---



CONSOLIDATEDFINANCIALSTATEMENTS

****

YEARS ENDED
DECEMBER 31, 2010 AND 2009



(ExpressedinthousandsofCanadianDollars)

---

Report of Independent Registered Chartered
  Accountants

To the Board of Directors and Shareholders of Northern Dynasty
  Minerals Ltd.

We have audited the accompanying consolidated financial
  statements of Northern Dynasty Minerals Ltd. and subsidiaries (the Company),
  which comprise the consolidated statements of financial position as at December
  31, 2010 and 2009, and the consolidated statements of comprehensive loss,
  changes in equity and cash flows for the years then ended, and a summary of
  significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial
  Statements

Management is responsible for the preparation and fair
  presentation of these consolidated financial statements in accordance with
  International Financial Reporting Standards as issued by the International
  Accounting Standards Board, and for such internal control as management
  determines is necessary to enable the preparation of consolidated financial
  statements that are free from material misstatement, whether due to fraud or
  error.

Auditor's Responsibility

Our responsibility is to express an opinion on these
  consolidated financial statements based on our audits. We conducted our audits
  in accordance with Canadian generally accepted auditing standards and the
  standards of the Public Company Accounting Oversight Board (United States).
  Those standards require that we comply with ethical requirements and plan and
  perform the audit to obtain reasonable assurance about whether the consolidated
  financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit
  evidence about the amounts and disclosures in the consolidated financial
  statements. The procedures selected depend on the auditor's judgment, including
  the assessment of the risks of material misstatement of the consolidated
  financial statements, whether due to fraud or error. In making those risk
  assessments, the auditor considers internal control relevant to the entity's
  preparation and fair presentation of the consolidated financial statements in
  order to design audit procedures that are appropriate in the circumstances. An
  audit also includes evaluating the appropriateness of accounting policies used
  and the reasonableness of accounting estimates made by management, as well as
  evaluating the overall presentation of the consolidated financial
  statements.

We believe that the audit evidence we have obtained in our
  audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present
  fairly, in all material respects, the financial position of Northern Dynasty
  Minerals Ltd. and subsidiaries as at December 31, 2010 and 2009, and their
  financial performance and cash flows for the years then ended in accordance with
  International Financial Reporting Standards as issued by the International
  Accounting Standards Board.

Other Matter

We have also audited, in accordance with the standards of the
  Public Company Accounting Oversight Board (United States), the Company's
  internal control over financial reporting as of December 31, 2010, based on the
  criteria established in Internal ControlIntegrated Frameworkissued by
  the Committee of Sponsoring Organizations of the Treadway Commission and our
  report dated March 29, 2011 expressed an unqualified opinion on the Companys
  internal control over financial reporting.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants

Vancouver, Canada
  March 29, 2011

---

Report of Independent Registered Chartered
  Accountants

To the Board of Directors and Shareholders of Northern Dynasty
  Minerals Ltd.

We have audited the internal control over financial reporting
  of Northern Dynasty Minerals Ltd. and subsidiaries (the Company) as of
  December 31, 2010, based on the criteria established in Internal
    ControlIntegrated Frameworkissued by the Committee of Sponsoring
  Organizations of the Treadway Commission. The Company's management is
  responsible for maintaining effective internal control over financial reporting
  and for its assessment of the effectiveness of internal control over financial
  reporting, included in the accompanying Managements Report on Internal Control
  over Financial Reporting. Our responsibility is to express an opinion on the
  Company's internal control over financial reporting based on our audit.

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

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

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

In our opinion, the Company maintained, in all material
  respects, effective internal control over financial reporting as of December 31,
  2010, based on the criteria established in Internal Control  Integrated
    Frameworkissued by the Committee of Sponsoring Organizations of the
  Treadway Commission.

We have also audited, in accordance with Canadian generally
  accepted auditing standards and in accordance with the standards of the Public
  Company Accounting Oversight Board (United States), the consolidated financial
  statements as of and for the year ended December 31, 2010 of the Company and our
  report dated March 29, 2011 expressed an unqualified opinion on those financial
  statements.

