----

----

----

| (Signed) Robert Gallagher | (Signed) Brian Penny         |
|---------------------------|------------------------------|
|                      |                         |
| Robert Gallagher          | Brian Penny                  |
| Chief Executive Officer   | Executive Vice-President and |
|                      | Chief Financial Officer      |

----

| ·   | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (Signed) Robert Gallagher | (Signed) Brian Penny         |
|---------------------------|------------------------------|
|                      |                         |
| Robert Gallagher          | Brian Penny                  |
| Chief Executive Officer   | Executive Vice-President and |
|                      | Chief Financial Officer      |

----

----

----

----

|  Consolidated income statements                  |  1    |
|-------------------------------------------------------|------------|
|                                                  |       |
|  Consolidated statements of comprehensive income |  2    |
|                                                  |       |
|  Consolidated statements of financial position   |  3    |
|                                                  |       |
|  Consolidated statements of changes in equity    |  4    |
|                                                  |       |
|  Consolidated statements of cash flows           |  5    |
|                                                  |       |
|  Notes to the consolidated financial statements  |  6-71 |
|                                                  |       |
|                                                  |       |

----

| New Gold Inc.                                                               |   |   |                                                                                                                                                          |   |                                                                                                                               |
|-----------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated income statements                                              |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Years ended December 31                                                     |   |   |                                                                                                                                                          |   |                                                                                                                               |
| (Expressed in thousands of United States dollars, except per share amounts) |   |   |
|                                                                        |   |   |                                                                     |   |                                |
|                                                                        | Note   |   | 2011                                                                                                                                                     |   | 2010                                                                                                                          |
|                                                                        |   |   |  $                                                                                                                                                       |   |  $                                                                                                                            |
|                                                                        |   |   |                                                                                                                                                          |   | Note 26                                                                                                                            |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Revenues                                                                    |   |   |             695,939                                                                               |   |               530,450                                        |
| Operating expenses                                                          | 5(a)   |   |             303,778                                                                               |   |               247,773                                        |
| Depreciation and depletion                                                  |   |   |                76,935                                                              |   |                 78,374                             |
| Earnings from mine operations                                               |   |   |             315,226                                                                               |   |               204,303                                        |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Corporate administration expenses                                           |   |   |                26,272                                                              |   |                 24,134                             |
| Share-based payment expenses                                                |   |   |                11,140                                                              |   |                    6,877            |
| Exploration expenses                                                        |   |   |                10,021                                                              |   |                 12,834                             |
| Impairment of exploration assets                                            | 11     |   |                           - |   |                 15,728                             |
| Income from operations                                                      |   |   |             267,793                                                                               |   |               144,730                                        |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
|     Finance income                                           | 5(b)   |   |                  3,589                                                   |   |                    3,258            |
|     Finance costs                                            | 5(b)   |   |                (5,142)                                                             |   |                 (2,371)                            |
|     Other gains (losses)                                     | 5(c)   |   |                (7,854)                                                             |   |               (70,261)                                       |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Earnings before taxes                                                       |   |   |             258,386                                                                               |   |                 75,356                             |
| Income tax expense                                                          | 15     |   |             (79,358)                                                                              |   |               (18,009)                                       |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Net earnings from continuing operations                                     |   |   |             179,028                                                                               |   |                 57,347                             |
| Earnings from discontinued operations, net of tax                           | 10     |   |                           - |   |                 (9,886)                            |
| Net earnings                                                                |   |   |             179,028                                                                               |   |                 47,461                             |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Earnings per share from continuing operations                               | 14     |   |                                                                                                                                                          |   |                                                                                                                               |
|     Basic                                                    |   |   |                     0.42                                  |   |                      0.15 |
|     Diluted                                                  |   |   |                     0.40                                  |   |                      0.15 |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Earnings (loss) per share from discontinued operations                      | 14     |   |                                                                                                                                                          |   |                                                                                                                               |
|     Basic                                                    |   |   |                           - |   |                    (0.03)           |
|     Diluted                                                  |   |   |                           - |   |                    (0.03)           |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Earnings per share from                                                     |   |   |                                                                                                                                                          |   |                                                                                                                               |
| continuing and discontinued operations                                      | 14     |   |                                                                                                                                                          |   |                                                                                                                               |
|     Basic                                                    |   |   |                     0.42                                  |   |                      0.12 |
|     Diluted                                                  |   |   |                     0.40                                  |   |                      0.12 |
|                                                                        |   |   |                                                                                                                                                          |   |                                                                                                                               |
| Weighted average number of shares outstanding                               | 14     |   |                                                                                                                                                          |   |                                                                                                                               |
|     Basic                                                    |   |   |             429,591                                                                               |   |               390,883                                        |
|     Diluted                                                  |   |   |             441,009                                                                               |   |               395,233                                        |

----

| New Gold Inc.                                                                                 |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
|-----------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| Consolidated statements of comprehensive income                                               |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
| Years ended December 31                                                                       |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
| (Expressed in thousands of United States dollars)                                             |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
|                                                                                          |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
|                                                                                          | Note                                                                                              |   |                   2011                                              |   |                     2010  |
|                                                                                          |                                                                                              |   |  $                                                                                                                                                       |   |  $                                                                                                                       |
|                                                                                          |                                                                                              |   |                                                                                                                                                          |   | Note 26                                                                                                                       |
|                                                                                          |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
| Net earnings                                                                                  |                                                                                              |   |             179,028                                                                               |   |                 47,461                        |
|                                                                                          |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
| Other comprehensive (loss) income                                                             |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
|     Unrealized losses on mark-to-market of gold contracts                      | 13                                                                                                |   |             (32,051)                                                                              |   |               (85,849)                                  |
|     Realized losses on settlement of gold contracts                            | 13                                                                                                |   |                41,651                                                              |   |                 20,035                        |
|     Unrealized losses on mark-to-market of fuel contracts                      | 13                                                                                                |   |                           - |   |                     (366) |
|     Unrealized loss on available-for-sale securities (net of $nil tax expense) |                (1,861) |   |                           - |
|     Foreign exchange translation adjustment                                    |                                                                                              |   |             (38,359)                                                                              |   |                 14,334                        |
| Income tax related to components of other                                                     |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |
|     comprehensive (loss) income                                                | 13                                                                                                |   |                (3,834)                                                             |   |                 27,572                        |
| Total other comprehensive loss                                                                |                                                                                              |   |             (34,454)                                                                              |   |               (24,274)                                  |
| Total comprehensive income                                                                    |                                                                                              |   |             144,574                                                                               |   |                 23,187                        |
|                                                                                          |                                                                                              |   |                                                                                                                                                          |   |                                                                                                                          |

----

| New Gold Inc.                                                |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
|--------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated statements of financial position                |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| (Expressed in thousands of United States dollars)            |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
|                                                         |   |   | December 31                                                                                                                                                   |   | December 31                                                                                                                                                   | January 1                                                                                                                                                     |
|                                                         | Note   |   |                   2011                                              |   |                     2010                                  |                     2010                                  |
|                                                         |   |   |  $                                                                                                                                                       |   |  $                                                                                                                                                       |  $                                                                                                                                                       |
| Assets                                                       |   |   |                                                                                                                                                          |   | Note 26                                                                                                                                                       | Note 26                                                                                                                                                       |
| Current assets                                               |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
|    Cash and cash equivalents                       |   |   |             309,406                                                                               |   |               490,754                                                                   |               271,526                                                                   |
|    Trade and other receivables                     | 6      |   |                37,572                                                              |   |                 11,929                                                        |                 10,345                                                        |
|    Inventories                                     | 8      |   |             106,490                                                                               |   |               103,055                                                                   |                 86,299                                                        |
|    Current derivative assets                       | 13     |   |                           - |   |                           - |                       706                       |
|    Prepaid expenses and other                      |   |   |                  7,928                                                   |   |                    7,325                                       |                    6,933                                       |
|    Current assets of operations held for sale      | 10     |   |                           - |   |                           - |                 10,298                                                        |
| Total current assets                                         |   |   |             461,396                                                                               |   |               613,063                                                                   |               386,107                                                                   |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Investments                                                  | 9      |   |                  1,823                                                   |   |                    7,533                                       |                 45,890                                                        |
| Non-current inventories                                      | 8      |   |                20,253                                                              |   |                           - |                           - |
| Mining interests                                             | 11     |   |         2,695,297                                                                                                     |   |            1,767,240                                                                                   |            1,664,563                                                                                   |
| Deferred tax assets                                          | 15     |   |                  8,924                                                   |   |                 10,058                                                        |                 11,098                                                        |
| Non-current non-hedged derivative asset                      | 13     |   |                18,797                                                              |   |                    7,679                                       |                           - |
| Reclamation deposits and other                               |   |   |                14,912                                                              |   |                 23,616                                                        |                 17,646                                                        |
| Assets of operations held for sale                           | 10     |   |                           - |   |                           - |                 78,989                                                        |
| Total assets                                                 |   |   |         3,221,402                                                                                                     |   |            2,429,189                                                                                   |            2,204,293                                                                                   |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Liabilities and equity                                       |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Current liabilities                                          |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
|    Trade and other payables                        | 7      |   |             100,437                                                                               |   |                 69,245                                                        |                 37,999                                                        |
|    Current tax liabilities                         |   |   |                20,495                                                              |   |                 31,392                                                        |                 13,711                                                        |
|    Current derivative liabilities                  | 13     |   |                49,184                                                              |   |                 40,072                                                        |                 19,206                                                        |
|    Current non-hedged derivative liabilities       | 13     |   |                53,288                                                              |   |                           - |                           - |
|    Current portion of long-term debt               | 12     |   |                           - |   |                           - |                 12,088                                                        |
|    Current liabilities of operations held for sale | 10     |   |                           - |   |                           - |                 10,414                                                        |
| Total current liabilities                                    |   |   |             223,404                                                                               |   |               140,709                                                                   |                 93,418                                                        |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Reclamation and closure cost obligations                     | 16     |   |                50,713                                                              |   |                 34,173                                                        |                 24,764                                                        |
| Provisions                                                   | 25     |   |                12,646                                                              |   |                    9,227                                       |                    4,541                                       |
| Non-current derivative liabilities                           | 13     |   |                92,407                                                              |   |               113,303                                                                   |                 76,780                                                        |
| Non-current non-hedged derivative liabilities                | 13     |   |             114,296                                                                               |   |               155,365                                                                   |                 37,542                                                        |
| Long-term debt                                               | 12     |   |             251,664                                                                               |   |               229,884                                                                   |               225,456                                                                   |
| Deferred tax liabilities                                     | 15     |   |             146,880                                                                               |   |               179,180                                                                   |               245,969                                                                   |
| Deferred benefit                                             | 12     |   |                46,276                                                              |   |                 46,276                                                        |                           - |
| Other                                                        |   |   |                      747                             |   |                       577                       |                       814                       |
| Liabilities of operations held for sale                      | 10     |   |                           - |   |                           - |                 19,890                                                        |
| Total liabilities                                            |   |   |             939,033                                                                               |   |               908,694                                                                   |               729,174                                                                   |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Equity                                                       |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Common shares                                                | 14     |   |         2,463,968                                                                                                     |   |            1,845,886                                                                                   |            1,810,039                                                                                   |
| Contributed surplus                                          |   |   |                80,394                                                              |   |                 81,176                                                        |                 82,984                                                        |
| Share purchase warrants                                      |   |   |                           - |   |                           - |                 11,850                                                        |
| Other reserves                                               |   |   |             (86,367)                                                                              |   |               (51,913)                                                                  |               (27,639)                                                                  |
| Deficit                                                      |   |   |           (175,626)                                                                                         |   |             (354,654)                                                                             |             (402,115)                                                                             |
|                                                         |   |   |           (261,993)                                                                                         |   |             (406,567)                                                                             |             (429,754)                                                                             |
| Total equity                                                 |   |   |         2,282,369                                                                                                     |   |            1,520,495                                                                                   |            1,475,119                                                                                   |
| Total liabilities and equity                                 |   |   |         3,221,402                                                                                                     |   |            2,429,189                                                                                   |            2,204,293                                                                                   |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Approved and authorized by the Board on March 1, 2012        |   |   |                                                                                                                                                          |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| "Robert Gallagher"                                           |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| Robert Gallagher, Director                                   |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
|                                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| "James Estey"                                                |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |
| James Estey, Director                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |                                                                                                                                                          |

----

| New Gold Inc.                                               |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
|-------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated statements of changes in equity                |
| Years ended December 31                                     |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| (Expressed in thousands of United States dollars)           |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
|                                                        | Note   |   |                   2011                                              |   |                     2010                                  |
|                                                        |   |   |  $                                                                                                                                                       |   |  $                                                                                                                                                       |
|                                                        |   |   |                                                                                                                                                          |   | Note 26                                                                                                                                                       |
| Common shares                                               |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Balance, beginning of period                                |   |   |         1,845,886                                                                                                     |   |            1,810,039                                                                                   |
|     Shares issued for Richfield              | 4,14   |   |             487,906                                                                               |   |                           - |
|     Shares issued for Silver Quest           | 4,14   |   |             105,761                                                                               |   |                           - |
|     Shares issued for exercise of options    | 14     |   |                24,350                                                              |   |                 19,394                                                        |
|     Shares issued for exercise of warrants   | 14     |   |                         65            |   |                 16,453                                                        |
| Balance, end of period                                      |   |   |         2,463,968                                                                                                     |   |            1,845,886                                                                                   |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Contributed surplus                                         |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Balance, beginning of period                                |   |   |                81,176                                                              |   |                 82,984                                                        |
|     Exercise of options                      |   |   |                (7,974)                                                             |   |                 (9,959)                                                       |
|     Equity settled share-based payments      |   |   |                  7,192                                                   |   |                    8,151                                       |
| Balance, end of period                                      |   |   |                80,394                                                              |   |                 81,176                                                        |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Share purchase warrants                                     |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Balance, beginning of period                                |   |   |                           - |   |                 11,850                                                        |
|     Exercise of warrants                     |   |   |                           - |   |               (11,850)                                                                  |
| Balance, end of period                                      |   |   |                           - |   |                           - |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Other reserves                                              |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Balance, beginning of period                                |   |   |             (51,913)                                                                              |   |               (27,639)                                                                  |
|     Foreign exchange translation adjustment  |   |   |             (38,359)                                                                              |   |                 14,334                                                        |
|     Change in fair value investments         |   |   |                (1,861)                                                             |   |                           - |
|     Change in fair value hedging instruments |   |   |                  5,766                                                   |   |               (38,608)                                                                  |
| Balance, end of period                                      |   |   |             (86,367)                                                                              |   |               (51,913)                                                                  |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Deficit                                                     |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Balance, beginning of period                                |   |   |           (354,654)                                                                                         |   |             (402,115)                                                                             |
|     Net earnings                             |   |   |             179,028                                                                               |   |                 47,461                                                        |
| Balance, end of period                                      |   |   |           (175,626)                                                                                         |   |             (354,654)                                                                             |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |
| Total equity                                                |   |   |         2,282,369                                                                                                     |   |            1,520,495                                                                                   |
|                                                        |   |   |                                                                                                                                                          |   |                                                                                                                                                          |

----

| New Gold Inc.                                                                             |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|-------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
| Consolidated statements of cash flows                                                     |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Years ended December 31                                                                   |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| (Expressed in thousands of United States dollars)                                         |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|                                                                                      | Note                                                                                                                      |             2011                                                    |               2010                                  |
|                                                                                      |                                                                                                                      |                                                                                                                            |  $                                                                                                                   |  $                                                                                                                         |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      | Note 26                                                                                                                         |
| Operating activities                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|    Net earnings                                                                 |                                                                                                                      |                                                                                                                            |      179,028                                                                                     |           47,461                                                              |
|    Loss from discontinued operations                                            |                                                                                                                      |                                                                                                                            |                     - |              9,886                                             |
|    Adjustments for:                                                        |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|        Realized gain on gold contracts                      |                                                                                                                      |                                                                                                                            |         (8,793)                                                                   |           (8,425)                                                             |
|        Realized loss on fuel contracts                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                  340                       |
|        Realized and unrealized foreign exchange (gain) loss | 5                                                                                                                         |                                                                                                                            |         (7,122)                                                                   |              9,675                                             |
|        Realized and unrealized gain on investments          | 5                                                                                                                         |                                                                                                                            |         (1,349)                                                                   |        (48,838)                                                                              |
|        Unrealized loss on non-hedged derivatives            | 5                                                                                                                         |                                                                                                                            |            7,229                                                   |         105,657                                                                         |
|        Loss on disposal of assets                           |                                                                                                                      |                                                                                                                            |                509                             |              1,938                                             |
|        Impairment of exploration asset                      |                                                                                                                      |                                                                                                                            |                     - |           15,728                                                              |
|        Depreciation and depletion                           |                                                                                                                      |                                                                                                                            |         76,243                                                                    |           78,772                                                              |
|        Equity-settled share-based payment expense           |                                                                                                                      |                                                                                                                            |            7,192                                                   |              6,540                                             |
|        Unrealized loss on cash flow hedging items           | 5                                                                                                                         |                                                                                                                            |            6,611                                                   |                      - |
|        Income tax expense                                   |                                                                                                                      |                                                                                                                            |         79,358                                                                    |           18,009                                                              |
|        Finance income                                       |                                                                                                                      |                                                                                                                            |         (3,589)                                                                   |           (3,258)                                                             |
|        Finance costs                                        |                                                                                                                      |                                                                                                                            |            5,142                                                   |              2,371                                             |
|                                                                                      |                                                                                                                      |                                                                                                                            |      340,459                                                                                     |         235,856                                                                         |
|    Change in non-cash operating working capital                                 | 17                                                                                                                        |                                                                                                                            |      (12,538)                                                                                    |           (7,499)                                                             |
| Cash generated from operations                                                            |                                                                                                                      |                                                                                                                            |      327,921                                                                                     |         228,357                                                                         |
|    Income taxes paid                                                            |                                                                                                                      |                                                                                                                            |      (98,391)                                                                                    |        (41,855)                                                                              |
| Net cash generated from continuing operations                                             |                                                                                                                      |                                                                                                                            |      229,530                                                                                     |         186,502                                                                         |
| Cash used in discontinued operations                                                      |                                                                                                                      |                                                                                                                            |                     - |           (1,696)                                                             |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Investing activities                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|    Mining interests                                                        |                                                                                                                      |                                                                                                                            |   (413,620)                                                                                                     |      (134,089)                                                                                         |
|    Recovery of (contribution to) reclamation deposits                           |                                                                                                                      |                                                                                                                            |            8,388                                                   |           (1,590)                                                             |
|    Cash acquired in asset acquisition, net of transaction costs - Richfield     |         18,651                                                                    |                      - |
|    Asset acquisition costs, net of cash received - Silver Quest                 |         (7,979)                                                                   |                      - |
|    Asset acquisition costs, net of cash received - Geo Minerals                 |      (18,053)                                                                                    |                      - |
|    Purchase of available-for-sale securities                                    | 9                                                                                                                         |                                                                                                                            |         (3,684)                                                                   |                      - |
|    Cash received in El Morro transaction, net of transaction costs              |                     - |           46,276                                                              |
|    Investment in El Morro                                                       |                                                                                                                      |                                                                                                                            |                     - |      (463,000)                                                                                         |
|    Proceeds from sale of investments                                            | 9                                                                                                                         |                                                                                                                            |            8,927                                                   |         106,476                                                                         |
|    Interest received                                                            |                                                                                                                      |                                                                                                                            |            3,200                                                   |              1,577                                             |
|    Proceeds from disposal of assets                                             |                                                                                                                      |                                                                                                                            |                821                             |                  439                       |
| Cash used in investing activities                                                         |                                                                                                                      |                                                                                                                            |   (403,349)                                                                                                     |      (443,911)                                                                                         |
| Cash generated from discontinued operations                                               |                                                                                                                      |                                                                                                                            |                     - |           34,410                                                              |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Financing activities                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|    Exercise of options to purchase common stock                                 |                                                                                                                      |                                                                                                                            |         16,375                                                                    |           15,649                                                              |
|    Exercise of warrants to purchase common stock                                |                                                                                                                      |                                                                                                                            |                   65            |                      - |
|    Interest paid                                                                |                                                                                                                      |                                                                                                                            |      (21,864)                                                                                    |        (20,895)                                                                              |
|    El Morro loan                                                                |                                                                                                                      |                                                                                                                            |                     - |         463,000                                                                         |
|    Revolving credit facility initiation costs                                   |                                                                                                                      |                                                                                                                            |                     - |           (4,225)                                                             |
|    Repayment of long-term debt                                                  |                                                                                                                      |                                                                                                                            |                     - |        (27,235)                                                                              |
| Cash generated by financing activities                                                    |                                                                                                                      |                                                                                                                            |         (5,424)                                                                   |         426,294                                                                         |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Effect of exchange rate changes on cash and cash equivalents                              |         (2,105)                                                                   |           16,803                                                              |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| (Decrease) increase in cash and cash equivalents                                          |                                                                                                                      |                                                                                                                            |   (181,348)                                                                                                     |         218,402                                                                         |
| Cash and cash equivalents, beginning of year                                              |                                                                                                                      |                                                                                                                            |      490,754                                                                                     |         272,352                                                                         |
| Cash and cash equivalents, end of year                                                    |                                                                                                                      |                                                                                                                            |      309,406                                                                                     |         490,754                                                                         |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Cash and cash equivalents are comprised of                                                |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
|    Cash                                                                         |                                                                                                                      |                                                                                                                            |      179,023                                                                                     |         191,844                                                                         |
|    Short-term money market instruments                                          |                                                                                                                      |                                                                                                                            |      130,383                                                                                     |         298,910                                                                         |
|                                                                                      |                                                                                                                      |                                                                                                                            |      309,406                                                                                     |         490,754                                                                         |
|                                                                                      |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |
| Supplemental cash flow information (Note 17)                                              |                                                                                                                      |                                                                                                                            |                                                                                                                      |                                                                                                                            |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1.   | Description of business and nature of operations |
|----------------|--------------------------------------------------|

