |  |   | (443,665   | )
|Net change in non-cash working capital items          |  |      | 2,493,856   |   |                |   | 777,548    |                |  |   | 191,095    |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|Cash (used for) provided by operating activities      |  |      | (19,261     | ) |                |   | 442,360    |                |  |   | (252,570   | )
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|INVESTING ACTIVITIES                                  |  |      |             |   |                |   |            |                |  |   |            |  
|Proceeds on sale of marketable security               |  |      |            |   |                |   | 9,790      |                |  |   |           |  
|Proceeds on sale of investment property               |  |      |            |   |                |   | 143,668    |                |  |   |           |  
|Payments for mineral properties and exploration costs |  |      | (16,567,083 | ) |                |   | (2,386,636 | )              |  |   | (1,742,663 | )
|Acquisition of property and equipment                 |  |      | (165,857    | ) |                |   | (451,644   | )              |  |   |           |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|Cash used for investing activities                    |  |      | (16,732,940 | ) |                |   | (2,684,822 | )              |  |   | (1,742,663 | )
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|FINANCING ACTIVITIES                                  |  |      |             |   |                |   |            |                |  |   |            |  
|Payments on capital lease                             |  |      | (22,671     | ) |                |   | (15,114    | )              |  |   |           |  
|Cash proceeds from shares issued                      |  |      | 10,010,000  |   |                |   | 2,550,000  |                |  |   | 24,510,000 |  
|Share issue costs paid                                |  |      | (85,893     | ) |                |   |           |                |  |   | (1,649,750 | )
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|Cash provided by financing activities                 |  |      | 9,901,436   |   |                |   | 2,534,886  |                |  |   | 22,860,250 |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|(Decrease) Increase in cash and cash equivalents      |  |      | (6,850,765  | ) |                |   | 292,424    |                |  |   | 20,865,017 |  
|Cash and cash equivalents, beginning of year          |  |      | 25,029,585  |   |                |   | 24,737,161 |                |  |   | 3,872,144  |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|Cash and cash equivalents, end of year                |  | $    | 18,178,820  |   |                | $ | 25,029,585 |                |  | $ | 24,737,161 |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|Cash and cash equivalents comprises:                  |  |      |             |   |                |   |            |                |  |   |            |  
|Cash                                                  |  | $    | 2,883,130   |   |                | $ | 60,461     |                |  | $ | 27,760     |  
|Term deposits and short-term discount notes           |  |      | 15,295,690  |   |                |   | 24,969,124 |                |  |   | 24,709,401 |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  
|                                                      |  | $    | 18,178,820  |   |                | $ | 25,029,585 |                |  | $ | 24,737,161 |  
|                                                      |  |      |             |   |                |   |            |                |  |   |            |  

See accompanying notes.



|* | Supplemental disclosure of non-cash investing and financing activities, refer to Note 11.
|- | -----------------------------------------------------------------------------------------



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

For the years ended December 31, 2005, 2004 and 2003

(Canadian Dollars)



|                                     |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|------------------------------------ |  | ------------ |  | ------ | ------------------- | - | ------- | - | --------- | ------------------------- | - | ---------- | - |  | - | ---------- | -
|                                     |  | Common Stock |  |        | Contributed Surplus |   | Deficit |   |           | TotalShareholders Equity |  
|                                     |  | Shares       |  | Amount |                     |   |         |  
|Balance as at December 31, 2002      |  | 9,131,766    |  | $      | 8,086,803           |   |         | $ |          |                           | $ | (1,752,914 | ) |  | $ | 6,333,889  |  
|Issued for cash                      |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|Exercise of stock options            |  | 50,000       |  |        | 150,000             |   |         |   |          |                           |   |           |   |  |   | 150,000    |  
|Broker warrants                      |  | 70,000       |  |        | 210,000             |   |         |   |          |                           |   |           |   |  |   | 210,000    |  
|Issued by private placement for cash |  | 3,450,000    |  |        | 24,150,000          |   |         |   |          |                           |   |           |   |  |   | 24,150,000 |  
|Share issue costs                    |  |             |  |        | (1,649,750          | ) |         |   |          |                           |   |           |   |  |   | (1,649,750 | )
|Tax effect on flow-through shares    |  |             |  |        | (608,692            | ) |         |   |          |                           |   |           |   |  |   | (608,692   | )
|Issued for mineral properties        |  | 200,000      |  |        | 60,000              |   |         |   |          |                           |   |           |   |  |   | 60,000     |  
|Loss for the year                    |  |             |  |        |                    |   |         |   |          |                           |   | (1,218,371 | ) |  |   | (1,218,371 | )
|                                     |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|Balance as at December 31, 2003      |  | 12,901,766   |  |        | 30,398,361          |   |         |   |          |                           |   | (2,971,285 | ) |  |   | 27,427,076 |  
|Issued for cash                      |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|Exercise of stock options            |  | 840,000      |  |        | 2,550,000           |   |         |   |          |                           |   |           |   |  |   | 2,550,000  |  
|Issued for mineral properties        |  | 200,000      |  |        | 60,000              |   |         |   |          |                           |   |           |   |  |   | 60,000     |  
|Value assigned to options granted    |  |             |  |        |                    |   |         |   | 868,190   |                           |   |           |   |  |   | 868,190    |  
|Loss for the year                    |  |             |  |        |                    |   |         |   |          |                           |   | (1,249,545 | ) |  |   | (1,249,545 | )
|                                     |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|Balance as at December 31, 2004      |  | 13,941,766   |  |        | 33,008,361          |   |         |   | 868,190   |                           |   | (4,220,830 | ) |  |   | 29,655,721 |  
|Issued by private placement for cash |  | 1,330,000    |  |        | 10,010,000          |   |         |   |          |                           |   |           |   |  |   | 10,010,000 |  
|Issued for finders fees             |  | 103,951      |  |        | 669,788             |   |         |   |          |                           |   |           |   |  |   | 669,788    |  
|Share issue costs                    |  |             |  |        | (755,681            | ) |         |   |          |                           |   |           |   |  |   | (755,681   | )
|Tax effect on flow-through shares    |  |             |  |        | (3,530,672          | ) |         |   |          |                           |   |           |   |  |   | (3,530,672 | )
|Issued for mineral properties        |  | 200,000      |  |        | 60,000              |   |         |   |          |                           |   |           |   |  |   | 60,000     |  
|Value assigned to options granted    |  |             |  |        |                    |   |         |   | 859,394   |                           |   |           |   |  |   | 859,394    |  
|Loss for the year                    |  |             |  |        |                    |   |         |   |          |                           |   | (3,399,340 | ) |  |   | (3,399,340 | )
|                                     |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  
|Balance as at December 31, 2005      |  | 15,575,717   |  | $      | 39,461,796          |   |         | $ | 1,727,584 |                           | $ | (7,620,170 | ) |  | $ | 33,569,210 |  
|                                     |  |              |  |        |                     |   |         |   |           |                           |   |            |   |  |   |            |  