(Signed) Deloitte & Touche LLP

Independent Registered Chartered Accountants

Vancouver, Canada
  March 29, 2011

---

|NorthernDynastyMineralsLtd.                 
|--------------------------------------------
|ConsolidatedStatementsofFinancialPosition   
|(Expressed in thousands of Canadian Dollars)

|                                             |  |      |  |   | As at       |  
|-------------------------------------------- |  | ---- |  | - | ----------- | -
|                                             |  |      |  |   | December 31 |  
|                                             |  | Note |  |   | 2010        |  
|                                             |  |      |  |   |             |  
|ASSETS                                       |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|Non-currentassets                            |  |      |  |   |             |  
|Investment in the Pebble Limited Partnership |  | 3    |  | $ | 99,306      |  
|Mineral property interest                    |  | 4    |  |   | 1,055       |  
|                                             |  |      |  |   | 100,361     |  
|                                             |  |      |  |   |             |  
|Currentassets                                |  |      |  |   |             |  
|Balances receivable from a related party     |  | 8    |  |   | 75          |  
|Amounts receivable and other assets          |  | 5    |  |   | 3,408       |  
|Marketable securities                        |  |      |  |   | 1           |  
|Cash and cash equivalents                    |  | 6    |  |   | 40,402      |  
|                                             |  |      |  |   | 43,886      |  
|                                             |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|TotalAssets                                  |  |      |  | $ | 144,247     |  
|                                             |  |      |  |   |             |  
|EQUITY                                       |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|Share capital                                |  | 7    |  | $ | 380,570     |  
|Reserves                                     |  |      |  |   | 35,114      |  
|Deficit                                      |  |      |  |   | (275,624    | )
|                                             |  |      |  |   | 140,060     |  
|LIABILITIES                                  |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|Currentliabilities                           |  |      |  |   |             |  
|Balances payable to a related party          |  | 8    |  |   | 102         |  
|Amounts payable and other liabilities        |  | 9    |  |   | 452         |  
|                                             |  |      |  |   | 554         |  
|                                             |  |      |  |   |             |  
|Non-currentliabilities                       |  |      |  |   |             |  
|Deferred income taxes                        |  | 13   |  |   | 3,633       |  
|                                             |  |      |  |   | 3,633       |  
|                                             |  |      |  |   |             |  
|TotalLiabilities                             |  |      |  |   | 4,187       |  
|                                             |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|                                             |  |      |  |   |             |  
|TotalEquityandLiabilities                    |  |      |  | $ | 144,247     |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

These consolidated financial statements are authorized for issue by the Board of Directors on March 29, 2011. They are signed on the 
Company's behalf by:

|/s/RonaldW.Thiessen | /s/RobertA.Dickinson
|------------------- | --------------------
|                    |                     
|Ronald W. Thiessen  | Robert A. Dickinson 
|Director            | Director            

Page 2

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|NorthernDynastyMineralsLtd.                                               
|--------------------------------------------------------------------------
|ConsolidatedStatementsofComprehensiveLoss                                 
|(Expressed in thousands of Canadian Dollars, except for share information)