| 2.   | Significant accounting policies |
|----------------|---------------------------------|

|    |  (a) | Statement of compliance |
|--------------|-----------|-------------------------|

|   |  (b) | Basic of preparation |
|--------|-----------|----------------------|

| ·   | Derivative financial instruments; |
|--------------------|-----------------------------------|

| ·   | Financial instruments at fair value through profit and loss; and |
|--------------------|------------------------------------------------------------------|

| ·   | Available-for-sale securities. |
|--------------------|--------------------------------|

|   |  (c) | Basis of presentation and principles of consolidation |
|--------|-----------|-------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | Significant accounting policies (continued) |
|----------------|---------------------------------------------|

|   |  (c) | Basis of presentation and principles of consolidation (continued) |
|--------|-----------|-------------------------------------------------------------------|

|                                  |            |         | Country of    | Interest    | Interest                                                                                                | Interest                                                                  |
|---------------------------------------|-----------------|--------------|---------------|-------------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|
|                                  | Principal       | Method of    | incorporation | December 31 | December 31                                                                                             | January 1                                                                 |
| Name of subsidiary/associate          | Activity        | accounting   | and operation | 2011        | 2010                                                                                                    | 2010                                                                      |
| Metallica Resources Inc.              | Holding company | Consolidated | Canada        | 100%        | 100%                                                                                                    | 100%                                                                      |
| Minera Metallica Resources Chile Ltd. | Mining          | Consolidated | Chile         | 100%        | 100%                                                                                                    | 100%                                                                      |
| Minera San Xavier S.A. de C.V.        | Mining          | Consolidated | Mexico        | 100%        | 100%                                                                                                    | 100%                                                                      |
| Peak Gold Mines Pty Ltd               | Mining          | Consolidated | Australia     | 100%        | 100%                                                                                                    | 100%                                                                      |
| Inversiones El Morro Limitada         | Holding company | Consolidated | Chile         | 100%        | 100%                                                                                                    | 100%                                                                      |
| Sociedad Contractual Minera El Morro  | Mining          | Equity       | Chile         | 30%         | 30%                                                                                                     | 30%                                                                       |
| Western Goldfields Inc.               | Holding company | Consolidated | Canada        | 100%        | 100%                                                                                                    | 100%                                                                      |
| Western Goldfields (USA) Inc.         | Holding company | Consolidated | USA           | 100%        | 100%                                                                                                    | 100%                                                                      |
| Western Mesquite Mines, Inc.          | Mining          | Consolidated | USA           | 100%        | 100%                                                                                                    | 100%                                                                      |
| Richfield Venture Corp.               | Mining          | Consolidated | Canada        | 100%        |                  - |             - |
| Geo Minerals Ltd.                     | Mining          | Consolidated | Canada        | 100%        |                  - |             - |
| Silver Quest Resources Ltd.           | Mining          | Consolidated | Canada        | 100%        |                  - |             - |

| ·   | has begun planned principal activities; |
|--------------------|-----------------------------------------|

| ·   | has employees, intellectual property and other inputs and processes that could be applied to those inputs; |
|--------------------|------------------------------------------------------------------------------------------------------------|

| ·   | is pursuing a plan to produce outputs; and |
|--------------------|--------------------------------------------|

| ·   | will be able to obtain access to customers that will purchase the outputs. |
|--------------------|----------------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (c) | Basis of presentation and principles of consolidation (continued) |
|--------|-----------|-------------------------------------------------------------------|

| ·   | The identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree; |
|--------------------|---------------------------------------------------------------------------------------------------------|

| ·   | The consideration transferred in exchange for interest in the acquiree; |
|--------------------|-------------------------------------------------------------------------|

| ·   | In a business combination achieved in stages, the equity interest in the acquiree previously held by the acquirer; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

| ·   | The resulting goodwill or gain on a bargain purchase. |
|--------------------|-------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (d) | Cash and cash equivalents |
|--------|-----------|---------------------------|

|   |  (e) | Inventories |
|--------|-----------|-------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (f) | Mining interests  |
|--------|-----------|------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (f) | Mining interests (continued) |
|--------|-----------|-----------------------------------|

| ·   | The Company controls access to the benefit; |
|--------------------|---------------------------------------------|

| ·   | Internal project economics are beneficial to the Company; |
|--------------------|-----------------------------------------------------------|

| ·   | The project is technically feasible; and |
|--------------------|------------------------------------------|

| ·   | Costs can be reliably measured. |
|--------------------|---------------------------------|

|                | Average useful life |
|---------------------|---------------------|
| Building            | 15 – 50       |
| Plant and machinery | 3 – 20        |
| Office equipment    | 5 – 10        |
| Vehicles            | 5 – 7         |
| Computer equipment  | 3 - 5               |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (f) | Mining interests (continued) |
|--------|-----------|-----------------------------------|

| ·   | All major capital expenditures to bring the mine to the condition necessary for it to be capable of operating in the manner intended by management have been completed; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The completion of a reasonable period of testing of the mine plant and equipment; |
|--------------------|-----------------------------------------------------------------------------------|

| ·   | The mine or mill has reached a pre-determined percentage of design capacity; and |
|--------------------|----------------------------------------------------------------------------------|

| ·   | The ability to sustain ongoing production of ore. |
|--------------------|---------------------------------------------------|

|   |  (g) | Impairment of long-lived assets |
|--------|-----------|---------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (g) | Impairment of long-lived assets (continued) |
|--------|-----------|---------------------------------------------|

|   |  (h) | Reclamation and closure cost obligations  |
|--------|-----------|------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (h) | Reclamation and closure cost obligations (continued) |
|--------|-----------|-----------------------------------------------------------|

|   |  (i) | Income taxes |
|--------|-----------|--------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (i) | Income taxes (continued) |
|--------|-----------|--------------------------|

|   |  (j) | Foreign currency translation |
|--------|-----------|------------------------------|

| ·   | The main influences of sales prices for goods and the country whose competitive forces and regulations mainly determine the sales price; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The currency that mainly influences labour, material and other costs of providing goods; |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | The currency in which funds from financing activities are generated; and |
|--------------------|--------------------------------------------------------------------------|

| ·   | The currency in which receipts from operating activities are usually retained. |
|--------------------|--------------------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (j) | Foreign currency translation (continued) |
|--------|-----------|------------------------------------------|

|   |  (k) | Earnings per share |
|--------|-----------|--------------------|

|   |  (l) | Revenue recognition |
|--------|-----------|---------------------|

| ·   | the Company has transferred to the buyer the significant risks and rewards of ownership; |
|--------------------|------------------------------------------------------------------------------------------|

| ·   | the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the amount of revenue can be measured reliably; |
|--------------------|-------------------------------------------------|

| ·   | it is probable that the economic benefits associated with the transaction will flow to the entity; and |
|--------------------|--------------------------------------------------------------------------------------------------------|

| ·   | the costs incurred or to be incurred in respect of the transaction can be measured reliably |
|--------------------|---------------------------------------------------------------------------------------------|

|   |  (m) | Share-based payments |
|--------|-----------|----------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (m) | Share-based payments (continued) |
|--------|-----------|----------------------------------|

|   |  (n) | Non-derivative financial assets |
|--------|-----------|---------------------------------|

|   |  (o) | Non-derivative financial liabilities |
|--------|-----------|--------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   |  (p) | Derivative instruments, including hedge accounting |
|--------|-----------|----------------------------------------------------|

|   |  (q) | Trade and other receivables |
|--------|-----------|-----------------------------|

|   |  (r) | Reclamation deposits |
|--------|-----------|----------------------|

|   |  (s) | Leases |
|--------|-----------|--------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | Future changes in accounting policies |
|----------------|---------------------------------------|

|   |  (a) | Financial instruments disclosure |
|--------|-----------|----------------------------------|

|   |  (b) | Income taxes |
|--------|-----------|--------------|

|   |  (a) | Consolidation |
|--------|-----------|---------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | Future changes in accounting policies (continued) |
|----------------|---------------------------------------------------|

|   |  (b) | Joint arrangements |
|--------|-----------|--------------------|

|   |  (c) | Fair value measurement |
|--------|-----------|------------------------|

|   |  (d) | Financial statement presentation |
|--------|-----------|----------------------------------|

|   |  (e) | Stripping costs in the production phase of a mine |
|--------|-----------|---------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | Future changes in accounting policies (continued) |
|----------------|---------------------------------------------------|

| 4.   | Asset Acquisitions |
|----------------|--------------------|

| ·   | Richfield Venture Corp.; |
|--------------------|--------------------------|

| ·   | Geo Minerals Ltd.; and |
|--------------------|------------------------|

| ·   | Silver Quest Resources Ltd. |
|--------------------|-----------------------------|

|   |  (a) | Richfield Venture Corp. |
|--------|-----------|-------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | Asset Acquisitions (continued) |
|----------------|--------------------------------|

|   |  (a) | Richfield Venture Corp. (continued) |
|--------|-----------|-------------------------------------|

|                                                   | $       |
|--------------------------------------------------------|---------|
| Issuance of New Gold shares (48,611,979 common shares) | 487,906 |
| Acquisition costs                                      | 5,764   |
| Purchase consideration                                 | 493,670 |
|                                                   |    |
| Net assets acquired                                    |    |
| Net working capital (including cash of $24,415)        | 21,235  |
| Plant and equipment                                    | 2,604   |
| Blackwater project                                     | 465,290 |
| Deferred tax asset                                     | 4,221   |
| Other assets                                           | 320     |
|                                                   | 493,670 |

|   |  (b) | Geo Minerals Ltd. |
|--------|-----------|-------------------|

|                                           | $      |
|------------------------------------------------|--------|
| Cash consideration                             | 21,158 |
| Acquisition costs                              | 387    |
| Purchase consideration                         | 21,545 |
|                                           |   |
| Net assets acquired                            |   |
| Net working capital (including cash of $3,492) | 3,342  |
| Mineral interest                               | 18,087 |
| Other assets                                   | 116    |
|                                           | 21,545 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | Asset Acquisitions (continued) |
|----------------|--------------------------------|

|   |  (c) | Silver Quest Resources Ltd. |
|--------|-----------|-----------------------------|

|                                                                  | $          |
|-----------------------------------------------------------------------|---------------------------------------------------------|
| Issuance of New Gold shares (10,512,496 common shares)                | 105,761                                                 |
| Cash consideration                                                    | 5,297                                                   |
| Acquisition costs                                                     | 2,682                                                   |
| Purchase consideration                                                | 113,740                                                 |
|                                                                  |                                                    |
| Net assets acquired                                                   |                                                    |
|      Net working capital (including cash of $nil) | 249                                                     |
|      Mining interest                              | 114,353                                                 |
|      Other net liabilities                        | (862                                                    |
|                                                                  | 113,740                                                 |

| 5.   | Expenses |
|----------------|----------|

|   |  (a) | Operating expenses by nature |
|--------|-----------|------------------------------|

|                                       | 2011    |   | 2010    |   |
|--------------------------------------------|---------|--------|---------|--------|
|                                       | $  |   | $       |   |
| Raw materials and consumables              | 132,971 |   | 106,665 |   |
| Salaries and employee benefits             | 72,481  |   | 60,860  |   |
| Repairs and maintenance                    | 19,889  |   | 19,589  |   |
| Contractors                                | 24,058  |   | 17,129  |   |
| Royalties                                  | 15,703  |   | 12,124  |   |
| Shipping costs                             | 603     |   | 391     |   |
| Change in inventories and work in progress | (14,466 | )      | (10,737 | )      |
| Operating leases                           | 32,377  |   | 25,350  |   |
| General and administrative                 | 17,856  |   | 14,540  |   |
| Other                                      | 2,306   |   | 1,862   |   |
|                                       | 303,778 |   | 247,773 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5.     | Expenses (continued) |
|--------|----------------------|
|   |                 |   |   |
|   | (b)                  |   | Finance costs and income |

|                                           | 2011    |   | 2010    |   |
|------------------------------------------------|---------|--------|---------|--------|
|                                           | $  |   | $       |   |
| Finance costs:                                 |    |   |    |   |
| Interest on convertible debentures             | 5,937   |   | 5,813   |   |
| Interest on senior notes                       | 19,727  |   | 20,077  |   |
| Other interest                                 | 1,232   |   | 799     |   |
| Unwinding of the discount on                   |    |   |    |   |
|     decommissioning obligations | 1,551   |   | 1,424   |   |
| Other finance costs                            | 2,359   |   | 148     |   |
|                                           | 30,806  |   | 28,261  |   |
| Less: amounts included in                      |    |   |    |   |
| cost of qualifying assets                      | (25,664 | )      | (25,890 | )      |
|                                           | 5,142   |   | 2,371   |   |
|                                           |    |   |    |   |
| Finance income:                                |    |   |    |   |
| Interest income                                | 3,589   |   | 3,258   |   |

|   | (c) |   |   Other gains and losses |
|--------|-----|--------|-------------------------------|

|                                            |   |   | 2011    |   | 2010     |   |
|-------------------------------------------------|--------|--------|---------|--------|----------|--------|
|                                            |   |   | $       |   | $        |   |
| Fair value change of                            |   |   |    |   |     |   |
|     embedded derivative in Notes | i      |   | 11,118  |   | 7,679    |   |
| Gains on FVTPL financial assets                 |   |   | 1,349   |   | 48,838   |   |
| Ineffectiveness on hedging instruments          | ii     |   | (6,611  | )      | -        |   |
| Fair value change of non-hedged derivatives     | iii    |   | (18,347 | )      | (113,336 | )      |
| Gain (loss) on foreign exchange                 |   |   | 7,122   |   | (9,675   | )      |
| Other                                           |   |   | (2,485  | )      | (3,767   | )      |
|                                            |   |   | (7,854  | )      | (70,261  | )      |

|   | (i)    |   | Fair value change of embedded derivative in Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |   | The Company has the right to redeem the senior secured notes (“Notes”), as described in Note 12 (a) in whole or in part at any time prior to June 27, 2017 at a price ranging from 120% to 100% (decreasing based on the length of time the Notes are outstanding) of the principal amount of the Notes to be redeemed.  At December 31, 2011, the redemption price was 105% and is scheduled to decrease to 104% on June 28, 2012.  The early redemption feature in the Notes qualifies as an embedded derivative that must be bifurcated for reporting purposes. At December 31, 2011, the fair value of the non-hedged derivative asset was $18.8 million (2010 - $7.7 million). |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5.     | Expenses (continued) |
|--------|----------------------|
|   |                 |   |   |
|   | (c)                  |   | Other gains and losses |
|   |                 |   |   |
|   | (ii)                 |   | Ineffectiveness of hedging instruments |
|   |                 |   |   |
|   |                 |   | The Company has gold forward sales contracts that commenced in July 2008 representing a commitment of 5,500 ounces per month ending in December 2014 (as described in Note 13 (a)). The effective portion of gold contracts is recorded in other comprehensive income until the forecasted gold sale impacts earnings. The ineffective portion is recorded in other gains and losses in the current period. The ineffective portion has resulted in a loss of $6.6 million for the year ended December 31, 2011 (2010 - $nil). |

|   | (iii)  |   | Fair value change of non-hedged derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   | Conversion option on Debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   | The Company issued 55,000 convertible debentures (“Debentures”) in 2007, as described in Note 12 (b). The Debentures are classified as compound financial instruments for accounting purposes because of the holder conversion option. The conversion option is treated as a derivative liability measured at fair value on initial recognition, and is subsequently re-measured at fair value at the end of each reporting period. Unrealized gains or losses are recognized in net earnings. At December 31, 2011, the fair value of the derivative liability was $24.0 million (Cdn$24.3 million) (2010 - $29.4 million (Cdn$29.3 million)). The change in the fair value resulted in a gain of $5.1 million recorded in earnings for the year ended December 31, 2011 (2010 – $20.8 million loss). The debt component is measured at amortized cost and is accreted over the expected term to maturity using the effective interest method. |