See accompanying notes.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

SCHEDULES
OF MINERAL PROPERTIES

For the years ended December 31, 2005 and 2004

(Canadian Dollars)



|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|--------------------------------- |  | ------------ | ---------- | ------------------ | - | ------- |  | ---- | ---------- |  | - | --------- | -
|                                  |  | 2005         |            | 2004               |  
|ACQUISITION COSTS                 |  |              |            |                    |   |         | 
|Kamloops Afton Claims             |  | $            | 601,734    |                    | $ | 541,734 | 
|Kamloops Ajax-Python Claims       |  |              | 48,732     |                    |   | 48,732  | 
|Timmins, Ontario Claims           |  |              | 1          |                    |   | 1       | 
|                                  |  |              |            |                    |   |         | 
|Balance, End of Year              |  | $            | 650,467    |                    | $ | 590,467 | 
|                                  |  |              |            |                    |   |         | 
|                                 
|DEFERRED EXPLORATION COSTS        | 
|                                  |  | Afton Claims |            | Ajax-Python Claims |   | 2005    |  | 2004 |           
|Balance, Beginning of Year        |  | $            | 5,118,047  |                    | $ | 225,418 |  | $    | 5,343,465  |  | $ | 2,956,829 |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Aboveground Exploration Costs     |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Assays and testing                |  |              | 13,430     |                    |   |        |  |      | 13,430     |  |   | 11,019    |  
|Drilling                          |  |              | 217,441    |                    |   |        |  |      | 217,441    |  |   | 131,944   |  
|Engineering                       |  |              |           |                    |   |        |  |      |           |  |   | 37,380    |  
|Geological consulting             |  |              | 219,780    |                    |   |        |  |      | 219,780    |  |   | 51,615    |  
|Miscellaneous                     |  |              | 16,975     |                    |   |        |  |      | 16,975     |  |   | 7,278     |  
|Staking and filing fees           |  |              | 443        |                    |   | 1,684   |  |      | 2,127      |  |   | 4,781     |  
|Supplies and equipment rental     |  |              | 67,130     |                    |   |        |  |      | 67,130     |  |   | 3,829     |  
|Travel and accommodation          |  |              | 16,020     |                    |   |        |  |      | 16,020     |  |   | 10,529    |  
|Wages and benefits                |  |              | 121,207    |                    |   |        |  |      | 121,207    |  |   | 9,348     |  
|Grant recoveries (Note 2(d))      |  |              |           |                    |   |        |  |      |           |  |   | (40,311   | )
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|                                  |  |              | 672,426    |                    |   | 1,684   |  |      | 674,110    |  |   | 227,412   |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Underground Exploration Costs     |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Assays and testing                |  |              | 306,938    |                    |   |        |  |      | 306,938    |  |   | 1,049     |  
|Drilling                          |  |              | 1,942,818  |                    |   |        |  |      | 1,942,818  |  |   | 59,556    |  
|Engineering                       |  |              | 46,943     |                    |   |        |  |      | 46,943     |  |   | 184,494   |  
|Geological consulting             |  |              | 680,515    |                    |   |        |  |      | 680,515    |  |   | 233,552   |  
|Insurance                         |  |              | 6,111      |                    |   |        |  |      | 6,111      |  |   | 36,161    |  
|Miscellaneous                     |  |              | 6,485      |                    |   |        |  |      | 6,485      |  |   | 6,728     |  
|Road construction and maintenance |  |              | 45,115     |                    |   |        |  |      | 45,115     |  |   | 221,240   |  
|Staking and filing fees           |  |              | 10,406     |                    |   |        |  |      | 10,406     |  |   |          |  
|Supplies and equipment rental     |  |              | 197,777    |                    |   |        |  |      | 197,777    |  |   | 49,636    |  
|Travel and accommodation          |  |              | 94,941     |                    |   |        |  |      | 94,941     |  |   | 24,990    |  
|Tunneling and decline costs       |  |              | 11,981,887 |                    |   |        |  |      | 11,981,887 |  |   | 1,319,167 |  
|Utilities                         |  |              | 191,462    |                    |   |        |  |      | 191,462    |  |   |          |  
|Wages and benefits                |  |              | 381,575    |                    |   |        |  |      | 381,575    |  |   | 22,651    |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|                                  |  |              | 15,892,973 |                    |   |        |  |      | 15,892,973 |  |   | 2,159,224 |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Balance, End of Year              |  | $            | 21,683,446 |                    | $ | 227,102 |  |      | 21,910,548 |  |   | 5,343,465 |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  
|Mineral Properties                |  |              |            |                    |   |         |  | $    | 22,561,015 |  | $ | 5,933,932 |  
|                                  |  |              |            |                    |   |         |  |      |            |  |   |           |  