|                                                                                                 |  |       |   |                         |   |   |        |  
|------------------------------------------------------------------------------------------------ |  | ----- | - | ----------------------- | - | - | ------ | -
|                                                                                                 |  |       |   | Year ended December 31, |  
|                                                                                                 |  | Note  |   | 2010                    |   |   | 2009   |  
|                                                                                                 |  |       |   |                         |   |   |        |  
|Expenses                                                                                         |  |       |   |                         |   |   |        |  
|Conference and travel                                                                            |  |       | $ | 288                     |   | $ | 349    |  
|Donations                                                                                        |  | 7 (b) |   | 12                      |   |   | 445    |  
|Exploration                                                                                      |  |       |   | 1,800                   |   |   | 321    |  
|Foreign exchange loss                                                                            |  |       |   | 138                     |   |   | 130    |  
|Impairment loss on marketable securities                                                         |  |       |   |                        |   |   | 15     |  
|Impairment loss on property, plant and equipment                                                 |  |       |   |                        |   |   | 11     |  
|Insurance                                                                                        |  |       |   | 248                     |   |   | 263    |  
|Legal, accounting and audit                                                                      |  |       |   | 274                     |   |   | 354    |  
|Office costs                                                                                     |  |       |   | 653                     |   |   | 331    |  
|Salaries                                                                                         |  |       |   | 2,188                   |   |   | 1,453  |  
|Shareholder communication                                                                        |  |       |   | 431                     |   |   | 750    |  
|Share-based compensation                                                                         |  | 7     |   | 8,373                   |   |   | 8,479  |  
|Trust and filing                                                                                 |  |       |   | 224                     |   |   | 199    |  
|Loss from operating activities                                                                   |  |       |   | 14,629                  |   |   | 13,100 |  
|Interest (income)                                                                                |  |       |   | (544                    | ) |   | (335   | )
|Loss before tax                                                                                  |  |       |   | 14,085                  |   |   | 12,765 |  
|Income tax expense (recovery)                                                                    |  | 13    |   | 30                      |   |   | (25    | )
|Lossfortheyear                                                                                   |  |       | $ | 14,115                  |   | $ | 12,740 |  
|                                                                                                 |  |       |   |                         |   |   |        |  
|Other comprehensive loss (income)                                                                |  |       |   |                         |   |   |        |  
|Unrealized loss on available-for-sale marketable securities                                      |  |       |   | 1                       |   |   | 1      |  
|Exchange difference
      arising on translation of investment in the Pebble Limited Partnership |  | 3     |   | 5,631                   |   |   | 16,674 |  
|Deferred income tax on investment                                                                |  | 13    |   | (204                    | ) |   | (609   | )
|Othercomprehensiveloss                                                                           |  |       | $ | 5,428                   |   | $ | 16,066 |  
|                                                                                                 |  |       |   |                         |   |   |        |  
|Totalcomprehensiveloss                                                                           |  |       | $ | 19,543                  |   | $ | 28,806 |  
|                                                                                                 |  |       |   |                         |   |   |        |  
|Basicanddilutedlosspercommonshare                                                                |  | 11    | $ | 0.15                    |   | $ | 0.14   |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 3

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|NorthernDynastyMineralsLtd.                 
|--------------------------------------------
|ConsolidatedStatementsofCashFlows           
|(Expressed in thousands of Canadian Dollars)

|                                                                |  |       |  |   |                         |   |   |         |  
|--------------------------------------------------------------- |  | ----- |  | - | ----------------------- | - | - | ------- | -
|                                                                |  |       |  |   | Years ended December 31 |  
|                                                                |  | Notes |  |   | 2010                    |   |   | 2009    |  
|                                                                |  |       |  |   |                         |   |   |         |  
|Cashflowsfromoperatingactivities                                |  |       |  |   |                         |   |   |         |  
|(Loss) for the year                                             |  |       |  | $ | (14,115                 | ) | $ | (12,740 | )
|Adjustments for:                                                |  |       |  |   |                         |   |   |         |  
|Impairment loss on marketable securities                        |  |       |  |   |                        |   |   | 15      |  
|Impairment loss on property, plant and equipment                |  |       |  |   |                        |   |   | 11      |  
|Donation of shares                                              |  |       |  |   |                        |   |   | 437     |  
|Foreign exchange loss                                           |  |       |  |   | 20                      |   |   | 130     |  
|Income tax expense (recovery)                                   |  |       |  |   | 30                      |   |   | (25     | )
|Interest income                                                 |  |       |  |   | (544                    | ) |   | (335    | )
|Share-based compensation                                        |  |       |  |   | 8,373                   |   |   | 8,479   |  
|                                                                |  |       |  |   | (6,236                  | ) |   | (4,028  | )
|Changes in non-cash working capital items                       |  |       |  |   |                         |   |   |         |  
|Increase in amounts receivable and other assets                 |  |       |  |   | (91                     | ) |   | (17     | )
|(Increase) decrease in balances receivable from related parties |  |       |  |   | (20                     | ) |   | 94      |  
|Increase in amounts payable and other liabilities               |  |       |  |   | 259                     |   |   | 45      |  
|Decrease in balances payable to related parties                 |  |       |  |   | 102                     |   |   |        |  
|                                                                |  |       |  |   | 250                     |   |   | 122     |  
|                                                                |  |       |  |   |                         |   |   |         |  
|Net cash (used in) operating activities                         |  |       |  |   | (5,986                  | ) |   | (3,906  | )
|                                                                |  |       |  |   |                         |   |   |         |  
|Cashflowsfrominvestingactivities                                |  |       |  |   |                         |   |   |         |  
|Interest income                                                 |  |       |  |   | 387                     |   |   | 335     |  
|Loan advanced                                                   |  | 4     |  |   | (2,979                  | ) |   |        |  
|Mineral property interest                                       |  | 4     |  |   | (1,055                  | ) |   |        |  
|Net cash (used in) generated by investing activities            |  |       |  |   | (3,647                  | ) |   | 335     |  
|                                                                |  |       |  |   |                         |   |   |         |  
|Cashflowsfromfinancingactivities                                |  |       |  |   |                         |   |   |         |  
|Common shares issued for cash, net of issue costs               |  | 7     |  |   | 5,160                   |   |   | 2,630   |  
|Net cash generated by financing activities                      |  |       |  |   | 5,160                   |   |   | 2,630   |  
|                                                                |  |       |  |   |                         |   |   |         |  
|Netdecreaseincashandcashequivalents                             |  |       |  |   | (4,473                  | ) |   | (941    | )
|Effect of exchange rate fluctuations on cash held               |  |       |  |   | (20                     | ) |   | (130    | )
|Cash and cash equivalents at beginning of the year              |  |       |  |   | 44,895                  |   |   | 45,966  |  
|                                                                |  |       |  |   |                         |   |   |         |  
|Cashandcashequivalentsatendoftheyear                            |  |       |  | $ | 40,402                  |   | $ | 44,895  |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 4