|   |   |   | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | The Company has outstanding share purchase warrants (“Warrants”), as described in Note 13 (b). The Warrants have an exercise price denominated in a currency other than the Company’s functional currency and are classified as a derivative liability. The Warrants are measured at fair value on initial recognition, and subsequently re-measured at fair value through profit or loss at the end of each period and is recorded in non-hedged derivatives. At December 31, 2011, the fair value of the current and non-current portion of the derivative liability was $142.6 million (Cdn$145.0 million) (2010 - $125.9 million (Cdn$125.3 million)). At December 31, 2011 the fair value of the current portion was $53.3 million (Cdn$54.2 million) (2010 - $nil). The change in the fair value resulted in a loss of $23.5 million and a foreign exchange gain of $6.8 million recorded in net earnings for the year ended December 31, 2011 (2010 – loss of $92.6 million). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |   | The Company assumed $1.0 million (Cdn$1.0 million) of warrants in the Silver Quest asset acquisition transaction (Note 4 (c)) on December 23, 2011. The warrants have an exercise price denominated in a currency other than the Company’s functional current and are classified as a derivative liability. The change in the fair value was $nil for the year ended December 31, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6.   | Trade and other receivables |
|----------------|-----------------------------|

|                 |   | December 31 |   |   |   |   |   | December 31 |    |   |   |   |   | January 1 |   |
|----------------------|--------|-------------|--------|--------|--------|--------|--------|-------------|---------|--------|--------|--------|--------|-----------|--------|
|                 |   | 2011        |   |   |   |   |   | 2010        |    |   |   |   |   | 2010      |   |
|                 |   | $           |   |   |   |   |   |        | $  |   |   |   |   |      |   |   | $ |   |
|                 |   |        |   |   |   |   |   |        |    |   |   |   |   |      |   |   |   |   |
| Trade receivables    |   |        | 6,684  |   |   |   |   |        |    |   | 3,700  |   |   |      |   |   |   |   | 4,145 |   |
| Sales tax receivable |   |        | 29,161 |   |   |   |   |        |    |   | 7,723  |   |   |      |   |   |   |   | 5,424 |   |
| Other receivables    |   |        | 1,727  |   |   |   |   |        |    |   | 506    |   |   |      |   |   |   |   | 776 |   |
|                 |   |        | 37,572 |   |   |   |   |        |    |   | 11,929 |   |   |      |   |   |   |   | 10,345 |   |

| 7.   | Trade and other payables |
|----------------|--------------------------|

|                                           |   | December 31 |    |   |   |   |   | December 31 |    |   |   |   |   | January 1 |   |
|------------------------------------------------|--------|-------------|---------|--------|--------|--------|--------|-------------|---------|--------|--------|--------|--------|-----------|--------|
|                                           |   | 2011        |    |   |   |   |   | 2010        |    |   |   |   |   | 2010      |   |
|                                           |   | $           |    |   |   |   |   |        | $  |   |   |   |   |      |   |   | $ |   |
|                                           |   |        |    |   |   |   |   |        |    |   |   |   |   |      |   |   |   |   |
| Trade payables                                 |   |        | 26,974  |   |   |   |   |        |    |   | 19,542 |   |   |      |   |   |   |   | 13,452 |   |
| Accruals                                       |   |        | 69,137  |   |   |   |   |        |    |   | 48,388 |   |   |      |   |   |   |   | 23,933 |   |
| Current portion of decommissioning obligations |   |        | 4,326   |   |   |   |   |        |    |   | 1,315  |   |   |      |   |   |   |   | 614 |   |
|                                           |   |        | 100,437 |   |   |   |   |        |    |   | 69,245 |   |   |      |   |   |   |   | 37,999 |   |

| 8.   | Inventories |
|----------------|-------------|

|                          |   | December 31 |    |   |   |   |   | December 31 |    |   |    |   |   | January 1 |   |
|-------------------------------|--------|-------------|---------|--------|--------|--------|--------|-------------|---------|--------|---------|--------|--------|-----------|--------|
|                          |   | 2011        |    |   |   |   |   | 2010        |    |   |    |   |   | 2010      |   |
|                          |   | $           |    |   |   |   |   |        | $  |   |    |   |   |      |   |   | $ |   |
|                          |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |
| Heap leach ore                |   |        | 87,838  |   |   |   |   |        |    |   | 61,738  |   |   |      |   |   |   |   | 58,169 |   |
| Work-in-process               |   |        | 13,710  |   |   |   |   |        |    |   | 21,623  |   |   |      |   |   |   |   | 13,907 |   |
| Finished goods                |   |        | 4,611   |   |   |   |   |        |    |   | 5,506   |   |   |      |   |   |   |   | 4,819 |   |
| Stockpiled ore                |   |        | 79      |   |   |   |   |        |    |   | 79      |   |   |      |   |   |   |   | 55 |   |
| Supplies                      |   |        | 20,505  |   |   |   |   |        |    |   | 14,109  |   |   |      |   |   |   |   | 9,349 |   |
|                          |   |        | 126,743 |   |   |   |   |        |    |   | 103,055 |   |   |      |   |   |   |   | 86,299 |   |
| Less: non-current inventories |   |        | 20,253  |   |   |   |   |        |    |   | -       |   |   |      |   |   |   |   | - |   |
|                          |   |        | 106,490 |   |   |   |   |        |    |   | 103,055 |   |   |      |   |   |   |   | 86,299 |   |

| 9.   | Investments |
|----------------|-------------|

|   |  (a) | Available for sale securities |
|--------|-----------|-------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 9.   | Investments (continued) |
|----------------|-------------------------|

|   |  (a) | Available for sale securities (continued) |
|--------|-----------|-------------------------------------------|

|   |  (b) | Asset backed notes |
|--------|-----------|--------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.   | Operations held for sale |
|-----------------|--------------------------|

| 11.   | Mining interests |
|-----------------|------------------|

|                         | Mining Properties                                                                                                   |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |
|------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                         | Depletable                                                                                                          |  Non depletable                                                                                                |  Plant and equipment                                                                                           | Construction in Progress                                                                                                  | Exploration and evaluation                                                                                          | Total |
|                         |  $                                                                                                             |  $                                                                                                             |  $                                                                                                             |  $                                                                                                                   |                                                                                                                | $ |
| Cost                         |                                                                                                                |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |   |
| As at January 1, 2010        |       528,155                                                                         |      865,448                                                                               |       69,980                                                                          |                   19            |          25,388                                                        |    1,788,990 |
| Additions                    |          13,665                                                        |        93,959                                                                    |          5,219                                                         |              1,787                                       |                    - |       184,630 |
| Disposals                    |                    - |                    - |       (5,362)                                                                         |                     - |                    - |         (5,362) |
| Impairment                   |                    - |                    - |                    - |                     - |        (15,728)                                                                  |      (15,728) |
| Transfers                    |          16,250                                                        |     (16,250)                                                                                    |                    - |                     - |                    - |                     - |
| Foreign exchange translation |                    - |        20,965                                                                    |           4,622                                                   |                     - |                    - |         25,587 |
| As at December 31, 2010      |     558,070                                                                                     |     964,122                                                                                     |     444,459                                                                                     |              1,806                                       |             9,660                                       |   1,978,117 |
| Additions                    |          29,484                                                        |      190,398                                                                               |    207,252                                                                                           |           13,547                                                        |        623,942                                                                   |    1,064,623 |
| Disposals                    |                    - |                    - |       (4,323)                                                                         |                     - |                    - |         (4,323) |
| Transfers                    |          25,140                                                        |     (26,998)                                                                                    |          7,629                                                         |           (5,771)                                                       |                    - |                     - |
| Foreign exchange translation |                    - |       (3,518)                                                                         |     (14,227)                                                                                    |                     - |        (28,925)                                                                  |      (46,670) |
| As at December 31, 2011      |      612,694                                                                               | 1,124,004                                                                                                           |    640,790                                                                                           |            9,582                                                   |      604,677                                                                               | 2,991,747 |
|                         |                                                                                                                |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |   |
| Accumulated depreciation     |                                                                                                                |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |   |
| As at January 1, 2010        |          54,744                                                        |                    - |        69,683                                                                    |                     - |                    - |       124,427 |
| Depreciation for the period  |          58,732                                                        |                    - |        31,149                                                                    |                     - |                    - |         89,881 |
| Disposals                    |                    - |                    - |       (3,431)                                                                         |                     - |                    - |         (3,431) |
| As at December 31, 2010      |       113,476                                                                         |                    - |       97,401                                                                          |                     - |                    - |      210,877 |
| Depreciation for the period  |          48,610                                                        |                    - |        40,697                                                                    |                     - |                    - |         89,307 |
| Disposals                    |                    - |                    - |       (2,993)                                                                         |                     - |                    - |         (2,993) |
| Foreign exchange translation |                    - |                    - |          (741)                                                         |                     - |                    - |            (741) |
| As at December 31, 2011      |      162,086                                                                               |                    - |    134,364                                                                                           |                     - |                    - |     296,450 |
|                         |                                                                                                                |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |   |
| Carrying amount              |                                                                                                                |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                |   |
| As at January 1, 2010        |    473,411                                                                                           |      865,448                                                                               |     300,297                                                                                     |                   19            |          25,388                                                        |    1,664,563 |
| As at December 31, 2010      |      444,594                                                                               |      964,122                                                                               |     347,058                                                                                     |              1,806                                       |             9,660                                       |    1,767,240 |
| As at December 31, 2011      |      450,608                                                                               | 1,124,004                                                                                                           |   506,426                                                                                                 |            9,582                                                   |      604,677                                                                               |  2,695,297 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 11.   | Mining interests (continued) |
|-----------------|------------------------------|

|                 |                                                                                                                                        |                                                                                                                                        |  Mining properties                                                                                                                     |                                                                                                                                        |                                                                                                        |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
|                 |                                                                                                                                        |  Non-                                                                                                                                  |                                                                                                                                        |  Plant and                                                                                                                             | December 31                                                                                                 |
|                 |  Depletable                                                                                                                            |  depletable                                                                                                                            |  Total                                                                                                                                 |  equipment                                                                                                                             |  2011                                                                                                  |
|                 |  $                                                                                                                                     |  $                                                                                                                                     |  $                                                                                                                                     |  $                                                                                                                                     |  $                                                                                                     |
|                 |                                                                                                                                        |                                                                                                                                        |                                                                                                                                        |                                                                                                                                        |                                                                                                        |
| Mesquite Mine        |             172,209                                                             |               30,913                                                  |             203,122                                                             |             101,117                                                             |            304,239                                   |
| Cerro San Pedro Mine |             187,584                                                             |               77,910                                                  |             265,494                                                             |               76,700                                                  |            342,194                                   |
| Peak Mine            |               90,815                                                  |               47,855                                                  |             138,670                                                             |               85,935                                                  |            224,605                                   |
| New Afton Project    |                        - |             586,634                                                             |             586,634                                                             |             217,304                                                             |            803,938                                   |
| El Morro Project     |                        - |             390,274                                                             |             390,274                                                             |                        - |            390,274                                   |
| Blackwater Project   |                        - |             595,017                                                             |             595,017                                                             |               23,620                                                  |            618,637                                   |
| Other projects       |                        - |                 9,660                                       |                 9,660                                       |                        - |                  9,660 |
| Corporate            |                        - |                        - |                        - |                 1,750                                       |                  1,750 |
|                 |             450,608                                                             |         1,738,263                                                                                   |         2,188,871                                                                                   |             506,426                                                             |         2,695,297                                                   |

|                 |                                                                                                                                                                      |                                                                                                                                                                      |  Mining properties                                                                                                                                                   |                                                                                                                                                                      |                                                                                                                                     |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                 |                                                                                                                                                                      |  Non-                                                                                                                                                                |                                                                                                                                                                      |  Plant and                                                                                                                                                           |  December 31                                                                                                                        |
|                 |  Depletable                                                                                                                                                          |  depletable                                                                                                                                                          |  Total                                                                                                                                                               |  equipment                                                                                                                                                           |                       2010 |
|                 |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                  |
|                 |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                     |
| Mesquite Mine        |              168,068                                                                                     |                 46,485                                                                    |              214,553                                                                                     |                 98,826                                                                    |                313,379                                        |
| Cerro San Pedro Mine |              204,144                                                                                     |                 82,927                                                                    |              287,071                                                                                     |                 73,203                                                                    |                360,274                                        |
| Peak Mine            |                 72,382                                                                    |                 46,671                                                                    |              119,053                                                                                     |                 68,934                                                                    |                187,987                                        |
| New Afton Project    |                             - |              420,912                                                                                     |              420,912                                                                                     |              104,934                                                                                     |                525,846                                        |
| El Morro Project     |                             - |              368,933                                                                                     |              368,933                                                                                     |                             - |                368,933                                        |
| Other projects       |                             - |                    9,660                                                   |                    9,660                                                   |                             - |                      9,660      |
| Corporate            |                             - |                             - |                             - |                    1,161                                                   |                      1,161      |
|                 |              444,594                                                                                     |              975,588                                                                                     |          1,420,182                                                                                                           |              347,058                                                                                     |            1,767,240                                                              |

|                 |                                                                                                                                                                      |                                                                                                                                                                      |  Mining properties                                                                                                                                                   |                                                                                                                                                                      |                                                                                                                                     |
|----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|                 |                                                                                                                                                                      |  Non-                                                                                                                                                                |                                                                                                                                                                      |  Plant and                                                                                                                                                           |  January 1                                                                                                                          |
|                 |  Depletable                                                                                                                                                          |  depletable                                                                                                                                                          |  Total                                                                                                                                                               |  equipment                                                                                                                                                           |                       2010 |
|                 |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                                                   |  $                                                                                                                                  |
|                 |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                                                      |                                                                                                                                     |
| Mesquite Mine        |              182,231                                                                                     |                 44,566                                                                    |              226,797                                                                                     |                 97,235                                                                    |                324,032                                        |
| Cerro San Pedro Mine |              233,696                                                                                     |                 84,779                                                                    |              318,475                                                                                     |                 66,208                                                                    |                384,683                                        |
| Peak Mine            |                 57,484                                                                    |                 61,506                                                                    |              118,990                                                                                     |                 57,251                                                                    |                176,241                                        |
| New Afton Project    |                             - |              310,079                                                                                     |              310,079                                                                                     |                 78,581                                                                    |                388,660                                        |
| El Morro Project     |                             - |              364,537                                                                                     |              364,537                                                                                     |                             - |                364,537                                        |
| Other projects       |                             - |                 25,388                                                                    |                 25,388                                                                    |                             - |                   25,388                       |
| Corporate            |                             - |                             - |                             - |                    1,022                                                   |                      1,022      |
|                 |              473,411                                                                                     |              890,855                                                                                     |          1,364,266                                                                                                           |              300,297                                                                                     |            1,664,563                                                              |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.   | Long-term debt |
|-----------------|----------------|

|                                    |   |   |   |   | December 31 |   |    |   |   |   | December 31 |    |   |   |    |   | January 1 |   |
|-----------------------------------------|--------|--------|--------|--------|-------------|--------|---------|--------|--------|--------|-------------|---------|--------|--------|---------|--------|-----------|--------|
|                                    |   |   |   |   | 2011        |   |    |   |   |   | 2010        |    |   |   |    |   | 2010      |   |
|                                    |   |   |   |   | $           |   |    |   |   |   |        | $  |   |   |    |   |      |   |   | $ |   |
|                                    |   |   |   |   |        |   |    |   |   |   |        |    |   |   |    |   |      |   |   |   |   |
| Senior secured notes                    |   |   | a      |   |        |   | 176,560 |   |   |   |        |    |   |   | 179,197 |   |      |   |   |   |   |   | 169,044 |   |
| Subordinated convertible debentures     |   |   | b      |   |        |   | 44,923  |   |   |   |        |    |   |   | 42,635  |   |      |   |   |   |   |   | 37,609 |   |
| Term loan facility                      |   |   | c      |   |        |   | -       |   |   |   |        |    |   |   | -       |   |      |   |   |   |   |   | 27,235 |   |
| El Morro project funding loan           |   |   | d      |   |        |   | 30,181  |   |   |   |        |    |   |   | 8,052   |   |      |   |   |   |   |   | 3,656 |   |
| Revolving credit facility               |   |   | e      |   |        |   | -       |   |   |   |        |    |   |   | -       |   |      |   |   |   |   |   | - |   |
|                                    |   |   |   |   |        |   | 251,664 |   |   |   |        |    |   |   | 229,884 |   |      |   |   |   |   |   | 237,544 |   |
| Less: current portion of long-term debt |   |   |   |   |        |   | -       |   |   |   |        |    |   |   | -       |   |      |   |   |   |   |   | (12,088 | ) |
|                                    |   |   |   |   |        |   | 251,664 |   |   |   |        |    |   |   | 229,884 |   |      |   |   |   |   |   | 225,456 |   |

|   |  (a) | Senior secured notes |
|--------|-----------|----------------------|

|   |  (b) | Subordinated convertible debentures |
|--------|-----------|-------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.   | Long-term debt (continued) |
|-----------------|----------------------------|

|   |  (b) | Subordinated convertible debentures (continued) |
|--------|-----------|-------------------------------------------------|

|   |  (c) | Term loan facility |
|--------|-----------|--------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.   | Long-term debt (continued) |
|-----------------|----------------------------|

|   |  (c) | Term loan facility (continued) |
|--------|-----------|--------------------------------|

|   |  (d) | El Morro Project funding loan |
|--------|-----------|-------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.   | Long-term debt (continued) |
|-----------------|----------------------------|

|   |  (d) | El Morro Project funding loan (continued) |
|--------|-----------|------------------------------------------------|

|   |  (e) | Revolving credit facility |
|--------|-----------|---------------------------|

|   |   |  Minimum tangible net worth                                              |  $1.38 billion at December 31, 2011 + 25% of positive quarterly net income |
|--------|--------|-------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|   |   |                                                                          |                                                                            |
|   |   |  Minimum interest coverage ratio                                         |  4.0:1.0                                                                   |
|   |   |  (EBITDA to interest)                                               |                                                                            |
|   |   |                                                                          |                                                                            |
|   |   |  Maximum leverage ratio                                                  |  3.0:1.0                                                                   |
|   |   |   (Debt to EBITDA)                                             |                                                                            |
|   |   |                                                                          |                                                                       |
|   |   |  The Company is in compliance with these covenants at December 31, 2011. |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.   | Long-term debt (continued) |
|-----------------|----------------------------|

|   |  (e) | Revolving credit facility (continued) |
|--------|-----------|---------------------------------------|