See accompanying notes.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and
2004

(Canadian dollars)



|1. | NATURE OF OPERATIONS
|-- | --------------------

New Gold Inc., which changed its name from DRC Resources Corporation on June 1, 2005 (the Company), is in the process of exploring and developing mineral prospects in British Columbia, Canada. Its
principal project, the Afton copper-gold project, has previously been subject to exploration, an advanced scoping study and has not yet been confirmed to have economically viable copper/gold reserves. The Companys intention is to proceed to
complete a feasibility study in 2006 to confirm whether economical reserves exist.

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 investments may be subject to 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 Afton copper/gold project, administration while having surplus funds available for exploration.
Management will have to pursue additional financing upon the completion of a positive feasibility to finance the projects construction. There can be no assurance it will be able to raise sufficient funds when these funds are required. (See Note
16(a))



|2. | SIGNIFICANT ACCOUNTING POLICIES
|-- | -------------------------------



| | 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 at purchase dates of 90 days or less.



| | b) | Mineral Properties
| | -- | ------------------

The Company records the
acquisition cost of mineral rights and all related exploration expenditures at cost. Expenditures relating to mineral properties that have economically recoverable reserves or significant mineralization, which in the view of management justify
further exploration, are deferred until such time as such properties are brought into production, sold, allowed to lapse or abandoned. Mineral property option proceeds, if received, are credited against the deferred costs incurred by the Company on
the property or properties being optioned. The balances of costs deferred in respect to the Companys mineral property interests at any point in time represent actual historical costs incurred and are not meant to be indicative of present or
future fair values.

The Company reviews quarterly the capitalized costs on its mineral property interests on property-by-property basis and
will recognize an impairment in value based upon current exploration results and managements assessment of the probability of achieving the recovery of the costs incurred to date, whether by profitable commercial production or by the sale of
the property in question. Managements assessment of a particular mineral



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



propertys estimated current fair value may also be based upon a review of other property transactions that have occurred in the same geographical area
as that of the property under review.

The Company has accounted for its mineral property interests as tangible assets in accordance with
Section 3061 of the Accounting Recommendations issued by the Canadian Institute of Chartered Accountants (CICA 3061). This standard states that mining properties are items of property, plant and equipment represented by the
capitalized costs of acquired mineral rights and the costs associated with exploration for and development of mineral reserves. Under CICA 3061 the amortization of such mining assets will be over their estimated useful life upon the
achievement of commercial production.



| | 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 mining,
office and computer equipment. Amortization is recorded when the asset is fully operational.



| | 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 B.C.



| | 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. 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 treasury stock method is used to determine the dilutive effect of stock options, warrants and other dilutive instruments. The effect of potential issuances of shares under options would be anti-dilutive
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 of estimate relate to the recoverability of mineral properties and related deferred exploration costs, determinations as to whether costs are expensed or deferred, stock compensation 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.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



| | 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 tax assets and liabilities (FITs) are measured using the enacted or substantially 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 future income tax 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) | Foreign Currency Translation
| | -- | ----------------------------

The
Companys former foreign wholly-owned subsidiary operation, which was wound-up effective January 1, 2005, was considered fully integrated with the Company and was translated into Canadian dollars using the weighted average rates for the
year for items included in the statement of operations and deficit, except for amortization which was translated at historical rates, the rate prevailing at the balance sheet date for monetary assets and liabilities, and historical rates for all
other items. Exchange gains or losses on translation were included in the current years operations.



| | i) | Flow-Through Shares
| | -- | -------------------

During 2005 the Company
has substantially adopted the consensus of Abstract #146 of the Emerging Issues Committee of the CICA in respect to its accounting for all flow-through share renunciations occurring subsequent to March 19, 2004. 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 (or renounced
expenditures multiplied by the effective corporate tax rate) on the earlier of the date that the resource expenditures are renounced to the investors and the date that, in the opinion of management, reasonable assurance exists that the expenditures
will be completed. During 2005 these FITs have been presented in the balance sheets of the first financial statements prepared by the Company for continuous disclosure purposes, including herein, subsequent to the date of each issuance of flow
through shares. The FIT amounts are recorded as share issue costs, offset to share capital.



| | j) | Asset Retirement Obligations
| | -- | ----------------------------

The Company
recognizes a liability for an asset retirement obligation when it is determinable and calculates the liability based upon undiscounted 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 allocated to expense over its expected life. Adjustments will also be made in subsequent periods to changes on asset retirement



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



obligations due to changes in regulations or cost estimates. As at December 31, 2005, the Company has not recorded any asset retirement obligations.



| | k) | Stock-Based Compensation
| | -- | ------------------------

The Company
adopted the recommendations of CICA Handbook Section 3870, stock-based compensation and other stock-based payments, effective to all awards granted on or after January 1, 2003. The new standard requires that all stock-based awards made to
employees and non-employees be measured and recognized using a fair value based method. The fair value of stock options is determined by the Black-Scholes option pricing model with assumptions for risk-free interest rates, dividend yields,
volatility factors of the expected market price of the Companys common shares and an expected life of the options. The fair value of direct awards of share capital is determined by the quoted market price of the Companys shares.



|3. | MINERAL PROPERTIES
|-- | ------------------



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

The Afton mineral properties consist of nine new mineral claims staked under the new mineral tenure system in British Columbia and fourteen heritage claims, covering a total area of 4,011.1 hectares.