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|NorthernDynastyMineralsLtd.                                                
|---------------------------------------------------------------------------
|ConsolidatedStatementsofChangesinEquity                                    
|(Expressed in thousands of  Canadian Dollars, except for share information)

|                                                                            |  | Sharecapital   |  |   | Reserves |  |   |               |   |   |             |  
|--------------------------------------------------------------------------- |  | -------------- |  | - | -------- |  | - | ------------- | - | - | ----------- | -
|                                                                            |  |                |  |   |          |  |   | Equitysettled |   |   | Foreign     |  
|                                                                            |  |                |  |   |          |  |   | share-based   |   |   | currency    |  
|                                                                            |  |                |  |   |          |  |   | payments      |   |   | translation |  
|                                                                            |  | Numberofshares |  |   | Amount   |  |   | reserve       |   |   | reserve     |  
|                                                                            |  |                |  |   |          |  |   |               |   |   |             |  
|Restated balance at January 1, 2009                                         |  | 92,543,639     |  | $ | 365,202  |  | $ | 25,088        |   | $ | 21,808      |  
|Shares issued for cash on exercise of options                               |  | 555,337        |  |   | 2,630    |  |   |              |   |   |            |  
|Fair value of share options allocated to shares issued on exercise          |  |               |  |   | 2,391    |  |   | (2,391        | ) |   |            |  
|Shares donated (note 7(b))                                                  |  | 75,000         |  |   | 437      |  |   |              |   |   |            |  
|Share-based compensation                                                    |  |               |  |   |         |  |   | 8,479         |   |   |            |  
|Cumulative loss reclassified to loss on impairment of marketable securities |  |               |  |   |         |  |   |              |   |   |            |  
|Total comprehensive loss for the year                                       |  |               |  |   |         |  |   |              |   |   | (16,065     | )
|BalanceatDecember31,2009                                                    |  | 93,173,976     |  | $ | 370,660  |  | $ | 31,176        |   | $ | 5,743       |  
|                                                                            |  |                |  |   |          |  |   |               |   |   |             |  
|Shares issued for cash on exercise of options                               |  | 1,003,090      |  |   | 5,160    |  |   |              |   |   |            |  
|Fair value of share options allocated to shares issued on exercise          |  |               |  |   | 4,750    |  |   | (4,750        | ) |   |            |  
|Share-based compensation                                                    |  |               |  |   |         |  |   | 8,373         |   |   |            |  
|Total comprehensive loss for the year                                       |  |               |  |   |         |  |   |              |   |   | (5,427      | )
|BalanceatDecember31,2010                                                    |  | 94,177,066     |  | $ | 380,570  |  | $ | 34,799        |   | $ | 316         |  

Theaccompanyingnotesareanintegralpartoftheseconsolidatedfinancialstatements.