| 13.   | Derivative instruments |
|-----------------|------------------------|

|                                    |   | December 31 |    |   |   |   |   | December 31 |    |   |    |   |   | January 1 |   |
|-----------------------------------------|--------|-------------|---------|--------|--------|--------|--------|-------------|---------|--------|---------|--------|--------|-----------|--------|
|                                    |   | 2011        |    |   |   |   |   | 2010        |    |   |    |   |   | 2010      |   |
|                                    |   | $           |    |   |   |   |   |        | $  |   |    |   |   |      |   |   | $ |   |
| Asset                                   |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |
|      Fuel contracts |   |        | -       |   |   |   |   |        |    |   | -       |   |   |      |   |   |   |   | 706 |   |
|                                    |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
| Less: current derivative assets         |   |        | -       |   |   |   |   |        |    |   | -       |   |   |      |   |   |   |   | (706 | ) |
|                                    |   |        | -       |   |   |   |   |        |    |   | -       |   |   |      |   |   |   |   | - |   |
|                                    |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
| Liability                               |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
|      Gold contracts |   |        | 141,591 |   |   |   |   |        |    |   | 153,375 |   |   |      |   |   |   |   | 95,986 |   |
|                                    |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
| Less: current derivative liabilities    |   |        | (49,184 | )      |   |   |   |        |    |   | (40,072 | )      |   |      |   |   |   |   | (19,206 | ) |
|                                    |   |        | 92,407  |   |   |   |   |        |    |   | 113,303 |   |   |      |   |   |   |   | 76,780 |   |

|                                            |   | 2011    |    |   |   |   |   | 2010   |   |
|-------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|--------|--------|
|                                            |   |  $ |    |   |   |   |   |   |   | $ |   |
| Derivatives designated as hedging instruments   |   |    |    |   |   |   |   |   |   |   |   |
|      Gold hedging contracts |   |    | (41,651 | )      |   |   |   |   |   |   | (20,035 | ) |
|      Fuel contracts         |   |    | -       |   |   |   |   |   |   |   | (5 | ) |
|                                            |   |    | (41,651 | )      |   |   |   |   |   |   | (20,040 | ) |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 13.   | Derivative instruments (continued) |
|-----------------|------------------------------------|

|                                                                 |   | 2011   |    |   |   |   |   | 2010   |   |
|----------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                                                                 |   | $      |    |   |   |   |   |   |   | $ |   |
| Derivatives not classified as hedging instruments for                |   |   |    |   |   |   |   |   |   |   |   |
| accounting purposes                                                  |   |   |    |   |   |   |   |   |   |   |   |
|      Share purchase warrants                     |   |   | (23,496 | )      |   |   |   |   |   |   | (92,551 | ) |
|      Conversion option on convertible debentures |   |   | 5,149   |   |   |   |   |   |   |   | (20,785 | ) |
|      Prepayment option embedded derivative       |   |   | 11,118  |   |   |   |   |   |   |   | 7,679 |   |
|                                                                 |   |   | (7,229  | )      |   |   |   |   |   |   | (105,657 | ) |

|                                                         |   | 2011    |    |   |   |   |   | 2010   |   |
|--------------------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|--------|--------|
|                                                         |   |  $ |    |   |   |   |   |   |   | $ |   |
| Effective portion of change in fair value of hedging         |   |    |    |   |   |   |   |   |   |   |   |
| instruments                                                  |   |    |    |   |   |   |   |   |   |   |   |
|      Gold hedging contracts - unrealized |   |    | (32,051 | )      |   |   |   |   |   |   | (85,849 | ) |
|      Gold hedging contracts - realized   |   |    | 41,651  |   |   |   |   |   |   |   | 20,035 |   |
|      Fuel contracts                      |   |    | -       |   |   |   |   |   |   |   | (366 | ) |
| Deferred income tax                                          |   |    | (3,834  | )      |   |   |   |   |   |   | 27,572 |   |
|                                                         |   |    | 5,766   |   |   |   |   |   |   |   | (38,608 | ) |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 13.   | Derivative instruments (continued) |
|-----------------|------------------------------------|

|   |  (a) | Gold hedging contracts |
|--------|-----------|------------------------|

|   |  (b) | Share purchase warrants |
|--------|-----------|-------------------------|

|     |   |        |    |   | Common   |   |   |     |   |        |
|----------|--------|-------------|---------|--------|----------|--------|--------|----------|--------|-------------|
|     |   | Number      |    |   | Shares   |   |   | Exercise |   |        |
| Series   |   | of warrants |    |   | Issuable |   |   | prices   |   | Expiry date |
|     |   | (000's)     |    |   | (000's)  |   |   | Cdn$     |   |        |
|     |   |        |    |   |     |   |   |     |   |        |
| Series B |   |        | 217,500 |   |     |   | 21,750 |     |   |        | 15.00 |   | April 3, 2012 |
| Series C |   |        | 73,812  |   |     |   | 7,381  |     |   |        | 9.00 |   | November 28, 2012 |
| Series A |   |        | 27,850  |   |     |   | 27,850 |     |   |        | 15.00 |   | June 28, 2017 |
|     |   |        | 319,162 |   |     |   | 56,981 |     |   |        |   |   |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 13.   | Derivative instruments (continued) |
|-----------------|------------------------------------|

|   |  (c) | Non-current non-hedged derivative asset and liabilities classified as FVTPL assets and liabilities |
|--------|-----------|----------------------------------------------------------------------------------------------------|

|                                                            |   | December 31 |    |   |   |   |   | December 31 |    |   |    |   |   | January 1 |   |
|-----------------------------------------------------------------|--------|-------------|---------|--------|--------|--------|--------|-------------|---------|--------|---------|--------|--------|-----------|--------|
|                                                            |   | 2011        |    |   |   |   |   | 2010        |    |   |    |   |   | 2010      |   |
|                                                            |   |  $     |    |   |   |   |   |        | $  |   |    |   |   |      |   |   | $ |   |
| Non-current non-hedged derivative asset                         |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |
|      Prepayment option on Notes             |   |        | 18,797  |   |   |   |   |        |    |   | 7,679   |   |   |      |   |   |   |   | - |   |
|                                                            |   |        | 18,797  |   |   |   |   |        |    |   | 7,679   |   |   |      |   |   |   |   | - |   |
|                                                            |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
| Non-current non-hedged derivative liabilities                   |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
|      Equity conversion option on Debentures |   |        | 23,957  |   |   |   |   |        |    |   | 29,429  |   |   |      |   |   |   |   | 7,701 |   |
|      Warrants                               |   |        | 143,627 |   |   |   |   |        |    |   | 125,936 |   |   |      |   |   |   |   | 29,841 |   |
|                                                            |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |   |   |
| Less: current non-hedged derivative liabilities                 |   |        | (53,288 | )      |   |   |   |        |    |   | -       |   |   |      |   |   |   |   | - |   |
|                                                            |   |        | 114,296 |   |   |   |   |        |    |   | 155,365 |   |   |      |   |   |   |   | 37,542 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | Share capital |
|-----------------|---------------|

|   |  (a) | No par value common shares issued |
|--------|-----------|-----------------------------------|

|                        |   |   |   |   | Number    |    |    |   |   |
|-----------------------------|--------|--------|--------|--------|-----------|---------|---------|--------|--------|
|                        |   |   |   |   | of shares |    |    |   |   |
|                        |   |   |   |   | (000's)   |    |    |   | $      |   |
|                        |   |   |   |   |      |    |    |   |   |   |
| Balance, January 1, 2010    |   |   |   |   |      | 388,815 |    |   |   | 1,810,039 |   |
| Exercise of options         |   |   |   |   |      | 4,171   |    |   |   | 19,394 |   |
| Exercise of warrants        |   |   |   |   |      | 6,056   |    |   |   | 16,453 |   |
| Balance, December 31, 2010  |   |   |   |   |      | 399,042 |    |   |   | 1,845,886 |   |
| Acquisition of Richfield    |   |   | i      |   |      |    | 48,612  |   |   |   | 487,906 |   |
| Acquisition of Silver Quest |   | ii     |   |   |      | 10,512  |    |   |   | 105,761 |   |
| Exercise of options         |   | iii    |   |   |      | 3,187   |    |   |   | 24,350 |   |
| Exercise of warrants        |   |   |   |   |      |    | 5       |   |   |   | 65 |   |
| Balance, December 31, 2011  |   |   |   |   |      |    | 461,358 |   |   |   | 2,463,968 |   |

| (i)   | On June 1, 2011, the Company issued 48.6 million common shares to effect the acquisition of Richfield Venture Corp., as described in Note 4 (a). The shares were issued at the opening share price of the Company on June 1, 2011, the transaction completion date, of Cdn$9.75 for a total consideration of $487.9 million. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)   | On December 23, 2011, the Company issued 10.5 million common shares to effect the acquisition of Silver Quest Resources Inc., as described in Note 4 (c). The shares were issued at the opening share price of the Company on December 23, 2011, the transaction completion date, of Cdn$10.27 for a total consideration of $105.8 million. |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii)   | During the year ended December 31, 2011, 3.2 million common shares were issued pursuant to the exercise of stock options. The Company received proceeds of $16.4 million from these exercises and transferred $8.0 million from contributed surplus. |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |  (b) | Stock options |
|--------|-----------|---------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | Share capital (continued) |
|-----------------|---------------------------|

|   |  (b) | Stock options (continued) |
|--------|-----------|---------------------------|

|                       |   |      |   |   | Weighted |   |
|----------------------------|--------|-----------|--------|--------|----------|--------|
|                       |   |      |   |   | average  |   |
|                       |   | Number of |   |   | exercise |   |
|                       |   | options   |   |   | price    |   |
|                       |   | (000's)   |   |   | Cdn$     |   |
|                       |   |      |   |   |     |   |
| Balance, January 1, 2010   |   |      | 15,324 |   |     |   | 4.34 |   |
| Granted                    |   |      | 2,704  |   |     |   | 4.80 |   |
| Exercised                  |   |      | (4,171 | )      |     |   | 2.74 |   |
| Forfeited                  |   |      | (1,609 | )      |     |   | 8.00 |   |
| Balance, December 31, 2010 |   |      | 12,248 |   |     |   | 4.50 |   |
| Granted                    |   |      | 1,815  |   |     |   | 8.03 |   |
| Exercised                  |   |      | (3,187 | )      |     |   | 5.01 |   |
| Expired                    |   |      | (183   | )      |     |   | 11.00 |   |
| Forfeited                  |   |      | (413   | )      |     |   | 5.17 |   |
| Balance, December 31, 2011 |   |      | 10,280 |   |     |   | 4.83 |   |

|     |          |   |         |   |   |          |   |   | Options outstanding |   |   |        |   |   | Options exercisable |   |
|----------|---------------|--------|--------------|--------|--------|---------------|--------|--------|---------------------|--------|--------|-------------|--------|--------|---------------------|--------|
|     |          |   | Weighted     |   |   |          |   |   |                |   |   |        |   |   |                |   |
|     |          |   | average      |   |   |          |   |   | Weighted            |   |   |        |   |   | Weighted            |   |
|     |          |   | remaining    |   |   | Number of     |   |   | average             |   |   | Number of   |   |   | average             |   |
| Exercise |          |   | contractual  |   |   | stock options |   |   | exercise            |   |   | options     |   |   | exercise            |   |
| prices   |          |   | life (years) |   |   | outstanding   |   |   | price               |   |   | exercisable |   |   | price               |   |
| Cdn$     |          |   |         |   |   | (000's)       |   |   | Cdn$                |   |   | (000's)     |   |   | Cdn$                |   |
|     |          |   |         |   |   |          |   |   |                |   |   |        |   |   |                |   |
|     | 0.34 - 0.99   |   |         |   | 2.12   |          |   |   | 560                 |   |   |        | 0.86   |   |                |   | 560 |   |   |   | 0.86 |   |
|     | 1.00 - 1.99   |   |         |   | 1.91   |          |   |   | 275                 |   |   |        | 1.75   |   |                |   | 275 |   |   |   | 1.75 |   |
|     | 2.00 - 2.99   |   |         |   | 3.73   |          |   |   | 1,164               |   |   |        | 2.57   |   |                |   | 758 |   |   |   | 2.50 |   |
|     | 3.00 - 3.99   |   |         |   | 4.09   |          |   |   | 3,099               |   |   |        | 3.23   |   |                |   | 2,024 |   |   |   | 3.23 |   |
|     | 4.00 - 4.99   |   |         |   | 5.08   |          |   |   | 1,350               |   |   |        | 4.39   |   |                |   | 351 |   |   |   | 4.39 |   |
|     | 5.00 - 5.99   |   |         |   | 2.94   |          |   |   | 391                 |   |   |        | 5.73   |   |                |   | 193 |   |   |   | 5.61 |   |
|     | 6.00 - 6.99   |   |         |   | 1.06   |          |   |   | 389                 |   |   |        | 6.35   |   |                |   | 389 |   |   |   | 6.35 |   |
|     | 7.00 - 7.99   |   |         |   | 4.39   |          |   |   | 2,285               |   |   |        | 7.73   |   |                |   | 843 |   |   |   | 7.83 |   |
|     | 8.00 - 8.99   |   |         |   | 5.86   |          |   |   | 150                 |   |   |        | 8.84   |   |                |   | 50 |   |   |   | 8.84 |   |
|     | 9.00 - 9.99   |   |         |   | 1.19   |          |   |   | 507                 |   |   |        | 9.36   |   |                |   | 395 |   |   |   | 9.30 |   |
|     | 10.00 - 10.99 |   |         |   | 5.83   |          |   |   | 35                  |   |   |        | 10.43  |   |                |   | - |   |   |   | - |   |
|     | 11.00 - 11.99 |   |         |   | -      |          |   |   | -                   |   |   |        | -      |   |                |   | - |   |   |   | - |   |
|     | 12.00 - 12.22 |   |         |   | 4.86   |          |   |   | 75                  |   |   |        | 12.22  |   |                |   | - |   |   |   | - |   |
|     | 0.34 - 12.22  |   |         |   | 3.82   |          |   |   | 10,280              |   |   |        | 4.83   |   |                |   | 5,838 |   |   |   | 4.32 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | Share capital (continued) |
|-----------------|---------------------------|

|   |  (b) | Stock options (continued) |
|--------|-----------|---------------------------|

| Grant 1 | January 26, 2011  |   |
|---------|-------------------|--------|
| Grant 2 | March 7, 2011     |   |
| Grant 3 | June 8, 2011      |   |
| Grant 4 | November 9, 2011  |   |
| Grant 5 | December 16, 2011 |   |

|                    |    |   | Grant 1                            |   | Grant 2                                            |   | Grant 3                            |   | Grant 4                                            |   | Grant 5                                            |
|-------------------------|---------|--------|------------------------------------|--------|----------------------------------------------------|--------|------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|
| Granted                 | (000)'s |   |   1,593                  |   |         25 |   |      112  |   |         75 |   |         10 |
| Grant date share price  | Cdn     |   |      7.67 |   |   10.46                                  |   |      9.59 |   |   12.19                                  |   |   10.35                                  |
| Expected volatility     |    |   | 70%                                |   | 70%                                                |   | 60%                                |   | 60%                                                |   | 60%                                                |
| Option life             |    |   |      4.17 |   |      3.67                 |   |      4.67 |   |      3.67                 |   |      3.67                 |
| Dividend yield          |    |   | 0%                                 |   | 0%                                                 |   | 0%                                 |   | 0%                                                 |   | 0%                                                 |
| Risk-free interest rate |    |   | 1.61%                              |   | 1.54%                                              |   | 1.38%                              |   | 0.54%                                              |   | 0.99%                                              |
| Forfeiture rate         |    |   | 3.0%                               |   | 3.0%                                               |   | 3.0%                               |   | 3.0%                                               |   | 3.0%                                               |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | Share capital (continued) |
|-----------------|---------------------------|

|   | (c) | Share award units |
|--------|-----|-------------------|

|                       | Number                                                                                                                      |
|----------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                       | of units                                                                                                                    |
|                       |  (000)                                                                                                                 |
| Balance, January 1, 2010   |                     560 |
| Units granted              |                     724 |
| Units settled in cash      |                  (361)                 |
| Units cancelled            |                  (165)                 |
| Balance, December 31, 2010 |                     758 |
| Units granted              |                1,049                             |
| Units settled in cash      |                 (652)                       |
| Units cancelled            |                 (127)                       |
| Balance, December 31, 2011 |                1,028                             |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | Share capital (continued) |
|-----------------|---------------------------|

|   | (d) | Earnings per share |
|--------|-----|--------------------|

|                                                           |  2011                                                                                        |  2010                                                                                        |
|----------------------------------------------------------------|---------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                                           |  $                                                                                           |  $                                                                                           |
|                                                           |                                                                                              |                                                                                              |
| Earnings (loss)                                                |                                                                                              |                                                                                              |
|      Continuing operations                 |    179,028                                                                         |        57,347                                                  |
|      Discontinued operations, net of tax   |                 - |        (9,886)                                                 |
| Net earnings                                                   |    179,028                                                                         |        47,461                                                  |
|                                                           |                                                                                              |                                                                                              |
| Dilution of net earnings (gain) loss:                          |                                                                                              |                                                                                              |
| Debentures (net of tax)                                        |       (3,862)                                                       |                 - |
| Net diluted earnings                                           |    175,166                                                                         |        47,461                                                  |
|                                                           |                                                                                              |                                                                                              |
| Basic weighted average                                         |                                                                                              |                                                                                              |
| number of shares outstanding                                   |    429,591                                                                         |      390,883                                                             |
|                                                           |                                                                                              |                                                                                              |
| Effective of diluted securities                                |                                                                                              |                                                                                              |
|      Stock options                         |     5,536                                                                     |       4,350                                                         |
|      Debentures                            |     5,882                                                                     |              -                   |
|      Warrants                              |              -                   |              -                   |
| Diluted weighted average                                       |                                                                                              |                                                                                              |
| number of shares outstanding                                   |    441,009                                                                         |      395,233                                                             |
|                                                           |                                                                                              |                                                                                              |
| Earnings per share from continuing operations                  |                                                                                              |                                                                                              |
|      Basic                                 |            0.42                            |             0.15                      |
|      Diluted                               |            0.40                            |             0.15                      |
|                                                           |                                                                                              |                                                                                              |
| Earnings (loss) per share from discontinued operations         |                                                                                              |                                                                                              |
|      Basic                                 |                 - |          (0.03)                                      |
|      Diluted                               |                 - |          (0.03)                                      |
|                                                           |                                                                                              |                                                                                              |
| Earnings per share from continuing and discontinued operations |                                                                                              |                                                                                              |
|      Basic                                 |            0.42                            |             0.12                      |
|      Diluted                               |            0.40                            |             0.12                      |

|          |  2011                                                                                                                            |  2010                                                                                      |
|---------------|---------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|          |  (000's)                                                                                                                         |  (000's)                                                                                   |
|          |                                                                                                                                  |                                                                                            |
| Stock options |                   185                       |                2,881 |
| Warrants      |            49,600                                                              |             56,986                  |
| Debentures    |                       - |                5,882 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 15.   | Income and mining taxes |
|-----------------|-------------------------|