Under the terms of two option agreements (Option) dated September 22, 1999 to acquire the Afton Mineral Claims, the Company agreed to
issue 2 million common shares and complete an aggregate work commitment totaling $6.5 million over nine years to earn the rights to 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 13(a)).

The Company made the final common share payment of 200,000
common shares on August 22, 2005 and now has completed its commitment under the Option agreement. The Company has a 100% interest in the mineral claims subject to the 10% net profit royalty maintained by the optionors.

A director of the Company had a one-half interest in the Option agreement as one of the optionors (See Note 9(d)).



| | 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, consisting of fifteen new mineral claims staked under the new mineral tenure system in British Columbia and fifteen heritage claims.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



| | c) | Timmins, Ontario, Mineral Property
| | -- | ----------------------------------

The
Company owns a 100% interest in eleven mineral claims located in the Porcupine Mining Division of Ontario. The mineral claims are in good standing until October 14, 2006.



|4. | PROPERTY AND EQUIPMENT
|-- | ----------------------



|                              |  |      |         |                         |   |                |  |   |        
|----------------------------- |  | ---- | ------- | ----------------------- | - | -------------- |  | - | -------
|                              |  |      |         |                         |   | Net Book Value
|                              |  | Cost |         | AccumulatedAmortization |   | 2005          
|Land                          |  | $    | 56,900  |                         | $ |               |  | $ | 56,900 
|Building                      |  |      | 104,700 |                         |   | 10,470         |  |   | 94,230 
|Transportation vehicles       |  |      | 130,071 |                         |   | 58,434         |  |   | 71,637 
|Mining equipment              |  |      | 304,296 |                         |   | 43,845         |  |   | 260,451
|Office and computer equipment |  |      | 146,146 |                         |   | 50,865         |  |   | 95,281 
|                              |  |      |         |                         |   |                |  |   |        
|                              |  | $    | 742,113 |                         | $ | 163,614        |  | $ | 578,499
|                              |  |      |         |                         |   |                |  |   |        



|                              |  |      |         |                         |   |                |  |   |        
|----------------------------- |  | ---- | ------- | ----------------------- | - | -------------- |  | - | -------
|                              |  |      |         |                         |   | Net Book Value
|                              |  | Cost |         | AccumulatedAmortization |   | 2004          
|Land                          |  | $    | 56,900  |                         | $ |               |  | $ | 56,900 
|Building                      |  |      | 104,700 |                         |   | 5,235          |  |   | 99,465 
|Transportation vehicles       |  |      | 130,071 |                         |   | 32,420         |  |   | 97,651 
|Mining equipment              |  |      | 212,926 |                         |   |               |  |   | 212,926
|Office and computer equipment |  |      | 77,741  |                         |   | 36,545         |  |   | 41,196 
|                              |  |      |         |                         |   |                |  |   |        
|                              |  | $    | 582,338 |                         | $ | 74,200         |  | $ | 508,138
|                              |  |      |         |                         |   |                |  |   |        



|5. | CAPITAL LEASE PAYABLE
|-- | ---------------------



|                                                                              |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                              |  | 2005 |         |   | 2004 |  
|GMAC, 0%, repayable in monthly installments of $1,889, matures April 30, 2007 |  | $    | 30,228  |   |      | $ | 52,899  |  
|Less: current portion due within one year                                     |  |      | (30,228 | ) |      |   | (22,671 | )
|                                                                              |  |      |         |   |      |   |         |  
|                                                                              |  | $    |        |   |      | $ | 30,228  |  
|                                                                              |  |      |         |   |      |   |         |  

In January 2006, the Company sold a transportation vehicle to a former director of the Company who
took over the related capital lease payments totaling $30,228.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



|6. | INCOME TAXES
|-- | ------------



| | a) | Loss before income taxes are as follows:
| | -- | ----------------------------------------



|       |  |      |            |   |      |   |            |      |  |   |          |  
|------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|       |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Canada |  | $    | (3,463,007 | ) |      | $ | (1,222,186 | )    |  | $ | (415,736 | )
|U.S.A. |  |      |           |   |      |   | 19,381     |      |  |   | 34       |  
|       |  |      |            |   |      |   |            |      |  |   |          |  
|Total  |  | $    | (3,463,007 | ) |      | $ | (1,202,805 | )    |  | $ | (415,702 | )
|       |  |      |            |   |      |   |            |      |  |   |          |  



| | b) | The provision for income taxes consist of the following:
| | -- | --------------------------------------------------------



|                        |  |      |         |   |      |   |        |  |   |        
|----------------------- |  | ---- | ------- | - | ---- | - | ------ |  | - | -------
|                        |  | 2005 |         |   | 2004 |   | 2003  
|Future Taxes (Recovery) |  |      |         |   |      |   |        |  |   |        
|Canada                  |  | $    | (68,667 | ) |      | $ | 46,740 |  | $ | 762,169
|Ontario Capital Tax     |  |      | 5,000   |   |      |   |        |  |   |        
|Large Corporation Tax   |  |      |         |   |      |   |        |  |   |        
|Canada                  |  |      |        |   |      |   |       |  |   | 40,500 
|                        |  |      |         |   |      |   |        |  |   |        
|Total                   |  | $    | (63,667 | ) |      | $ | 46,740 |  | $ | 802,669
|                        |  |      |         |   |      |   |        |  |   |        

Temporary differences that give rise to future income taxes are as follows:



|                                            |  |      |           |      |   |        
|------------------------------------------- |  | ---- | --------- | ---- | - | -------
|                                            |  | 2005 |           | 2004
|Long-term future tax liability              |  |      |           |      |   |        
|Mineral Properties                          |  | $    | 4,364,096 |      | $ | 909,057
|Equipment                                   |  |      | 20,584    |      |   | 13,618 
|                                            |  |      |           |      |   |        
|Total long-term future income tax liability |  | $    | 4,384,680 |      | $ | 922,675
|                                            |  |      |           |      |   |        



| | c) | A reconciliation of expected and actual income tax expense at statutory rates is as follows:
| | -- | --------------------------------------------------------------------------------------------



|                                                  |  |      |            |   |      |            |  
|------------------------------------------------- |  | ---- | ---------- | - | ---- | ---------- | -
|                                                  |  | 2005 |            |   | 2004 |           
|Loss for accounting purposes                      |  | $    | (3,463,007 | ) |      | (1,202,805 | )
|                                                  |  |      |            |   |      |            |  
|Expected income tax recovery                      |  | $    | (1,232,830 | ) |      | (439,024   | )
|Net effect of non-deductible amounts              |  |      | 92,093     |   |      | 271,907    |  
|Unrecognized benefit of tax pools carried forward |  |      | 1,140,737  |   |      | 167,117    |  
|                                                  |  |      |            |   |      |            |  
|Income tax recovery                               |  | $    |           |   |      |           |  
|                                                  |  |      |            |   |      |            |  



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



| | d) | Temporary differences that could give rise to future income tax assets:
| | -- | -----------------------------------------------------------------------



|                                         |  |      |            |   |      |   |            |  
|---------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                         |  | 2005 |            |   | 2004 |  
|Long-Term Future Income Tax Assets       |  |      |            |   |      |   |            |  
|Loss carry forwards                      |  | $    | 1,969,520  |   |      | $ | 948,462    |  
|Share issue costs                        |  |      | 456,888    |   |      |   | 403,265    |  
|                                         |  |      |            |   |      |   |            |  
|Total Long-Term Future Income Tax Assets |  |      | 2,426,408  |   |      |   | 1,351,727  |  
|Less valuation allowance                 |  |      | (2,426,408 | ) |      |   | (1,351,727 | )
|                                         |  |      |            |   |      |   |            |  
|Net long-term future income tax assets   |  | $    |           |   |      | $ |           |  
|                                         |  |      |            |   |      |   |            |  



| | e) | Subject to confirmation by the income tax authorities, the Company has the following undeducted tax pools:
| | -- | ----------------------------------------------------------------------------------------------------------



|                                                      |  |      |           |      |   |          
|----------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                      |  | 2005 |           | 2004
|Canadian Exploration Expenses                         |  | $    | 9,421,165 |      | $ | 2,866,209
|                                                      |  |      |           |      |   |          
|Canadian Development Expenses                         |  | $    | 713,607   |      | $ | 651,480  
|                                                      |  |      |           |      |   |          
|Undepreciated Capital Costs                           |  | $    | 462,989   |      | $ | 451,039  
|                                                      |  |      |           |      |   |          
|Share Issue Costs                                     |  | $    | 1,300,933 |      | $ | 1,071,942
|                                                      |  |      |           |      |   |          
|Non-Capital Losses, expiring at various dates to 2015 |  | $    | 5,607,974 |      | $ | 2,532,071
|                                                      |  |      |           |      |   |          



|7. | SHARE CAPITAL
|-- | -------------

Authorized

Unlimited number of common shares without par value. 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



|                                                 |  |                 |  |        |            |  
|------------------------------------------------ |  | --------------- |  | ------ | ---------- | -
|                                                 |  | Number ofShares |  | Amount |           
|Balance, December 31, 2003                       |  | 12,901,766      |  | $      | 30,398,361 |  
|Issued for cash                                  |  |                 |  |        |            |  
|Exercise of stock options                        |  | 840,000         |  |        | 2,550,000  |  
|Issued for mineral properties                    |  | 200,000         |  |        | 60,000     |  
|                                                 |  |                 |  |        |            |  
|Balance, December 31, 2004                       |  | 13,941,766      |  |        | 33,008,361 |  
|Issued for cash                                  |  |                 |  |        |            |  
|Private placements, net of share issue costs (a) |  | 1,330,000       |  |        | 9,254,319  |  
|Issued for finders fee (a)                      |  | 103,951         |  |        | 669,788    |  
|Tax effect on flow-through shares                |  |                |  |        | (3,530,672 | )
|Issued for mineral properties (b)                |  | 200,000         |  |        | 60,000     |  
|                                                 |  |                 |  |        |            |  
|Balance, December 31, 2005                       |  | 15,575,717      |  | $      | 39,461,796 |  
|                                                 |  |                 |  |        |            |  



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



| | a) | 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 $2,793,809). The Company issued 29,000 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. The Company issued 36,331 shares, at a market value of $5.78 per share, as a finders fee for placement of the common shares.

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. The Company issued 38,620 shares, at a market value of $7.25 per share, as a finders fee for placement of the common shares.



| | b) | The Company issued the final share commitment of 200,000 common shares at a deemed value of $0.30 per share in accordance with the Afton mineral claim agreement.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | STOCK OPTIONS
|-- | -------------



| | 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
subsequent third year.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company has issued under the 2% inducement rules available under the TSX regulations,
a total of 500,000 stock options to senior officers which are not included in the 10% allowable issuable amount.

Options issued subsequent
to the approval of the new Plan primarily vest one half after six months and the remainder after one year from the date of issuance.