|                                              |   | 2011   |    |   |   |   |   | 2010   |   |
|---------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                                              |   | $      |    |   |   |   |   |   |   | $ |   |
|                                              |   |   |    |   |   |   |   |   |   |   |   |
| Current income and mining tax expense (recovery)  |   |   |    |   |   |   |   |   |   |   |   |
| Canada                                            |   |   | 4,587   |   |   |   |   |   |   |   | 2,137 |   |
| Australia                                         |   |   | 12,797  |   |   |   |   |   |   |   | 12,383 |   |
| Mexico                                            |   |   | 58,879  |   |   |   |   |   |   |   | 36,257 |   |
| United States                                     |   |   | 14,814  |   |   |   |   |   |   |   | 7,530 |   |
| Total current tax                                 |   |   | 91,077  |   |   |   |   |   |   |   | 58,307 |   |
|                                              |   |   |    |   |   |   |   |   |   |   |   |   |
|                                              |   |   |    |   |   |   |   |   |   |   |   |   |
| Deferred income and mining tax expense (recovery) |   |   |    |   |   |   |   |   |   |   |   |   |
| Canada                                            |   |   | 2,549   |   |   |   |   |   |   |   | (36,278 | ) |
| Australia                                         |   |   | 1,778   |   |   |   |   |   |   |   | 220 |   |
| Mexico                                            |   |   | (15,385 | )      |   |   |   |   |   |   | (21,171 | ) |
| United States                                     |   |   | (661    | )      |   |   |   |   |   |   | 16,931 |   |
| Total deferred tax                                |   |   | (11,719 | )      |   |   |   |   |   |   | (40,298 | ) |
|                                              |   |   |    |   |   |   |   |   |   |   |   |   |
| Income tax expense                                |   |   | 79,358  |   |   |   |   |   |   |   | 18,009 |   |

|                                                                          |   | 2011   |    |   |   |   |   | 2010   |   |
|-------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
|                                                                          |   | $      |    |   |   |   |   |   |   | $ |   |
|                                                                          |   |   |    |   |   |   |   |   |   |   |   |
| Earnings before income taxes                                                  |   |   | 258,386 |   |   |   |   |   |   |   | 75,356 |   |
|                                                                          |   |   |    |   |   |   |   |   |   |   |   |   |
| Canadian federal and provincial income tax rates                              |   |   | 26.50%  |   |   |   |   |   |   |   | 28.50% |   |
|                                                                          |   |   |    |   |   |   |   |   |   |   |   |   |
| Income tax recovery based on above rates                                      |   |   | 68,472  |   |   |   |   |   |   |   | 21,476 |   |
| Increase (decrease) due to                                                    |   |   |    |   |   |   |   |   |   |   |   |   |
|      Non-taxable income                                   |   |   | (15,294 | )      |   |   |   |   |   |   | (12,851 | ) |
|      Non-deductible expenditures                          |   |   | 13,510  |   |   |   |   |   |   |   | 9,218 |   |
|      Different statutory tax rates on earnings of foreign |   |   |    |   |   |   |   |   |   |   |   |   |
|          subsidiaries                 |   |   | 19,942  |   |   |   |   |   |   |   | 9,291 |   |
|      Adjustment of prior year provision to statutory tax  |   |   |    |   |   |   |   |   |   |   |   |   |
|          returns                      |   |   | (3,523  | )      |   |   |   |   |   |   | 1,645 |   |
| Non-taxable gain                                                              |   |   | -       |   |   |   |   |   |   |   | (15,993 | ) |
| Benefit of losses not recognized in period                                    |   |   | -       |   |   |   |   |   |   |   | 595 |   |
| Deferred tax assets not recognized and other                                  |   |   | (3,749  | )      |   |   |   |   |   |   | 4,628 |   |
|                                                                          |   |   | 79,358  |   |   |   |   |   |   |   | 18,009 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 15.   | Income and mining taxes (continued) |
|-----------------|-------------------------------------|

|                                                        |   | December 31 |     |   |   |   |   | December 31 |    |   |     |   |   | January 1 |   |
|-------------------------------------------------------------|--------|-------------|----------|--------|--------|--------|--------|-------------|---------|--------|----------|--------|--------|-----------|--------|
|                                                        |   | 2011        |     |   |   |   |   | 2010        |    |   |     |   |   | 2010      |   |
|                                                        |   | $           |     |   |   |   |   |        | $  |   |     |   |   |      |   |   | $ |   |
| Deferred tax assets                                         |   |        |     |   |   |   |   |        |    |   |     |   |   |      |   |   |   |   |
|   Unused non-capital losses                       |   |        | 33,838   |   |   |   |   |        |    |   | 23,286   |   |   |      |   |   |   |   | 28,243 |   |
|   Capital losses                                  |   |        | -        |   |   |   |   |        |    |   | 12,241   |   |   |      |   |   |   |   | 3,006 |   |
|   Investment tax credits / Government assistance  |   |        | 28,680   |   |   |   |   |        |    |   | 11,256   |   |   |      |   |   |   |   | - |   |
|   Alternative minimum tax credits and state taxes |   |        | 15,537   |   |   |   |   |        |    |   | 6,939    |   |   |      |   |   |   |   | 2,008 |   |
|   Derivative instruments / Hedging                |   |        | 57,706   |   |   |   |   |        |    |   | 62,500   |   |   |      |   |   |   |   | 49,588 |   |
|   Decommissioning obligations                     |   |        | 6,507    |   |   |   |   |        |    |   | 2,810    |   |   |      |   |   |   |   | 2,567 |   |
|   Property, plant and equipment                   |   |        | -        |   |   |   |   |        |    |   | -        |   |   |      |   |   |   |   | 6,771 |   |
|   Accrued liabilities and provisions              |   |        | 11,130   |   |   |   |   |        |    |   | 7,466    |   |   |      |   |   |   |   | 6,549 |   |
|   Other                                           |   |        | 2,945    |   |   |   |   |        |    |   | -        |   |   |      |   |   |   |   | 11,844 |   |
|                                                        |   |        | 156,343  |   |   |   |   |        |    |   | 126,498  |   |   |      |   |   |   |   | 110,576 |   |
|                                                        |   |        |     |   |   |   |   |        |    |   |     |   |   |      |   |   |   |   |   |   |
| Deferred tax liabilities                                    |   |        |     |   |   |   |   |        |    |   |     |   |   |      |   |   |   |   |   |   |
|   Mining interest                                 |   |        | (272,994 | )      |   |   |   |        |    |   | (277,189 | )      |   |      |   |   |   |   | (338,417 | ) |
|   Property, plant and equipment                   |   |        | (17,233  | )      |   |   |   |        |    |   | (13,315  | )      |   |      |   |   |   |   | - |   |
|   Other                                           |   |        | (4,072   | )      |   |   |   |        |    |   | (5,116   | )      |   |      |   |   |   |   | (7,030 | ) |
|                                                        |   |        | (294,299 | )      |   |   |   |        |    |   | (295,620 | )      |   |      |   |   |   |   | (345,447 | ) |
| Deferred income tax liabilities, net                        |   |        | (137,956 | )      |   |   |   |        |    |   | (169,122 | )      |   |      |   |   |   |   | (234,871 | ) |

|                                          |   | 2011                                                                                                                |   | 2010                                                                                                    |
|-----------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
| Balance at the beginning of the year          |   |    (169,122)                                                                                         |   |    (234,871)                                                                             |
| Recognized in net earnings                    |   |         11,719                                                              |   |         40,298                                                  |
| Recognized in other comprehensive income      |   |         (3,700)                                                             |   |         27,570                                                  |
| Recognized as reduction in mineral properties |   |         23,699                                                              |   |         11,230                                                  |
| Recognized in equity                          |   |                    - |   |                  - |
| Other                                         |   |            (552)                                             |   |       (13,349)                                                            |
|                                          |   |    (137,956)                                                                                         |   |    (169,122)                                                                             |

| ·   | Canadian income tax losses of $4.8 million expire between 2014 to 2031; |
|--------------------|-------------------------------------------------------------------------|

| ·   | Canadian capital loss carry forwards of $6.5 million with no expiry date; |
|--------------------|---------------------------------------------------------------------------|

| ·   | United States loss carry forwards of $5.8 million expire between 2021 to 2028; and |
|--------------------|------------------------------------------------------------------------------------|

| ·   | Other loss carry forwards of $0.6 million with varying expiry dates. |
|--------------------|----------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 16.   | Reclamation and closure cost obligations |
|-----------------|------------------------------------------|

|                             |     |   | Cerro San |   |   |   | New     |   |       |   |   |   |
|----------------------------------|----------|--------|-----------|--------|--------|--------|---------|--------|------------|--------|--------|--------|
|                             | Mesquite |   | Pedro     |   | Peak   |   | Afton   |   | Blackwater |   |   |   |
|                             | Mine     |   | Mine      |   | Mine   |   | Project |   | Project    |   | Total  |   |
|                             |     | $      |      |   | $      |   |    | $      |       |   | $      |   |   | $ |   |   | $ |   |
|                             |     |   |      |   |   |   |    |   |       |   |   |   |   |   |   |   |   |   |
| Balance, January 1, 2010         |     | 7,301  |      |   | 5,764  |   |    | 9,201  |       |   | 3,112  |   |   | - |   |   | 25,378 |   |
| Reclamation expenditures         |     | (23    | )         |   | -      |   |    | (19    | )          |   | -      |   |   | - |   |   | (42 | ) |
| Unwinding of discount            |     | 246    |      |   | 308    |   |    | 571    |       |   | 121    |   |   | - |   |   | 1,246 |   |
| Revisions to expected cash flows |     | 964    |      |   | 2,597  |   |    | 3,189  |       |   | 238    |   |   | - |   |   | 6,988 |   |
| Foreign exchange movement        |     | -      |      |   | 242    |   |    | 1,492  |       |   | 184    |   |   | - |   |   | 1,918 |   |
|                             |     |   |      |   |   |   |    |   |       |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2010       |     | 8,488  |      |   | 8,911  |   |    | 14,434 |       |   | 3,655  |   |   | - |   |   | 35,488 |   |
| Reclamation expenditures         |     | (85    | )         |   | -      |   |    | (477   | )          |   | -      |   |   | - |   |   | (562 | ) |
| Unwinding of discount            |     | 364    |      |   | 244    |   |    | 842    |       |   | 116    |   |   | - |   |   | 1,566 |   |
| Revisions to expected cash flows |     | 1,727  |      |   | 8,622  |   |    | 2,669  |       |   | 6,227  |   |   | 251 |   |   | 19,496 |   |
| Foreign exchange movement        |     | -      |      |   | (999   | )      |    | 130    |       |   | (80    | )      |   | - |   |   | (949 | ) |
|                             |     |   |      |   |   |   |    |   |       |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2011       |     | 10,494 |      |   | 16,778 |   |    | 17,598 |       |   | 9,918  |   |   | 251 |   |   | 55,039 |   |
| Less: current portion            |     | 1,566  |      |   | 958    |   |    | 518    |       |   | 1,284  |   |   | - |   |   | 4,326 |   |
|                             |     |   |      |   |   |   |    |   |       |   |   |   |   |   |   |   |   |   |
|                             |     | 8,928  |      |   | 15,820 |   |    | 17,080 |       |   | 8,634  |   |   | 251 |   |   | 50,713 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 16.   | Reclamation and closure cost obligations (continued) |
|-----------------|------------------------------------------------------|

|   | (a) | Mesquite Mine |
|--------|-----|---------------|

|   | (b) | Cerro San Pedro |
|--------|-----|-----------------|

|   | (c) | Peak Mine |
|--------|-----|-----------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 16.   | Reclamation and closure cost obligations (continued) |
|-----------------|------------------------------------------------------|

|   | (d) | New Afton Project |
|--------|-----|-------------------|

| 17.   | Supplemental cash flow information |
|-----------------|------------------------------------|

|                                                 |   |   |                                                                                     |   |  December 31                                                                         |
|------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|
|                                                 |   |   |               2011 |   |               2010  |
|                                                 |   |   | $                                                                                        |   |  $                                                                                   |
| Operating activities:                                |   |   |                                                                                     |   |                                                                                      |
| Change in non-cash working capital                   |   |   |                                                                                     |   |                                                                                      |
|      Trade and other receivables |   |   |            (6,711)                |   |               1,536 |
|      Inventories                 |   |   |          (16,620)                           |   |          (10,247)                            |
|      Trade and other payables    |   |   |            11,920                 |   |               4,987 |
|      Prepaid expenses and other  |   |   |            (1,127)                |   |            (3,775)                 |
|                                                 |   |   |          (12,538)                           |   |            (7,499)                 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18.   | Segmented information |
|-----------------|-----------------------|

|   | (a) | Segment revenues and results |
|--------|-----|------------------------------|

|                                          |     |   |    |   |    |   |      |   |      |   |  December 31, 2011 |   |
|-----------------------------------------------|----------|--------|---------|--------|---------|--------|-----------|--------|-----------|--------|-------------------------|--------|
|                                          | Mesquite |   | CSP     |   | Peak    |   | New Afton |   | Corporate |   | Other (1)               |   | Total |   |
|                                          | $        |   | $       |   | $       |   | $         |   | $         |   | $                       |   | $ |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Revenues (2)                                  | 209,070  |   | 294,271 |   | 192,598 |   | -         |   | -         |   | -                       |   | 695,939 |   |
| Operating expenses                            | 103,266  |   | 89,119  |   | 111,393 |   | -         |   | -         |   | -                       |   | 303,778 |   |
| Depreciation and depletion                    | 26,148   |   | 32,429  |   | 18,358  |   | -         |   | -         |   | -                       |   | 76,935 |   |
| Earnings from mine operations                 | 79,656   |   | 172,723 |   | 62,847  |   | -         |   | -         |   | -                       |   | 315,226 |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Corporate admin. expenses                     | -        |   | -       |   | -       |   | -         |   | 25,512    |   | 760                     |   | 26,272 |   |
| Share-based payment expenses                  | -        |   | -       |   | -       |   | -         |   | 11,140    |   | -                       |   | 11,140 |   |
| Exploration expenses                          | -        |   | 3,681   |   | 4,224   |   |      |   | 119       |   | 1,997                   |   | 10,021 |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Earnings (loss) from operations               | 79,656   |   | 169,042 |   | 58,623  |   | -         |   | (36,771   | )      | (2,757                  | )      | 267,793 |   |
|      Finance income       | 90       |   | 77      |   | 290     |   | 189       |   | 2,791     |   | 152                     |   | 3,589 |   |
|      Finance costs        | (391     | )      | (255    | )      | (1,213  | )      | (116      | )      | (2,377    | )      | (790                    | )      | (5,142 | ) |
|      Other (losses) gains | (10,267  | )      | 1,405   |   | 2,181   |   | 17,311    |   | (17,476   | )      | (1,008                  | )      | (7,854 | ) |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Earnings (loss) before taxes                  | 69,088   |   | 170,269 |   | 59,881  |   | 17,384    |   | (53,833   | )      | (4,403                  | )      | 258,386 |   |
| Income tax (expense) recovery                 | (14,044  | )      | (43,275 | )      | (14,575 | )      | (278      | )      | (5,740    | )      | (1,446                  | )      | (79,358 | ) |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Net earnings (loss)                           |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| from continuing operations                    | 55,044   |   | 126,994 |   | 45,306  |   | 17,106    |   | (59,573   | )      | (5,849                  | )      | 179,028 |   |

|   | (1) | Other includes balances relating to the exploration properties that have no revenues or operating costs. |
|--------|-----|----------------------------------------------------------------------------------------------------------|

|   | (2) | Segmented revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the year. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------|

|                                          |     |   |    |   |    |   |      |   |      |   |  December 31, 2010 |   |
|-----------------------------------------------|----------|--------|---------|--------|---------|--------|-----------|--------|-----------|--------|-------------------------|--------|
|                                          | Mesquite |   | CSP     |   | Peak    |   | New Afton |   | Corporate |   | Other (1)               |   | Total |   |
|                                          | $        |   | $       |   | $       |   | $         |   | $         |   | $                       |   | $ |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Revenues                                      | 189,361  |   | 190,459 |   | 150,630 |   | -         |   | -         |   | -                       |   | 530,450 |   |
| Operating expenses                            | 100,235  |   | 73,423  |   | 74,115  |   | -         |   | -         |   | -                       |   | 247,773 |   |
| Depreciation and depletion                    | 27,993   |   | 33,477  |   | 16,904  |   | -         |   | -         |   | -                       |   | 78,374 |   |
| Earnings from mine operations                 | 61,133   |   | 83,559  |   | 59,611  |   | -         |   | -         |   | -                       |   | 204,303 |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Corporate admin. expenses                     | -        |   | -       |   | -       |   | (19       | )      | 23,208    |   | 945                     |   | 24,134 |   |
| Share-based payment expenses                  | -        |   | -       |   | -       |   | -         |   | 6,877     |   | -                       |   | 6,877 |   |
| Exploration expenses                          | 2,912    |   | 1,971   |   | 5,109   |   | -         |   | -         |   | 2,842                   |   | 12,834 |   |
| Exploration expenses                          | -        |   | -       |   | -       |   | -         |   | -         |   | 15,728                  |   | 15,728 |   |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Earnings (loss) from operations               | 58,221   |   | 81,588  |   | 54,502  |   | 19        |   | (30,085   | )      | (19,515                 | )      | 144,730 |   |
|      Finance income       | 227      |   | 524     |   | 300     |   | 115       |   | 2,086     |   | 6                       |   | 3,258 |   |
|      Finance costs        | (537     | )      | (667    | )      | (885    | )      | (119      | )      | (163      | )      | -                       |   | (2,371 | ) |
|      Other (losses) gains | (736     | )      | (15,588 | )      | (9,557  | )      | (4,486    | )      | (35,858   | )      | (4,036                  | )      | (70,261 | ) |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Earnings (loss) before taxes                  | 57,175   |   | 65,857  |   | 44,360  |   | (4,471    | )      | (64,020   | )      | (23,545                 | )      | 75,356 |   |
| Income tax (expense) recovery                 | (18,508  | )      | (19,447 | )      | (4,668  | )      | (4,330    | )      | 14,848    |   | 14,096                  |   | (18,009 | ) |
|                                          |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| Net earnings (loss)                           |     |   |    |   |    |   |      |   |      |   |                    |   |   |   |
| from continuing operations                    | 38,667   |   | 46,410  |   | 39,692  |   | (8,801    | )      | (49,172   | )      | (9,449                  | )      | 57,347 |   |

|   | (1) | Other includes balances relating to the exploration properties that have no revenues or operating costs. |
|--------|-----|----------------------------------------------------------------------------------------------------------|

|   | (2) | Segmented revenue reported above represents revenue generated from external customers. There were no inter-segment sales in the year. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18.   | Segmented information (continued) |
|-----------------|-----------------------------------|

|   | (b) | Segment assets and liabilities |
|--------|-----|--------------------------------|