As at
December 31, 2005, the stock options held by directors, consultants and employees are as follows:



|                    |  |                    |  |                                     
|------------------- |  | ------------------ |  | ------------------------------------
|Option Strike Price |  | OptionsOutstanding |  | WeightedAverageRemainingLife (Years)
|$4.60               |  | 600,000            |  | 3.8                                 
|$4.61 to $5.99      |  | 12,000             |  | 4.7                                 
|$6.00 to $6.99      |  | 800,000            |  | 4.4                                 
|$7.00 to $7.04      |  | 315,000            |  | 4.6                                 
|                    |  |                    |  |                                     
|                    |  | 1,727,000          |  | 4.5                                 
|                    |  |                    |  |                                     



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



As at December 31, 2005, 1,080,000 stock options had vested.



|                           |  |                    |   |  |                              |       |   |                                      |    
|-------------------------- |  | ------------------ | - |  | ---------------------------- | ----- | - | ------------------------------------ | ---
|                           |  | OptionsOutstanding |   |  | WeightedAverageExercisePrice |       |   | WeightedAverageRemainingLife (Years)
|Balance, December 31, 2003 |  | 840,000            |   |  | $                            | 3.03  |   |                                      | 0.9
|Granted                    |  | 700,000            |   |  | $                            | 4.87  |   |                                      | 4.3
|Exercised                  |  | (840,000           | ) |  | $                            | 3.03  |   |                                      | 3.9
|                           |  |                    |   |  |                              |       |   |                                      |    
|Balance, December 31, 2004 |  | 700,000            |   |  | $                            | 4.87  |   |                                      | 4.3
|Granted                    |  | 1,042,000          |   |  | $                            | 6.82  |   |                                      | 4.5
|Terminated                 |  | (15,000            | ) |  | $                            | (6.40 | ) |                                      |    
|                           |  |                    |   |  |                              |       |   |                                      |    
|Balance, December 31, 2005 |  | 1,727,000          |   |  | $                            | 6.04  |   |                                      | 4.5
|                           |  |                    |   |  |                              |       |   |                                      |    

The fair value of 535,000 options granted during the year ended December 31, 2005 (2004
750,000) has been estimated at the date of grant using a Black-Scholes option pricing model. The current years valuation was calculated with the following assumptions: weighted average risk free interest rate of 3.00  3.29% (2004,
3.21  3.44%); volatility factor of the expected market price of the Companys common stock of 44% (2004 - 43%); and a weighted average expected life of the options of 2.5 years (2004  2.5 years). The resulting weighted average cost
per option granted was $2.00 (2004  $1.34). The estimated fair value of the options is expensed over the vesting period.

The fair
value compensation recorded for the year ended December 31, 2005 in respect of awards granted in 2005 was $859,394 (2004 - $868,190).



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

As at
December 31, 2005, the following compensation options were issued and outstanding:



|                 |  |                              |  |                              |     
|---------------- |  | ---------------------------- |  | ---------------------------- | ----
|Expiry Date      |  | Number ofCompensationOptions |  | WeightedAverageExercisePrice
|October 13, 2006 |  | 50,000                       |  | $                            | 4.60
|                 |  |                              |  |                              |     

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



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



|9. | RELATED PARTY TRANSACTIONS
|-- | --------------------------



|                                                                                                                                                                                           |  |      |        |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | -------
|                                                                                                                                                                                           |  | 2005 |        | 2004
|a)      For consulting, administration and exploration costs charged by a Director of the Company.
Effective January 1, 2005, these services ceased to be provided by a related party.     |  | $    |       |      | $ | 46,460 
|b)      For wages and consulting services charged by a related person of a
Director.                                                                                                       |  | $    | 96,000 |      | $ | 72,600 
|c)      For wages and consulting services charged by the President/Director of the Company.
Effective January 1, 2005, these services ceased to be provided by a related party.            |  | $    |       |      | $ | 153,000
|d)      For geological consulting services on mineral properties charged by an Officer of the
Company. Effective January 1, 2005, these services ceased to be provided by a related party. |  | $    |       |      | $ | 101,060
|e)      For 100,000 shares issued in payment pursuant to the Afton mineral claim option agreement
to a Director of the Company.                                                            |  | $    | 30,000 |      | $ | 30,000 
|f)      For secretarial and administrative services charged by a Director of the Company.
Effective January 1, 2005, these services ceased to be a related party.                          |  | $    |       |      | $ | 72,600 



|10. | CONTRIBUTED SURPLUS
|--- | -------------------

The following table identifies the changes in contributed surplus for the period:



|                            |  |                         |          
|--------------------------- |  | ----------------------- | ---------
|                            |  | Stock-BasedCompensation
|Balance  December 31, 2004 |  | $                       | 868,190  
|Stock-based compensation    |  |                         | 859,394  
|                            |  |                         |          
|Balance  December 31, 2005 |  | $                       | 1,727,584
|                            |  |                         |          



|11. | SUPPLEMENTARY CASH FLOW INFORMATION
|--- | -----------------------------------

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



|                                     |  |      |         |      |   |        
|------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                     |  | 2005 |         | 2004
|Investing Activities                 |  |      |         |      |   |        
|Vehicle acquired via capital lease   |  | $    |        |      | $ | 68,013 
|Financing Activities                 |  |      |         |      |   |        
|Value assigned to options granted    |  |      | 859,394 |      |   | 868,190
|Shares issued for mineral properties |  |      | 60,000  |      |   | 60,000 
|Shares issued for finders fee       |  |      | 669,788 |      |   |       



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



|12. | FINANCIAL INSTRUMENTS
|--- | ---------------------

The Companys financial instruments consist of cash, term deposits, corporate notes, amounts receivable, accounts payable and accrued liabilities, and capital lease payable. 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 cash, term deposits, corporate notes, amounts receivable and accounts payable and accrued liabilities
approximate their carrying values due to the relatively short period to maturity of these instruments.



|13. | 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 shares of the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | The Company entered into two service agreements (Agreements) dated April 23, 2003, and subsequently amended on January 1, 2005, to provide
employment for the Chairman (formerly the President) and the Corporate Secretary (the Parties). The Agreements, amongst other things, provide for the terms and conditions for termination where no moral turpitude or dishonesty has
occurred on the part of the Parties as well as for retirement provisions should the Parties decide to cease their involvement in the Company. Upon termination by the Company or retirement by either of the Parties, the Company is obligated to pay a
lump sum payment equal to one months base compensation (based on the prior years average monthly rate) for each year of service. As at December 31, 2005 the liability under these employment conditions amount to $445,650 for the
Chairman and $225,215 for the Corporate Secretary. These amounts have been accrued and charged during the year to wages and benefits in the Statement of Loss. In January 2006 both of the Parties elected to retire and these amounts were paid.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | The Company is committed to an operating lease for office premise rentals in the aggregate of $115,103. The future minimum lease payments as at December 31, 2005 are as
follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     |  |   |        
|---- |  | - | -------
|2006 |  | $ | 42,131 
|2007 |  |   | 45,118 
|2008 |  |   | 27,854 
|     |  |   |        
|     |  | $ | 115,103
|     |  |   |        



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



|14. | ENVIRONMENTAL RISKS
|--- | -------------------

Existing and possible future environmental legislation, regulations and action could give rise to additional expense, including those for future removal and site restoration costs, capital expenditures, restrictions and delays in the
activities of the Company, the extent of which cannot be predicted. Regulatory requirements and environmental standards are subject to constant evaluation and may be significantly increased, which could materially and adversely affect the business
of the Company or its ability to develop its mineral properties on an economic basis. Before production can commence on any property, the Company must obtain regulatory and environmental approvals. There is no assurance that such approvals will be
obtained on a timely basis or at all. The cost of compliance with changes in government regulations has the potential to reduce the profitability of operations or preclude entirely the economic development of mineral properties.

Environmental expenditures that relate to ongoing environmental and reclamation programs are charged against operations as incurred or capitalized and
amortized depending on their future economic benefits. Estimated future removal and site restoration costs, when the ultimate liability is reasonably determinable, are charged against operations over the estimated remaining life of the related
business operation, net of expected recoveries.



|15. | COMPARATIVE FIGURES
|--- | -------------------

The comparative balance sheet as at December 31, 2004, and the statements of loss and deficit, and cash flows for the years ended December 31, 2004 and 2003, includes the accounts of the Company and its U.S. wholly-owned
subsidiary, Dynamic Resources Corporation, Inc. All significant inter-company transactions and balances were eliminated on consolidation in 2004. Effective January 1, 2005, the operations of the wholly-owned subsidiary were wound up.



|16. | SUBSEQUENT EVENTS
|--- | -----------------



| | a) | Short-form unit offering
| | -- | ------------------------

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 $75,006,000. Each unit consists of one common share and one-half of a share
purchase warrant. Each whole warrant is exercisable to purchase one common share at a price of $12.00 per share for a period of two years from the date of closing and have been listed for trading on the Toronto Stock Exchange. A commission of 5.25%
was paid to the underwriters.



| | b) | Subsequent to December 31, 2005, the Company will sign definitive contracts totaling $3.7 million for the preparation of a feasibility study (Study) for the New
Afton copper/gold project. The Study is expected to be completed in the fourth quarter of 2006.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



| | c) | Subsequent to December 31, 2005 the tax benefits associated with the $10,010,000 in flow through share issuances during 2005 were renounced to the purchasers of the shares.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|17. | 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 used in preparing these financial statements from principles,
practices and methods accepted in the United States (U.S. GAAP), and that impact financial statement line items, are described below.

Mineral property interests and deferred exploration costs

Under Canadian GAAP, costs to acquire property rights 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 to the
recoverability of those costs. Accordingly, while the Companys Afton project remains at a pre-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 must be expensed as incurred.

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 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, any difference between the market price of the Companys stock and the fair value of
the flow-through shares must be recorded as a liability if a premium is paid by investors. This liability is then recorded as income when the flow-through share proceeds are renounced to investors.

During the year ended December 31, 2005, the Company issued an aggregate of 1,330,000 flow-through shares at an average premium of approximately $0.73 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. Accordingly, an aggregate dollar premium of $975,100 was obtained and under U.S. GAAP would have been
recorded as income from the sale of the tax benefit upon its renunciation to the investors. Consistent with its approach under Canadian GAAP, the Company would record the future tax and income effects of renunciations effective at the first balance
sheet date subsequent to completion on the related flow through financing. For cash flow reporting purposes the Company would disclose the substance of the transaction, which is to report the proceeds of these sales as operating cash inflows.



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



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.

The impact of these differences in
respect to these financial statements is quantified below in financial statement line items as lettered a) to m):