|                     |   |  December 31, 2011 |   December 31, 2010 |        |    |    | January 1, 2010 |   |
|--------------------------|--------|-------------------------|--------------------------|-------------|---------|---------|-----------------|--------|
|                     |   |                    |                     |        |    |    |            |   |   |   |   |   |   |   |   |   |   |
|                     |   | Total                   |                     | Total       |    |    | Total           |   |   | Total |   |   | Total |   |   | Total |   |
|                     |   | assets                  |                     | liabilities |    |    | assets          |   |   | liabilities |   |   | assets |   |   | liabilities |   |
|                     |   |                    | $                        |        | $  |    |            |   | $ |   |   | $  |   |   |   | $ |   |   |   | $ |   |
|                     |   |                    |                     |        |    |    |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     |   |                    |                     |        |    |    |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mesquite Mine            |   |                    | 466,943                  |        |    | 260,708 |            |   |   | 424,361 |   |   |   | 212,142 |   |   |   | 414,882 |   |   |   | 186,929 |   |
| Cerro San Pedro Mine     |   |                    | 492,628                  |        |    | 163,311 |            |   |   | 455,367 |   |   |   | 175,971 |   |   |   | 452,994 |   |   |   | 135,056 |   |
| Peak Mine                |   |                    | 285,287                  |        |    | 70,722  |            |   |   | 256,247 |   |   |   | 67,714 |   |   |   | 226,458 |   |   |   | 54,987 |   |
| New Afton Project        |   |                    | 846,068                  |        |    | 261,409 |            |   |   | 567,074 |   |   |   | 265,709 |   |   |   | 467,505 |   |   |   | 221,740 |   |
| El Morro Project         |   |                    | 390,274                  |        |    | 96,527  |            |   |   | 368,932 |   |   |   | 70,758 |   |   |   | 364,537 |   |   |   | 61,647 |   |
| Blackwater Project       |   |                    | 626,702                  |        |    | 5,695   |            |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other (1)                |   |                    | 113,500                  |        |    | 80,661  |            |   |   | 357,208 |   |   |   | 116,400 |   |   |   | 188,630 |   |   |   | 38,511 |   |
| Operations held for sale |   |                    | -                        |        |    | -       |            |   |   | - |   |   |   | - |   |   |   | 89,287 |   |   |   | 30,304 |   |
|                     |   |                    | 3,221,402                |        |    | 939,033 |            |   |   | 2,429,189 |   |   |   | 908,694 |   |   |   | 2,204,293 |   |   |   | 729,174 |   |

|   |   | (1) | Other includes corporate balances and exploration properties. |
|--------|--------|-----|---------------------------------------------------------------|

|   | (c) | Geographical information |
|--------|-----|--------------------------|

|          |   |       | Revenues (1) |    |    |   | Non-current assets (2) |   |
|---------------|--------|------------|--------------|---------|---------|--------|------------------------|--------|
|          |   |       |         |    |    |   |  December 31      |   | December 31 | January 1  |   |
|          |   |  2011 | 2010    |    |    |   | 2011                   |   | 2010 | 2010  |   |
|          |   |       | $            | $  |    |   |                   |   | $ |   |   |   | $ |   | $ |   |
|          |   |       |         |    |    |   |                   |   |   |   |   |   |   |   |   |   |
| United States |   |       | 209,070      |    | 189,361 |   |                   |   |   | 324,493 |   |   |   | 313,379 |   | 339,760 |   |
| Mexico        |   |       | 294,271      |    | 190,459 |   |                   |   |   | 342,194 |   |   |   | 360,274 |   | 368,955 |   |
| Australia     |   |       | 192,598      |    | 150,630 |   |                   |   |   | 224,605 |   |   |   | 187,987 |   | 176,241 |   |
| Canada        |   |       | -            |    | -       |   |                   |   |   | 1,424,324 |   |   |   | 527,007 |   | 389,682 |   |
| Chile         |   |       | -            |    | -       |   |                   |   |   | 399,934 |   |   |   | 378,593 |   | 389,925 |   |
| Brazil        |   |       | -            |    | -       |   |                   |   |   | - |   |   |   | - |   | 78,989 |   |
|          |   |       | 695,939      |    | 530,450 |   |                   |   |   | 2,715,550 |   |   |   | 1,767,240 |   | 1,743,552 |   |

|   |   | (1) | Presented based on the location in which the sale originated. |
|--------|--------|-----|---------------------------------------------------------------|

|   |   | (2) | Non-current assets exclude financial instruments (investments, reclamation deposits and other) and deferred tax assets. |
|--------|--------|-----|-------------------------------------------------------------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18.   | Segmented information (continued) |
|-----------------|-----------------------------------|

|   | (d) | Information about major customers |
|--------|-----|-----------------------------------|

| Customer               |   | Reporting segment |               | 2011   |    |    | 2010   |   |
|------------------------|--------|-------------------|--------------------|--------|---------|---------|--------|--------|
|                   |   |              |               |   |    |    |   | $      |   |
|                   |   |              |               |   |    |    |   |   |   |
|                   | 1      |              | Mesquite(1)        |   |    | 118,779 |   |   |   | 142,026 |   |
|                   |   |              | Cerro San Pedro(1) |   |    | 248,135 |   |   |   | 4,010 |   |
|                   | 2      |              | Peak               |   |    | 97,573  |   |   |   | 186,450 |   |
|                   | 3      |              | Peak               |   |    | 74,753  |   |   |   | 87,620 |   |
|                   | 4      |              | Cerro San Pedro    |   |    | 46,136  |   |   |   | 62,873 |   |
| Total                  |   |              |               |   | 585,376 |    |   |   | 482,979 |   |
| % of total metal sales |   |              | 84%                |   |    |    | 91%    |   |

|   |   | (1) | Mesquite and Cerro San Pedro both sell to the same customer. |
|--------|--------|-----|--------------------------------------------------------------|

| 19.   | Capital risk management |
|-----------------|-------------------------|

|                      |   | December 31 |      |   |   |   |   | December 31 |    |   |      |   |   | January 1 |   |
|---------------------------|--------|-------------|-----------|--------|--------|--------|--------|-------------|---------|--------|-----------|--------|--------|-----------|--------|
|                      |   | 2011        |      |   |   |   |   | 2010        |    |   |      |   |   | 2010      |   |
|                      |   | $           |      |   |   |   |   |        | $  |   |      |   |   |      |   |   | $ |   |
|                      |   |        |      |   |   |   |   |        |    |   |      |   |   |      |   |   |   |   |
| Equity                    |   |        | 2,282,369 |   |   |   |   |        |    |   | 1,520,495 |   |   |      |   |   |   |   | 1,475,119 |   |
| Long-term debt            |   |        | 251,664   |   |   |   |   |        |    |   | 229,884   |   |   |      |   |   |   |   | 225,456 |   |
|                      |   |        | 2,534,033 |   |   |   |   |        |    |   | 1,750,379 |   |   |      |   |   |   |   | 1,700,575 |   |
| Cash and cash equivalents |   |        | (309,406  | )      |   |   |   |        |    |   | (490,754  | )      |   |      |   |   |   |   | (271,526 | ) |
| Investments               |   |        | (1,823    | )      |   |   |   |        |    |   | (7,533    | )      |   |      |   |   |   |   | (45,890 | ) |
|                      |   |        | 2,222,804 |   |   |   |   |        |    |   | 1,252,092 |   |   |      |   |   |   |   | 1,383,159 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 19.   | Capital risk management (continued) |
|-----------------|-------------------------------------|

| 20.   | Financial risk management |
|-----------------|---------------------------|

|   | (a) | Credit risk |
|--------|-----|-------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (a) | Credit risk (continued) |
|--------|-----|-------------------------|

|                           |   | December 31 |    |   |   |   |   | December 31 |    |   |    |   |   | January 1 |   |
|--------------------------------|--------|-------------|---------|--------|--------|--------|--------|-------------|---------|--------|---------|--------|--------|-----------|--------|
|                           |   | 2011        |    |   |   |   |   | 2010        |    |   |    |   |   | 2010      |   |
|                           |   | $           |    |   |   |   |   |        | $  |   |    |   |   |      |   |   | $ |   |
|                           |   |        |    |   |   |   |   |        |    |   |    |   |   |      |   |   |   |   |
| Cash and cash equivalents      |   |        | 309,406 |   |   |   |   |        |    |   | 490,754 |   |   |      |   |   |   |   | 271,526 |   |
| Trade receivables              |   |        | 37,572  |   |   |   |   |        |    |   | 11,929  |   |   |      |   |   |   |   | 10,345 |   |
| Reclamation deposits and other |   |        | 14,912  |   |   |   |   |        |    |   | 23,616  |   |   |      |   |   |   |   | 17,646 |   |
|                           |   |        | 361,890 |   |   |   |   |        |    |   | 526,299 |   |   |      |   |   |   |   | 299,517 |   |

|                 |   |   |   |   |   |   |   |     | December 31 | December 31 |   | January 1 |   |
|----------------------|--------|--------|--------|--------|--------|--------|--------|----------|-------------|-------------|--------|-----------|--------|
|                 | 0-30   |   | 31-60  |   | 61-90  | 91-120 |   | Over     | 2011        | 2010        |   | 2010      |   |
|                 | days   |   | days   |   | days   | days   |   | 120 days | Total       | Total       |   | Total     |   |
|                 | $      |   | $      |   | $      | $      |   | $   | $           |        |   |      |   |
|                 |   |   |   |   |   |   |   |     |        |        |   |      |   |
| Mesquite Mine        | 360    |   | -      |   | -      | -      |   | -        | 360         | 442         |   | 273       |   |
| Cerro San Pedro Mine | 3,756  |   | (48    | )      | 267    | (59    | )      | 787      | 4,703       | 3,798       |   | 5,348     |   |
| Peak Mine            | 2,464  |   | 1,883  |   | -      | 1,228  |   | 25       | 5,600       | 3,176       |   | 3,922     |   |
| New Afton            | 10,107 |   | -      |   | -      | 6,071  |   | -        | 16,178      | 3,581       |   | 632       |   |
| Blackwater           | 6,831  |   |   |   |   |   |   |     | 6,831       | -           |   | -         |   |
| Corporate            | 3,900  |   | -      |   | -      | -      |   | -        | 3,900       | 932         |   | 170       |   |
|                 | 27,418 |   | 1,835  |   | 267    | 7,240  |   | 812      | 37,572      | 11,929      |   | 10,345    |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (a) | Credit risk (continued) |
|--------|-----|-------------------------|

|   | (b) | Liquidity risk |
|--------|-----|----------------|

|                                    | Less    |   |   |   |    |   |   |   |   |   |   |    |   |   | December 31 |    | December 31 |   | January 1 |    |
|-----------------------------------------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|---------|--------|--------|-------------|---------|-------------|--------|-----------|---------|
|                                    | than    |   |   |   | 1-3     |   |   |   |   | 4-5    |   |    |   | After  |        |    | 2011        |   | 2010      |    |   | 2010 |   |
|                                    | 1 year  |   |   | years  |    |   |   | years  |   |   |   | 5 years |   |   | aTotal      |    | Total       |   | Total     |    |
|                                    | $  |   |   |   | $       |   |   |   |   |   | $      |    |   |   |        | $  |        |   | $         |    |   |   |   |   |   |
| Trade and other                         |    |   |   |   |    |   |   |   |   |   |   |    |   |   |        |    |        |   |      |    |   |   |   |   |   |
|      payables       | 100,437 |   |   |   | -       |   |   |   |   |   | -      |    |   |   |        |    | -           |   |      | 100,437 |   | 69,245 |   |   | 37,999 |   |
| Long-term debt                          | -       |   |   |   | -       |   |   |   |   |   | 54,082 |    |   |   |        |    | 183,877     |   |      | 237,959 |   | 243,307 |   |   | 258,467 |   |
| Interest payable on                     |    |   |   |   |    |   |   |   |   |   |   |    |   |   |        |    |        |   |      |    |   |   |   |   |   |   |
|      long-term debt | 21,092  |   |   |   | 40,806  |   |   |   |   |   | 36,775 |    |   |   |        |    | 9,194       |   |      | 107,867 |   | 131,857 |   |   | 147,352 |   |
| Gold contracts                          | 49,184  |   |   |   | 92,407  |   |   |   |   |   | -      |    |   |   |        |    | -           |   |      | 141,591 |   | 153,375 |   |   | 95,986 |   |
|                                    | 170,713 |   |   |   | 133,213 |   |   |   |   |   | 90,857 |    |   |   |        |    | 193,071     |   |      | 587,854 |   | 597,784 |   |   | 539,804 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (c) | Currency risk |
|--------|-----|---------------|

|   |   | (i) | Transaction exposure |
|--------|--------|-----|----------------------|

|   |   | (ii) | Exposure to currency risk |
|--------|--------|------|---------------------------|

|                                     |                                  |   |                                                                            |    December 31, 2011                                                  |
|------------------------------------------|---------------------------------------|--------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                                     |  Canadian                        |   |  Australian                                                                |  Mexican                                                                   |  Chilean |
|                                     |  dollar                          |   |  dollar                                                                    |  peso                                                                      |  peso |
|                                     |                                  |   |                                                                            |                                                                            |   |
| Cash and cash equivalents                |     75,342        |   |     20,794                                                  |       2,349                                       |                8 |
| Trade and other receivables              |     26,957        |   |        1,226                                 |       4,675                                       |              - |
| Prepayment option                        |      18,797  |   |              - |              - |              - |
| Trade and other payables                 |   (46,482)                  |   |   (22,306)                                                            |   (33,862)                                                            |              - |
| Reclamation and closure cost obligations |      (8,634) |   |    (17,080)                                                      |    (15,820)                                                      |              - |
| Warrants                                 |  (143,627)                       |   |              - |              - |              - |
| Conversion option on convertible debt    |   (23,957)                  |   |              - |              - |              - |
| Share award units                        |      (5,334) |   |              - |              - |              - |
| Long-term debt                           |  (221,483)                       |   |              - |              - |              - |
| Gross balance sheet exposure             |  (328,421)                       |   |    (17,366)                                                      |   (42,658)                                                            |                8 |

|                                     |                                                                                      |   |                                                                                                                                        |    December 31, 2010                                                                                                              |
|------------------------------------------|-------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |  Canadian                                                                            |   |  Australian                                                                                                                            |  Mexican                                                                                                                               |  Chilean |
|                                     |  dollar                                                                              |   |  dollar                                                                                                                                |  peso                                                                                                                                  |  peso |
|                                     |                                                                                      |   |                                                                                                                                        |                                                                                                                                        |   |
| Cash and cash equivalents                |          331,948                             |   |             41,254                                                              |               5,224                                                   |                        11 |
| Investments                              |               7,533 |   |                        - |                        - |                        - |
| Trade and other receivables              |               4,556 |   |                3,176                                             |               3,063                                                   |                      39 |
| Reclamation deposit                      |               8,043 |   |                        - |                        - |                        - |
| Prepayment option                        |               7,679 |   |                        - |                        - |                        - |
| Trade and other payables                 |          (24,458)                            |   |           (24,415)                                                                        |          (34,003)                                                                              |                        - |
| Reclamation and closure cost obligations |             (3,655)           |   |            (13,618)                                                                  |              (8,421)                                                       |                        - |
| Warrants                                 |        (125,936)                                       |   |                        - |                        - |                        - |
| Conversion option on convertible debt    |          (29,429)                            |   |                        - |                        - |                        - |
| Share award units                        |             (3,294)           |   |                        - |                        - |                        - |
| Long-term debt                           |        (221,832)                                       |   |                        - |                        - |                        - |
| Gross balance sheet exposure             |          (48,845)                            |   |               6,397                                                   |           (34,137)                                                                        |                      50 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (c) | Currency risk (continued) |
|--------|-----|--------------------------------|

|                                     |                                                                                                                   |                                                                                                                                        |                                                                                                                                        |  January 1, 2010                                                                                                                       |
|------------------------------------------|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |  Canadian                                                                                                         |  Australian                                                                                                                            |  Mexican                                                                                                                               |  Chilean                                                                                                                               |
|                                     |  dollar                                                                                                           |  dollar                                                                                                                                |  peso                                                                                                                                  |  peso                                                                                                                                  |
|                                     |                                                                                                                   |                                                                                                                                        |                                                                                                                                        |                                                                                                                                        |
| Cash and cash equivalents                |           165,147                                                    |            32,008                                                                    |               2,670                                                   |                       18      |
| Investments                              |            45,890                                               |                        - |                        - |                        - |
| Trade and other receivables              |                   549        |               3,922                                                   |               5,674                                                   |                        - |
| Reclamation deposit                      |                 6,211                  |                        - |                        - |                        - |
| Trade and other payables                 |             (6,529)                                        |            (11,566)                                                                  |             (8,806)                                                             |                    (94)                      |
| Reclamation and closure cost obligations |              (1,849)                                  |             (8,330)                                                             |              (4,314)                                                       |                        - |
| Warrants                                 |           (29,841)                                                   |                        - |                        - |                        - |
| Conversion option on convertible debt    |              (7,701)                                  |                        - |                        - |                        - |
| Share award units                        |                    (99) |                        - |                        - |                        - |
| Long-term debt                           |       (206,653)                                                                          |                        - |                        - |                        - |
| Gross balance sheet exposure             |          (34,875)                                                         |             16,034                                                              |             (4,776)                                                             |                    (76)                      |

|   |   | (iii) | Translation exposure |
|--------|--------|-------|----------------------|

|              | December 31 |   | December 31 |   |   | January 1 |   |
|-------------------|-------------|--------|-------------|--------|--------|-----------|--------|
|              | 2011        |   | 2010        |   |   | 2010      |   |
|              | $           |   | $      |   |   | $         |   |
|              |        |   |        |   |   |      |   |
| Canadian dollar   | (32,842     | )      | (4,885      | )      |   | (3,488    | )      |
| Australian dollar | (1,737      | )      | 640         |   |   | 1,603     |   |
| Mexican peso      | (4,266      | )      | (3,414      | )      |   | (478      | )      |
| Chilean peso      | 1           |   | 5           |   |   | (8        | )      |
|              | (38,844     | )      | (7,654      | )      |   | (2,371    | )      |

|   | (d) | Interest risk |
|--------|-----|---------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (e) | Price risk  |
|--------|-----|------------------|

| ·   | the strength of the United States economy and the economies of other industrialized and developing nations; |
|--------------------|-------------------------------------------------------------------------------------------------------------|

| ·   | global or regional political or economic crises; |
|--------------------|--------------------------------------------------|

| ·   | the relative strength of the United States dollar and other currencies; |
|--------------------|-------------------------------------------------------------------------|

| ·   | expectations with respect to the rate of inflation; |
|--------------------|-----------------------------------------------------|

| ·   | interest rates; |
|--------------------|-----------------|

| ·   | purchases and sales of gold by central banks and other holders; |
|--------------------|-----------------------------------------------------------------|

| ·   | demand for jewelry containing gold; and |
|--------------------|-----------------------------------------|

| ·   | investment activity, including speculation, in gold as a commodity. |
|--------------------|---------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 20.   | Financial risk management (continued) |
|-----------------|---------------------------------------|

|   | (e) | Price risk (continued) |
|--------|-----|-----------------------------|

|                            |     |   |   |          |   |     | Year ended December 31 |   |
|---------------------------------|----------|--------|--------|---------------|--------|----------|------------------------|--------|
|                            | 2011     |   |   | 2011          |   | 2010     | 2010                   |   |
|                            |     |   |   | Other         |   |     | Other                  |   |
|                            | Net      |   |   | Comprehensive |   | Net      | Comprehensive          |   |
|                            | Earnings |   |   | Income        |   | Earnings | Income                 |   |
|                            |  $  |   |   | $        |   | $   |                   | $      |   |
|                            |     |   |   |          |   |     |                   |   |   |
| Gold price                      |     | 57,228 |   |          |   | 28,400   |                   |   | 44,076 |   | 33,201 |   |
| Copper price                    |     | 5,794  |   |          |   | -        |                   |   | 4,889 |   | - |   |
| Silver price                    |     | 7,058  |   |          |   | -        |                   |   | 4,588 |   | - |   |
| Fuel price                      |     | 4,927  |   |          |   | -        |                   |   | 3,624 |   | - |   |
| Warrants                        |     | 14,363 |   |          |   | -        |                   |   | 12,594 |   | - |   |
| Conversion option on debentures |     | 4,414  |   |          |   | -        |                   |   | 4,464 |   | - |   |
| Share award unit                |     | 470    |   |          |   | -        |                   |   | 329 |   | - |   |

| 21.   | Fair value measurement |
|-----------------|------------------------|

|                                                 |         |   |   |          |    |   |        |   |           |   |   |    |   | December 31, 2011 |   |
|------------------------------------------------------|--------------|--------|--------|---------------|---------|--------|-------------|--------|----------------|--------|--------|---------|--------|-------------------|--------|
|                                                 | Loans and    |   |   | Designated    |    |   |        |   | Financial      |   |   |    |   |              |   |
|                                                 | receivables  |   |   | as Fair value |    |   | Available   |   | liabilities at |   |   |    |   |              |   |
|                                                 | at amortized |   |   | through       |    |   | for sale at |   | amortized      |   |   |    |   |              |   |
|                                                 | cost         |   |   | profit/loss   |    |   | fair value  |   | cost           |   |   |    |   | Total             |   |
|                                                 |         |   |   |          |    |   |        |   |           |   |   |    |   |              |   |
|                                                 | $       |   |   | $        |    |   |        |   | $         |   |   |    |   |              | $      |   |
| Financial Assets                                     |         |   |   |          |    |   |        |   |           |   |   |    |   |              |   |   |
|      Cash and cash equivalents   | 309,406      |   |   |          | -       |   |        |   | -              |   |   | -       |   |              |   |   |   | 309,406 |   |
|      Trade and other receivables | 37,572       |   |   |          | -       |   |        |   | -              |   |   | -       |   |              |   |   |   | 37,572 |   |
|      Investments                 | -            |   |   |          | -       |   |        |   | 1,823          |   |   | -       |   |              |   |   |   | 1,823 |   |
|      Prepayment option           | -            |   |   |          | 18,797  |   |        |   | -              |   |   | -       |   |              |   |   |   | 18,797 |   |
|      Reclamation deposits        | 10,004       |   |   |          | -       |   |        |   | -              |   |   | -       |   |              |   |   |   | 10,004 |   |
| Financial Liabilities                                |         |   |   |          |    |   |        |   |           |   |   |    |   |              |   |   |   |   |   |
|     Trade and other payables     | -            |   |   |          | -       |   |        |   | -              |   |   | 100,437 |   |              |   |   |   | 100,437 |   |
|     Long-term debt               | -            |   |   |          | -       |   |        |   | -              |   |   | 251,664 |   |              |   |   |   | 251,664 |   |
|    Gold contracts                          | -            |   |   |          | 141,591 |   |        |   | -              |   |   | -       |   |              |   |   |   | 141,591 |   |
|     Warrants                          | -            |   |   |          | 143,627 |   |        |   | -              |   |   | -       |   |              |   |   |   | 143,627 |   |
|     Conversion option                 | -            |   |   |          | 23,957  |   |        |   | -              |   |   | -       |   |              |   |   |   | 23,957 |   |
|     Share award units                 | -            |   |   |          | 5,334   |   |        |   | -              |   |   | -       |   |              |   |   |   | 5,334 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21.   | Fair value measurement (continued) |
|-----------------|------------------------------------|

|                                                 |         |   |   |   |   |          |    |   |   |   |           |   |    |   |   | December 31, 2010 |   |
|------------------------------------------------------|--------------|--------|--------|--------|--------|---------------|---------|--------|--------|--------|----------------|--------|---------|--------|--------|-------------------|--------|
|                                                 | Loans and    |   |   |   |   | Designated    |    |   |   |   | Financial      |   |    |   |   |              |   |
|                                                 | receivables  |   |   |   |   | as Fair value |    |   |   |   | Liabilities at |   |    |   |   |              |   |
|                                                 | at amortized |   |   |   |   | through       |    |   |   |   | amortized      |   |    |   |   |              |   |
|                                                 | cost         |   |   |   |   | profit/loss   |    |   |   |   | cost           |   |    |   |   | Total             |   |
|                                                 | $            |   |   |   |   | $        |    |   |   |   | $         |   |    |   |   |              | $      |   |
| Financial Assets                                     |         |   |   |   |   |          |    |   |   |   |           |   |    |   |   |              |   |   |
|      Cash and cash equivalents   | 490,754      |   |   |   |   |          | -       |   |   |   |           |   | -       |   |   |              |   |   | 490,754 |   |
|      Trade and other receivables | 11,929       |   |   |   |   |          | -       |   |   |   |           |   | -       |   |   |              |   |   | 11,929 |   |
|      Prepayment option           | -            |   |   |   |   |          | 7,679   |   |   |   |           |   | -       |   |   |              |   |   | 7,679 |   |
|      Investments                 | -            |   |   |   |   |          | 7,533   |   |   |   |           |   | -       |   |   |              |   |   | 7,533 |   |
|      Reclamation deposits        | 17,955       |   |   |   |   |          | -       |   |   |   |           |   | -       |   |   |              |   |   | 17,955 |   |
| Financial Liabilities                                |         |   |   |   |   |          |    |   |   |   |           |   |    |   |   |              |   |   |   |   |
|      Trade and other payables    | -            |   |   |   |   |          | -       |   |   |   |           |   | 69,245  |   |   |              |   |   | 69,245 |   |
|      Long-term debt              | -            |   |   |   |   |          | -       |   |   |   |           |   | 229,884 |   |   |              |   |   | 229,884 |   |
|      Gold contracts              | -            |   |   |   |   |          | 153,375 |   |   |   |           |   | -       |   |   |              |   |   | 153,375 |   |
|      Warrants                    | -            |   |   |   |   |          | 125,936 |   |   |   |           |   | -       |   |   |              |   |   | 125,936 |   |
|      Conversion option           | -            |   |   |   |   |          | 29,429  |   |   |   |           |   | -       |   |   |              |   |   | 29,429 |   |
|      Share award units           | -            |   |   |   |   |          | 3,295   |   |   |   |           |   | -       |   |   |              |   |   | 3,295 |   |

|                                                 |         |   |   |   |   |          |   |   |   |   |           |   |    |   |   | January 1, 2010 |   |
|------------------------------------------------------|--------------|--------|--------|--------|--------|---------------|--------|--------|--------|--------|----------------|--------|---------|--------|--------|-----------------|--------|
|                                                 | Loans and    |   |   |   |   | Designated    |   |   |   |   | Financial      |   |    |   |   |            |   |
|                                                 | receivables  |   |   |   |   | as Fair value |   |   |   |   | Liabilities at |   |    |   |   |            |   |
|                                                 | at amortized |   |   |   |   | through       |   |   |   |   | amortized      |   |    |   |   |            |   |
|                                                 | cost         |   |   |   |   | profit/loss   |   |   |   |   | cost           |   |    |   |   | Total           |   |
|                                                 | $            |   |   |   |   | $        |   |   |   |   | $         |   |    |   |   |            | $      |   |
| Financial Assets                                     |         |   |   |   |   |          |   |   |   |   |           |   |    |   |   |            |   |   |
|      Cash and cash equivalents   | 271,526      |   |   |   |   |          | -      |   |   |   |           |   | -       |   |   |            |   |   | 271,526 |   |
|      Trade and other receivables | 10,345       |   |   |   |   |          | -      |   |   |   |           |   | -       |   |   |            |   |   | 10,345 |   |
|      Investments                 | -            |   |   |   |   |          | 45,890 |   |   |   |           |   | -       |   |   |            |   |   | 45,890 |   |
|      Reclamation deposits        | 16,047       |   |   |   |   |          | -      |   |   |   |           |   | -       |   |   |            |   |   | 16,047 |   |
| Financial Liabilities                                |         |   |   |   |   |          |   |   |   |   |           |   |    |   |   |            |   |   |   |   |
|      Trade and other payables    | -            |   |   |   |   |          | -      |   |   |   |           |   | 37,999  |   |   |            |   |   | 37,999 |   |
|      Long-term debt              | -            |   |   |   |   |          | -      |   |   |   |           |   | 225,456 |   |   |            |   |   | 225,456 |   |
|      Gold contracts              | -            |   |   |   |   |          | 95,986 |   |   |   |           |   | -       |   |   |            |   |   | 95,986 |   |
|      Warrants                    | -            |   |   |   |   |          | 29,841 |   |   |   |           |   | -       |   |   |            |   |   | 29,841 |   |
|      Conversion option           | -            |   |   |   |   |          | 7,701  |   |   |   |           |   | -       |   |   |            |   |   | 7,701 |   |
|      Share award units           | -            |   |   |   |   |          | 99     |   |   |   |           |   | -       |   |   |            |   |   | 99 |   |
|                                                 |         |   |   |   |   |          |   |   |   |   |           |   |    |   |   |            |   |   |   |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21.   | Fair value measurement (continued) |
|-----------------|------------------------------------|

|                                                 | December 31, 2011 |   | December 31, 2010 |    | January 1, 2010 |   |
|------------------------------------------------------|-------------------|--------|-------------------|---------|-----------------|--------|
|                                                 | Carrying          |   | Fair              |    | Carrying        |   | Fair |   | Carrying |   | Fair |   |
|                                                 | Value             |   | Value             |    | Value           |   | Value |   | Value |   | Value |   |
|                                                 | $            |   | $            |    | $          |   | $  |   | $  |   |   | $ |   |
| Financial Assets                                     |              |   |              |    |            |   |   |   |   |   |   |   |   |
|      Cash and cash equivalents   | 309,406           |   |              | 309,406 |            |   | 490,754 |   |   | 490,7 |   |   | 262,325 |   |   | 262,325 |   |
|      Trade and other receivables | 37,572            |   |              | 37,572  |            |   | 11,929 |   |   | 11,929 |   |   | 10,345 |   |   | 10,345 |   |
|      Prepayment option           | 18,797            |   |              | 18,797  |            |   | 7,679 |   |   | 7,679 |   |   | - |   |   | - |   |
|      Investments                 | 1,823             |   |              | 1,823   |            |   | 7,533 |   |   | 7,533 |   |   | 45,890 |   |   | 45,890 |   |
|      Reclamation deposits        | 10,004            |   |              | 10,004  |            |   | 17,955 |   |   | 17,955 |   |   | 16,047 |   |   | 16,047 |   |
| Financial Liabilities                                |              |   |              |    |            |   |   |   |   |   |   |   |   |   |   |   |   |
|      Trade and other payables    | 100,437           |   |              | 100,437 |            |   | 69,245 |   |   | 69,245 |   |   | 35,816 |   |   | 69,245 |   |
|      Long-term debt              | 251,664           |   |              | 292,260 |            |   | 229,884 |   |   | 229,884 |   |   | 225,456 |   |   | 265,696 |   |
|      Gold contracts              | 141,591           |   |              | 141,591 |            |   | 153,375 |   |   | 153,375 |   |   | 95,986 |   |   | 95,986 |   |
|      Warrants                    | 143,627           |   |              | 143,627 |            |   | 125,936 |   |   | 125,936 |   |   | 29,841 |   |   | 29,841 |   |
|      Conversion option           | 23,957            |   |              | 23,957  |            |   | 29,429 |   |   | 29,429 |   |   | 7,701 |   |   | 7,701 |   |
|      Share award units           | 5,334             |   |              | 5,334   |            |   | 3,295 |   |   | 3,295 |   |   | 99 |   |   | 99 |   |

|                            |     |   |     |   | December 31, 2011 |   |
|---------------------------------|----------|--------|----------|--------|-------------------|--------|
| Asset (Liability)               | Level 1  |   | Level 2  |   | Level 3           |   |
|                            | $        |   | $        |   | $                 |   |
|                            |     |   |     |   |              |   |
| Investments                     | 1,823    |   | -        |   | -                 |   |
| Warrants                        | (143,627 | )      | -        |   | -                 |   |
| Share award units               | (5,334   | )      | -        |   | -                 |   |
| Gold contracts                  | -        |   | (141,591 | )      | -                 |   |
| Prepayment option on Notes      | -        |   | 18,797   |   | -                 |   |
| Conversion option on Debentures | -        |   | -        |   | (23,957           | )      |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21.   | Fair value measurement (continued) |
|-----------------|------------------------------------|

|                            |   |    |     |  December 31, 2010 |   |
|---------------------------------|--------|---------|----------|-------------------------|--------|
| Asset (Liability)               |   | Level 1 |     | Level 2                 |   | Level 3 |   |
|                            |   |    | $        |                    |   | $ |   |   | $ |   |
|                            |   |    |     |                    |   |   |   |   |   |   |
| Investments                     |   |    | -        |                    |   | 7,533 |   |   | - |   |
| Warrants                        |   |    | (125,936 | )                       |   | - |   |   | - |   |
| Share award units               |   |    | (3,295   | )                       |   | - |   |   | - |   |
| Gold contracts                  |   |    | -        |                    |   | (153,375 |   |   | - |   |
| Prepayment option on Notes      |   |    | -        |                    |   | 7,679 |   |   | - |   |
| Conversion option on Debentures |   |    | -        |                    |   | - |   |   | (29,429 | ) |

|                            |   |    |    |    |   | January 1, 2010 |   |
|---------------------------------|--------|---------|---------|---------|--------|-----------------|--------|
| Asset (Liability)               |   | Level 1 |    | Level 2 |   | Level 3         |   |
|                            |   |    | $       |    |   | $               |   |   | $ |   |
|                            |   |    |    |    |   |            |   |   |   |   |
| Investments                     |   |    | -       |    |   | 45,890          |   |   | - |   |
| Warrants                        |   |    | (29,841 | )       |   | -               |   |   | - |   |
| Share award units               |   |    | (99     | )       |   | -               |   |   | - |   |
| Gold contracts                  |   |    | -       |    |   | (95,986         |   |   | - |   |
| Conversion option on Debentures |   |    | -       |    |   | -               |   |   | (7,701 | ) |

|   | (a) | Prepayment option on Notes |
|--------|-----|----------------------------|

|   | (b) | Gold contracts |
|--------|-----|----------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21.   | Fair value measurement (continued) |
|-----------------|------------------------------------|

|                       |   |   |   | Conversion                                                            |
|----------------------------|--------|--------|--------|-----------------------------------------------------------------------|
|                       |   |   |   | option                                                                |
|                       |   |   |   |                                                                  |
| Balance, January 1, 2010   |   |   |   |        7,701                       |
| Non-hedged derivative loss |   |   |   |       20,785                            |
| Foreign exchange loss      |   |   |   |            943 |
| Balance, December 31, 2010 |   |   |   |     29,429                                        |
| Non-hedged derivative gain |   |   |   |       (5,149)                           |
| Foreign exchange gain      |   |   |   |          (323)           |
| Balance, December 31, 2011 |   |   |   |     23,957                                        |

|              |                                                                                                  |       |                                                                                        | 2011               |                                                                                                  |       |                                                                                        | 2010               |
|-------------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|--------------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|--------------------|
|              |                                                                                                  | Favourable |                                                                                        |  Unfavourable |                                                                                                  | Favourable |                                                                                        |  Unfavourable |
|              |                                                                                                  |       |                                                                                        |               |                                                                                                  |       |                                                                                        |               |
| Conversion option |                 3,185 |       |               (3,075) |               |                 3,357 |       |               (3,161) |

| 22. | Operating leases |
|-----|------------------|

|                  |   |   |                                                                                                                             | 2011                                                                                                                                        | 2010                                                                                       |
|-----------------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|
|                  |   |   |                                                                                                                             |                                                                                                                                        |                                                                                       |
| Less than 1 year      |   |   |             15,020                                                   |               15,415                                                  |
| Between 1 and 5 years |   |   |             43,922                                                   |               58,570                                                  |
| More than 5 years     |   |   |                      26 |                        - |
|                  |   |   |                                                                                                                             |             58,968                                                              |               73,985 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 23. | Compensation of directors and other key management personnel |
|-----|--------------------------------------------------------------|

|                            |   | 2011                                                                                                           | 2010                                                                                                                      |
|---------------------------------|--------|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                           |                                                                                                                      |
| Short –term benefits      |   |            4,901                                        |              4,899                                       |
| Post –Employment Benefits |   |                   76 |                   32            |
| Other long term benefits        |   |            8,034                                        |              3,667                                       |
| Share based payments            |   |            1,981                                        |                     - |
| Termination benefits            |   |            1,344                                        |                     - |
|                            |   |          16,336                                                   |              8,598                                       |

| 24. | Commitments and contingencies |
|-----|-------------------------------|

|   | (a) | Capital commitments |
|--------|-----|---------------------|

|                          |                             |   |
|-------------------------------|----------------------------------|--------|
| (US$ in millions)             | 2011$                            | 2010$  |
|                          |                             |   |
|                          |                             |   |
| Property, plant and equipment | 135,486                          | 69,244 |
|                          |                             |   |
| Other assets                  | -       | 13,573 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 24. | Commitments and contingencies (continued) |
|-----|-------------------------------------------|

|   | (b) | On January 13, 2010, the Company received a Statement of Claim filed by Barrick in the Ontario Superior Course of Justice, against New Gold, Goldcorp and affiliated subsidiaries. A Fresh Amended Statement of Claim was received in August 2010 which included Xstrata and its affiliated subsidiaries as defendants. The claim relates to Datawave’s exercise of its right of first refusal with respect to the El Morro Project. New Gold believes the claim is without merit and is defending this action using all available legal avenues. The closing arguments related to the litigation are now complete and it’s anticipated that a decision will be rendered by the end of the second quarter 2012. No amounts have been accrued for any potential loss under this claim. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | The Company owns 100% of the Cerro San Pedro Mine through the Mexican Company, Minera San Xavier S.A. de C.V. (“MSX”). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------|