BALANCE SHEETS



|    |  |                                                                             |  |      |             |   |      |   |             |  
|--- |  | --------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|    |  |                                                                             |  | 2005 |             |   | 2004 |  
|    |  | Assets                                                                      |  |      |             |   |      |   |             |  
|    |  | Deferred property costs under Canadian GAAP                                 |  | $    | 22,561,015  |   |      | $ | 5,933,932   |  
|    |  | Deferred property costs expenditures expensed under US GAAP                 |  |      | (22,561,015 | ) |      |   | (5,933,932  | )
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(a) |  | Deferred property costs under US GAAP                                       |  |      |            |   |      |   |            |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(b) |  | Total assets under US GAAP                                                  |  |      | 19,190,578  |   |      |   | 25,861,713  |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|    |  | Future tax liability under Canadian GAAP                                    |  |      | 4,384,680   |   |      |   | 922,675     |  
|    |  | Reversal of temporary differences for property costs expensed under US GAAP |  |      | (4,364,096  | ) |      |   | (909,057    | )
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(c) |  | Future tax liability under US GAAP                                          |  |      | 20,584      |   |      |   | 13,618      |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(d) |  | Total liabilities under US GAAP                                             |  |      | 3,818,287   |   |      |   | 1,230,867   |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|    |  | Share capital under Canadian GAAP                                           |  |      | 39,461,796  |   |      |   | 33,008,361  |  
|    |  | Flow-through proceeds included in income under US GAAP                      |  |      | (975,100    | ) |      |   |            |  
|    |  | Reduction of FIT liability under US GAAP                                    |  |      | 4,364,096   |   |      |   | 909,057     |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(e) |  | Share capital under US GAAP                                                 |  |      | 42,850,792  |   |      |   | 33,917,418  |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|    |  | Deficit under Canadian GAAP                                                 |  |      | (7,620,170  | ) |      | $ | (4,220,830  | )
|    |  | Adjustment for property costs expensed under US GAAP                        |  |      | (22,561,015 | ) |      |   | (5,933,932  | )
|    |  | Adjustment for flow through shares proceeds included in income              |  |      | 975,100     |   |      |   |            |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(f) |  | Deficit under US GAAP                                                       |  |      | (29,206,085 | ) |      |   | (10,154,762 | )
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(g) |  | Total Shareholders Equity Under US GAAP                                    |  |      | 15,372,291  |   |      | $ | 24,630,846  |  
|    |  |                                                                             |  |      |             |   |      |   |             |  
|(h) |  | Total liabilities and stockholders equity under US GAAP                    |  | $    | 19,190,578  |   |      |   | 25,861,713  |  
|    |  |                                                                             |  |      |             |   |      |   |             |  



---

New Gold Inc. (formerly DRC Resources Corporation)

(An Exploration Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2005 and 2004

(Canadian dollars)



STATEMENTS OF OPERATIONS AND DEFICIT



|    |  |                                                         |  |      |             |   |      |   |            |      |  |   |            |  
|--- |  | ------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|    |  |                                                         |  | 2005 |             |   | 2004 |   |            | 2003 | 
|    |  | Loss for the year under Canadian GAAP                   |  | $    | (3,399,340  | ) |      | $ | (1,249,545 | )    |  | $ | (1,218,371 | )
|    |  | Property costs written off under Canadian GAAP          |  |      |            |   |      |   |           |      |  |   | 1          |  
|    |  | Income on the sale of flow-through shares under US GAAP |  |      | 975,100     |   |      |   |           |      |  |   |           |  
|    |  | Property costs expenditures expensed under US GAAP      |  |      | (16,627,083 | ) |      |   | (2,446,636 | )    |  |   | (1,802,663 | )
|    |  |                                                         |  |      |             |   |      |   |            |      |  |   |            |  
|(i) |  | Loss for the year under US GAAP                         |  | $    | (19,051,323 | ) |      | $ | (3,696,181 | )    |  | $ | (3,021,033 | )
|    |  |                                                         |  |      |             |   |      |   |            |      |  |   |            |  
|(j) |  | Basic and diluted loss per share under US GAAP          |  | $    | 1.32        |   |      |   | 0.28       |      |  |   | 0.31       |  
|    |  |                                                         |  |      |             |   |      |   |            |      |  |   |            |  

STATEMENTS OF CASH FLOWS



|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|--- |  | ------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|    |  |                                                              |  | 2005 |             |   | 2004 |   |            | 2003 | 
|    |  | Operating Activities                                         |  |      |             |   |      |   |            |      |  |   |            |  
|    |  | Cash from (used in) operating activities under Canadian GAAP |  | $    | (19,261     | ) |      | $ | 442,360    |      |  | $ | (252,570   | )
|    |  | Loss for the year under Canadian GAAP                        |  |      | 3,399,340   |   |      |   | 1,249,545  |      |  |   | 1,218,371  |  
|    |  | Loss for the year under US GAAP                              |  |      | (19,051,323 | ) |      |   | (3,696,181 | )    |  |   | (3,021,033 | )
|    |  | Deferred property costs written off under Canadian GAAP      |  |      |            |   |      |   |           |      |  |   | (1         | )
|    |  | Non-cash issue of shares for mineral property costs          |  |      | 60,000      |   |      |   | 60,000     |      |  |   | 60,000     |  
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|(k) |  | Net cash used for operating activities under US GAAP         |  | $    | (15,611,244 | ) |      | $ | (1,944,276 | )    |  | $ | (1,995,233 | )
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|    |  | Investing Activities                                         |  |      |             |   |      |   |            |      |  |   |            |  
|    |  | Cash used in investing activities under Canadian GAAP        |  | $    | (16,732,940 | ) |      |   | (2,684,822 | )    |  |   | (1,742,663 | )
|    |  | Cash property costs included in operations under US GAAP     |  |      | 16,567,083  |   |      |   | 2,386,636  |      |  |   | 1,742,663  |  
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|(l) |  | Net cash used in investing activities under US GAAP          |  | $    | (165,857    | ) |      |   | (298,186   | )    |  |   |           |  
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|    |  | Financing Activities                                         |  |      |             |   |      |   |            |      |  |   |            |  
|    |  | Cash provided in financing activities under Canadian GAAP    |  | $    | 9,901,436   |   |      |   | 2,534,886  |      |  |   | 22,860,250 |  
|    |  | Flow-through proceeds included in income under US GAAP       |  |      | (975,100    | ) |      |   |           |      |  |   |           |  
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |  
|(m) |  | Net cash provided by financing activities under US GAAP      |  | $    | 8,926,336   |   |      |   | 2,534,886  |      |  |   | 22,860,250 |  
|    |  |                                                              |  |      |             |   |      |   |            |      |  |   |            |