| 25. | Provisions |
|-----|------------|

|                             |   | Share  |   |   |     |   |   |   |   |
|----------------------------------|--------|--------|--------|--------|----------|--------|--------|--------|--------|
|                             |   | award  |   |   | Employee |   |   |   |   |
|                             |   | units  |   |   | Benefits |   |   | Total  |   |
|                             |   |   |   |   |     |   |   |   | $      |   |
|                             |   |   |   |   |     |   |   |   |   |   |
| Balance, January 1, 2010         |   |   | 99     |   |     |   | 4,442  |   |   |   | 4,541 |   |
| Additional provisions recognized |   |   | 6,097  |   |     |   | 3,906  |   |   |   | 10,003 |   |
| Used during the year             |   |   | (3,126 | )      |     |   | (3,080 | )      |   |   | (6,206 | ) |
| Foreign exchange                 |   |   | 225    |   |     |   | 664    |   |   |   | 889 |   |
| Balance, December 31, 2010       |   |   | 3,295  |   |     |   | 5,932  |   |   |   | 9,227 |   |
|                             |   |   |   |   |     |   |   |   |   |   |   |   |
| Additional provisions recognized |   |   | 8,566  |   |     |   | 4,726  |   |   |   | 13,292 |   |
| Used during the year             |   |   | (6,442 | )      |     |   | (3,365 | )      |   |   | (9,807 | ) |
| Foreign exchange                 |   |   | (85    | )      |     |   | 19     |   |   |   | (66 | ) |
|                             |   |   | 5,334  |   |     |   | 7,312  |   |   |   | 12,646 |   |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS |
|-----|-----------------------------|

|   | (a) | Elected exemptions from full retrospective application |
|--------|-----|--------------------------------------------------------|

|   |   | (i) |        Business combinations |
|--------|--------|-----|------------------------------------------------------------|

|   |   | (ii) |        Deemed cost |
|--------|--------|------|--------------------------------------------------|

|   |   | (iii) |        Share-based payment transactions |
|--------|--------|-------|-----------------------------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|   |   | (iv) |        Cumulative translation differences |
|--------|--------|------|-------------------------------------------------------------------------|

|   |   | (v) |        Decommissioning liabilities included in the cost of property, plant and equipment |
|--------|--------|-----|------------------------------------------------------------------------------------------------------------------------|

|   |   | (vi) |        Borrowing costs |
|--------|--------|------|------------------------------------------------------|

|   |   | (vii) |        Assets and liabilities of subsidiaries, associates and joint ventures |
|--------|--------|-------|------------------------------------------------------------------------------------------------------------|

|   | (b) | Mandatory exceptions to retrospective application |
|--------|-----|---------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|   |   | (i) |        Hedge accounting |
|--------|--------|-----|-------------------------------------------------------|

|   |   | (ii) |        Estimates |
|--------|--------|------|------------------------------------------------|

|   | (c) | Reconciliations from previous Canadian GAAP to IFRS |
|--------|-----|-----------------------------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|                            | Note |
|---------------------------------|------|
| Deferred taxes                  | a    |
| Fair value deemed cost          | b    |
| Convertible debentures          | c    |
| Foreign Currency translation    | d    |
| Decommisioning liabilities      | e    |
| Property, plant & equipment | f    |
| Reversal of impairment loss     | g    |
| Share purchase warrants         | h    |
| Share-based payments            | i    |
| Other                           | j    |
| Cash flow reclassification      | k    |

|             |  Assets                                                                                                        |                                                                                                                |  Liabilities                                                                                                                                       |   |  Equity                                                                                                  |                                                                                                                |  Total                                                                                                                     |
|------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
|             |  Current                                                                                                       |  Non-current                                                                                                   |  Total                                                                                                                                             |   |  Current                                                                                                 |  Non-current                                                                                                   |  Total                                                                                                                     |   |  Components of equity |  Deficit |  Total |   |  Liabilities and equity |
|             |                                                                                                                |                                                                                                                |                                                                                                                                                    |   |                                                                                                          |                                                                                                                |                                                                                                                            |   |   |   |   |   |   |
| Previous CGAAP   |     394,955                                                                                     | 2,093,304                                                                                                           |     2,488,259                                                                                                                       |   |      93,418                                                                          |     663,796                                                                                     |     757,214                                                                                                 |   |       2,036,904 |     (305,859) |    1,731,045 |   |     2,488,259 |
|             |                                                                                                                |                                                                                                                |                                                                                                                                                    |   |                                                                                                          |                                                                                                                |                                                                                                                            |   |   |   |   |   |   |
| IFRS adjustments |                                                                                                                |                                                                                                                |                                                                                                                                                    |   |                                                                                                          |                                                                                                                |                                                                                                                            |   |   |   |   |   |
| a                |       (8,848)                                                                         |           8,848                                                   |                      -                         |   |                -                   |       13,653                                                                          |         13,653                                                                          |   |                            - |            (13,653) |       (13,653) |   |                        - |
| b                |                    - |  (327,606)                                                                                                     |       (327,606)                                                                                                           |   |                  -       |     (81,245)                                                                                    |    (81,245)                                                                                                      |   |                            - |         (246,361) |     (246,361) |   |     (327,606) |
| c                |                    - |                    - |                          - |   |                   - |         10,301                                                              |         10,301                                                                          |   |             (21,604) |               11,303 |       (10,301) |   |                          - |
| d                |                    - |           8,743                                                   |               8,743                                                               |   |                   - |           2,186                                                   |            2,186                                                         |   |                   1,566 |                  4,991 |             6,557 |   |               8,743 |
| e                |                    - |           4,311                                                   |               4,311                                                               |   |                   - |           4,875                                                   |            4,875                                                         |   |                            - |                   (564) |             (564) |   |               4,311 |
| f                |                    - |       (2,513)                                                                         |            (2,513)                                                                               |   |                   - |           (754)                                                   |           (754)                                                               |   |                            - |               (1,759) |          (1,759) |   |            (2,513) |
| g                |                    - |        51,909                                                                    |             51,909                                                                          |   |                   - |                    - |                     -       |   |                            - |               51,909 |           51,909 |   |             51,909 |
| h                |                    - |                    - |                          - |   |                   - |        41,754                                                                    |         41,754                                                                          |   |         (139,632) |               97,878 |       (41,754) |   |                         - |
| i                |                    - |                    - |                          - |   |                   - |                    - |                      - |   |                            - |                           - |                       - |   |                         - |
| j                |                    - |     (18,810)                                                                                    |          (18,810)                                                                                          |   |                   - |     (18,810)                                                                                    |    (18,810)                                                                                                      |   |                            - |                           - |                       - |   |        (18,810) |
| IFRS             |  386,107                                                                                                       | 1,818,186                                                                                                           |     2,204,293                                                                                                                       |   |      93,418                                                                          |     635,756                                                                                     |     729,174                                                                                                 |   |       1,877,234 |     (402,115) |    1,475,119 |   |     2,204,293 |

|             |  Assets                                                                          |                                                                                                    |  Liabilities                                                                                       |   |  Equity                                                                          |                                                                                  |  Total                                                                           |
|------------------|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|             |  Current                                                                         |  Non-current                                                                                       |  Total                                                                                             |   |  Current                                                                         |  Non-current                                                                     |  Total                                                                           |   |  Components of equity |  Deficit |  Total |   |  Liabilities and equity |
|             |                                                                                  |                                                                                                    |                                                                                                    |   |                                                                                  |                                                                                  |                                                                                  |   |   |   |   |   |   |
| Previous CGAAP   |  625,460                                                                         | 2,113,454                                                                                               |   2,738,914                                                                                   |   |   140,709                                                                   |   705,014                                                                   |   845,723                                                                   |   |     2,022,096 |   (128,905) |   1,893,191 |   |   2,738,914 |
|             |                                                                                  |                                                                                                    |                                                                                                    |   |                                                                                  |                                                                                  |                                                                                  |   |   |   |   |   |   |
| IFRS adjustments |                                                                                  |                                                                                                    |                                                                                                    |   |                                                                                  |                                                                                  |                                                                                  |   |   |   |   |   |
| a                |    (9,127)                                                             |           9,127                                       |                  - |   |               - |        4,491                                       |        4,491                                       |   |                      - |        (4,491) |         (4,491) |   |                  - |
| b                |               - |  (327,606)                                                                                         |    (327,606)                                                                             |   |               - |    (85,522)                                                            |   (85,522)                                                                  |   |                      - |    (242,084) |     (242,084) |   |    (327,606) |
| c                |               - |                  - |                  - |   |               - |      29,429                                                  |      29,429                                                  |   |          (21,604) |        (7,825) |       (29,429) |   |                  - |
| d                |               - |       33,052                                                              |         33,052                                                  |   |               - |        2,186                                       |        2,186                                       |   |             15,900 |        14,966 |         30,866 |   |         33,052 |
| e                |           347                       |           5,637                                       |           5,984                                       |   |                                                                                  |        8,452                                       |        8,452                                       |   |                      - |        (2,468) |         (2,468) |   |           5,984 |
| f                |    (3,617)                                                             |           1,272                                       |         (2,345)                                                 |   |               - |         (448)                                 |         (448)                                 |   |                      - |        (1,897) |         (1,897) |   |         (2,345) |
| g                |               - |                  - |                  - |   |               - |               - |               - |   |                      - |                 - |                  - |   |                  - |
| h                |               - |                  - |                  - |   |               - |    125,962                                                             |   125,962                                                                   |   |        (139,632) |        13,670 |     (125,962) |   |                  - |
| i                |               - |                  - |                  - |   |               - |               - |               - |   |             (1,611) |           1,611 |                  - |   |                  - |
| j                |               - |     (18,810)                                                                        |       (18,810)                                                            |   |               - |    (21,579)                                                            |   (21,579)                                                                  |   |                      - |           2,769 |            2,769 |   |       (18,810) |
| IFRS             |  613,063                                                                         | 1,816,126                                                                                               |   2,429,189                                                                                   |   |   140,709                                                                   |   767,985                                                                   |   908,694                                                                   |   |      1,875,149 |   (354,654) |   1,520,495 |   |   2,429,189 |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|                                                       | Notes  | Previous CGAAP                                                                        | Effect of IFRS transition                                                                                                             | IFRS                                                        |
|------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
| Revenues                                                   |   |   530,450                                                                   |                       - |    530,450                                   |
| Operating expenses                                         | e      |   250,338                                                                   |                    962                 |    247,773                                   |
|                                                       | f      |                                                                                  |              (3,527)                                                 |                                                        |
| Depreciation and depletion                                 | e      |      77,016                                                  |              (1,117)                                                 |       78,374                  |
|                                                       | f      |                                                                                  |                 2,475                                 |                                                        |
| Earnings from mine operations                              |   |   203,096                                                                   |              (1,207)                                                 |    204,303                                   |
|                                                       |   |                                                                                  |                                                                                                                                  |                                                        |
| Corporation administration expenses                        |   |      24,134                                                  |                       - |       24,134                  |
| Share-based payments                                       | i      |        8,488                                       |              (1,611)                                                 |         6,877       |
| Exploration                                                |   |      12,834                                                  |                       - |       12,834                  |
| Impairment charge of exploration assets                    |   |      15,728                                                  |                       - |       15,728                  |
|                                                       |   |                                                                                  |                                                                                                                                  |                                                        |
| Earnings from operations                                   |   |   141,912                                                                   |              (2,818)                                                 |    144,730                                   |
| Finance income                                             |   |        3,258                                       |                                                                                                                                  |         3,258       |
| Finance costs                                              | e      |         (947)                                 |              (1,424)                                                 |       (2,371)                 |
| Realized and unrealized gain on investments                |   |        9,128                                       |                       - |         9,128       |
| Unrealized gain on prepayment option                       |   |        7,679                                       |                       - |         7,679       |
| Gain on sale of investment                                 |   |      39,710                                                  |                       - |       39,710                  |
| Other expense                                              | f      |      (2,883)                                                 |                 (884)                                 |       (3,767)                 |
| Loss on foreign exchange                                   | c      |   (21,816)                                                                  |                 (941)                                 |       (9,675)                 |
|                                                       | d      |                                                                                  |              13,857                                                  |                                                        |
|                                                       | h      |                                                                                  |              (3,544)                                                 |                                                        |
|                                                       | j      |                                                                                  |                 2,769                                 |                                                        |
| Unrealized loss on non-hedged derivatives                  | c      |               - |            (20,785)                                                            |  (113,336)                                             |
|                                                       | h      |                                                                                  |            (92,551)                                                            |                                                        |
| Earnings (loss) before taxes                               |   |   176,041                                                                   |          (100,685)                                                                       |       75,356                  |
| Income tax expense                                         | a      |   (41,110)                                                                  |                 8,920                                 |    (18,009)                                  |
|                                                       | c      |                                                                                  |                 2,600                                 |                                                        |
|                                                       | f      |                                                                                  |                 (306)                                 |                                                        |
|                                                       | h      |                                                                                  |              11,887                                                  |                                                        |
| Net earnings (loss) from continuing operations             |   |   134,931                                                                   |            (77,584)                                                            |       57,347                  |
| Earnings (loss) from discontinued operations, net of taxes | g      |      42,023                                                  |            (51,909)                                                            |       (9,886)                 |
| Net earnings                                               |   |   176,954                                                                   |          (129,493)                                                                       |       47,461                  |
|                                                       |   |                                                                                  |                                                                                                                                  |                                                        |
|                                                       | Notes  | Previous CGAAP                                                                        | Effect of IFRS transition                                                                                                             | IFRS                                                        |
|                                                       |   |                                                                                  |                                                                                                                                  |                                                        |
| Net earnings                                               |   |   176,954                                                                   |          (129,493)                                                                       |       47,461                  |
|                                                       |   |                                                                                  |                                                                                                                                  |                                                        |
| Other comprehensive income (loss)                          |   |                                                                                  |                                                                                                                                  |                                                        |
| Unrealized losses on mark-to-market of gold contracts      |   |   (85,849)                                                                  |                       - |    (85,849)                                  |
| Realized losses on mark-to-market of gold contracts        |   |      20,035                                                  |                       - |       20,035                  |
| Unrealized gains on mark-to-market of fuel contracts       |   |         (366)                                 |                       - |          (366) |
| Currency translation adjustment                            | d      |               - |              14,334                                                  |       14,334                  |
| Deferred income tax                                        |   |      27,572                                                  |                       - |       27,572                  |
| Total other comprehensive loss                             |   |   (38,608)                                                                  |              14,334                                                  |    (24,274)                                  |
| Total comprehensive income                                 |   |   138,346                                                                   |          (115,159)                                                                       |       23,187                  |

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|                   | Operating                                                                                                     |                                                                                                                      |   | Investing                                                                                                                 |                                                                                                                      |   | Financing                                                                                                                 |   | Cash and cash equivalents                                                                                           |
|------------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|
|                   | Continuing                                                                                                    | Discontinued                                                                                                              |   | Continuing                                                                                                                | Discontinued                                                                                                              |   | Continuing                                                                                                                |   | Impact of exchange rate changes                                                                                     | Increase (decrease) | Beginning of year | End of year |
|                   |                                                                                                          |                                                                                                                      |   |                                                                                                                      |                                                                                                                      |   |                                                                                                                      |   |                                                                                                                |   |   |   |
|  Previous CGAAP   |  182,260                                                                                                 |      (1,696)                                                                                     |   |  (451,363)                                                                                                           |      34,410                                                                                      |   |    447,189                                                                                                 |   |     16,803                                                                                      |   227,603 |         263,151 |         490,754 |
|                   |                                                                                                          |                                                                                                                      |   |                                                                                                                      |                                                                                                                      |   |                                                                                                                      |   |                                                                                                                |   |   |   |
|  IFRS adjustments |                                                                                                          |                                                                                                                      |   |                                                                                                                      |                                                                                                                      |   |                                                                                                                      |   |                                                                                                                |   |   |   |
| Per income statement   |      (129,493)                                                                       |                     - |   |                     - |                     - |   |                     - |   |                    - |       (129,493) |                            - |                             - |
| a                      |          (8,920)                                                 |                     - |   |                     - |                     - |   |                     - |   |                    - |           (8,920) |                            - |                             - |
| b                      |                   - |                     - |   |                     - |                     - |   |                     - |   |                    - |                     - |                            - |                             - |
| c                      |           19,128                                            |                     - |   |                     - |                     - |   |                     - |   |                    - |             19,128 |                            - |                             - |
| d                      |         (17,262)                                                      |                     - |   |                     - |                     - |   |                     - |   |                    - |          (17,262) |                            - |                             - |
| e                      |               634                       |                     - |   |                     - |                     - |   |                     - |   |                    - |                 634 |                            - |                             - |
| f                      |            3,972                                       |                     - |   |             15,076                                            |                     - |   |                     - |   |                    - |            19,048 |                            - |                             - |
| g                      |           51,909                                            |                     - |   |                     - |                     - |   |                     - |   |                    - |            51,909 |                            - |                             - |
| h                      |         84,208                                                        |                     - |   |                     - |                     - |   |                     - |   |                    - |           84,208 |                            - |                             - |
| i                      |             (1,611)                               |                     - |   |                     - |                     - |   |                     - |   |                    - |              (1,611) |                            - |                             - |
| j                      |                   - |                     - |   |                     - |                     - |   |                     - |   |                    - |                     - |                            - |                             - |
| k                      |              1,677                           |                     - |   |            (7,624)                                                 |                     - |   |         (20,895)                                                                  |   |                    - |         (26,842) |                     9,201 |                             - |
|  IFRS             |   186,502                                                                                           |      (1,696)                                                                                     |   |   (443,911)                                                                                                     |      34,410                                                                                      |   |   426,294                                                                                                       |   |     16,803                                                                                      |   218,402 |        272,352 |         490,754 |

|   | (a) | Deferred tax |
|--------|-----|--------------|

|   | (b) | Fair value as deemed cost |
|--------|-----|---------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|   | (c) | Convertible debentures |
|--------|-----|------------------------|

|   | (d) | Foreign currency translation |
|--------|-----|------------------------------|

|   | (e) | Decommissioning liabilities (Reclamation and closure cost obligations) |
|--------|-----|------------------------------------------------------------------------|

|   | (f) | Property, plant and equipment |
|--------|-----|-------------------------------|

----

| New Gold Inc.Notes to the consolidated financial statementsDecember 31, 2011(Tabular amounts expressed in thousands of United States dollars, except per share amounts) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 26. | First time adoption of IFRS (continued) |
|-----|-----------------------------------------|

|   | (g) | Reversal of impairment loss |
|--------|-----|-----------------------------|

|   | (h) | Share purchase warrants |
|--------|-----|-------------------------|

|   | (i) | Share-based payments |
|--------|-----|----------------------|

|   | (j) | Other |
|--------|-----|-------|

|   | (k) | Consolidated statement of cash flows |
|--------|-----|--------------------------------------|

----

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