Page 5

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|1. | NATURE OF OPERATIONS AND CONTINUANCE OF
      OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Northern Dynasty Minerals Ltd. (the "Company") is
      incorporated under the laws of the Province of British Columbia, Canada,
      and its principal business activity is the exploration of mineral
      properties. The Companys corporate office is located at suite 1020, 800
      West Pender Street, Vancouver, British Columbia. The consolidated
      financial statements of the Company as at and for the year ended December
      31, 2010 consist of the Company and its subsidiaries (note 10) (together
      referred to as the "Group" and individually as "Group entities") and the
      Groups interest in jointly controlled entities. The Company is the
      ultimate parent. The Group owns a 50% share in the Pebble Limited
      Partnership (the "Pebble Partnership") (note 3). The Pebble Partnership
      owns the Pebble Copper-Gold- Molybdenum Project (the "Pebble Project"),
      the Groups principal mineral property interest located in Alaska, United
      States of America ("USA" or "US").
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Group is in the process of exploring its mineral
      property interests and has not yet determined whether the Pebble Project
      contains mineral reserves that are economically recoverable. The Groups
      continuing operations and the underlying value and recoverability of the
      amounts shown for the investment in the Pebble Partnership is entirely
      dependent upon the existence of economically recoverable mineral reserves;
      the ability of the Group to obtain the necessary financing to complete the
      exploration and development of the Pebble Project; obtaining the necessary
      permits to mine; and future profitable production or proceeds from the
      disposition of the investment in the Pebble Partnership.                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2. | SIGNIFICANT ACCOUNTING
      POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|(a) | Statement of Compliance                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                             
|    | The consolidated financial statements have been prepared
      in accordance with International Financial Reporting Standards ("IFRS") as
      issued by the International Accounting Standards Board ("IASB") and
      interpretations of the IFRS Interpretations Committee ("IFRIC").                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                             
|(b) | Basis of Preparation                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                             
|    | These consolidated financial statements have been
      prepared on a historical cost basis, except for financial instruments
      classified as available-for-sale which are stated at their fair value. In
      addition these consolidated financial statements have been prepared using
      the accrual basis of accounting, except for cash flow
      information.
|    |                                                                                                                                                                                                                                                                                                                                                                             
|    | The accounting policies set out below have been applied
      consistently to all periods presented in these consolidated financial
      statements.                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                             
|(c) | Basis of Consolidation                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                             
|    | These consolidated financial statements incorporate the
      financial statements of the Group and all its subsidiaries (note
      10).                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                             
|    | The Group has determined that its investment in the
      Pebble Partnership, a 50:50 limited partnership between the Group and
      Anglo American plc ("Anglo American"), each through wholly-owned
      affiliates,                                                                                                                                                    

Page 6

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | qualifies as an interest in a jointly controlled entity
      under IAS 31, Interests in Joint Ventures. The Group has elected to
      apply the equity method to account for its interest in the Pebble
      Partnership (note 3). The investment is carried in the statement of
      financial position at cost and adjusted by post- acquisition changes in
      the Groups share of the net assets of the joint venture, less any
      impairment losses. As the Groups investment is carried in US dollars, the
      investment is translated at the end of each reporting period (note
      3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Intra-Group balances and transactions, including any
      unrealized income and expenses arising from intra-Group transactions, are
      eliminated in full on consolidation. Unrealized gains arising from
      transactions with equity accounted investees are eliminated against the
      investment to the extent of the Groups interest in the investee.
      Unrealized losses are eliminated in the same way as unrealized gains, but
      only to the extent that there is no evidence of impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(d) | Business Combinations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Acquisitions of businesses are accounted for using the
      acquisition method. The cost of the business combination is measured as
      the aggregate of the acquisition-date fair values of assets transferred,
      liabilities incurred or assumed, and equity instruments issued by the
      Group in exchange for control of the acquiree. Acquisition-related costs
      are recognised in profit or loss as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | At the acquisition date the identifiable assets acquired
      and the liabilities assumed and any contingent liabilities are recognized
      at their fair values at the acquisition date, except for:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | Goodwill arising on acquisition is recognized as an asset
      and initially measured at cost, being the excess of the cost of the
      business combination over the Groups interest in the net fair value of
      the identifiable assets, liabilities and contingent liabilities
      recognized. If, after reassessment, the Groups interest in the net fair
      value of the acquirees identifiable assets, liabilities and contingent
      liabilities exceeds the cost of the business combination, the excess is
      recognized immediately in profit or loss. If the initial accounting for a
      business combination is incomplete by the end of the reporting period in
      which the combination occurs, the Group reports provisional amounts for
      the items for which the accounting is incomplete. Those provisional
      amounts are adjusted during the measurement period (see below), or
      additional assets or liabilities are recognized, to reflect new
      information obtained about facts and circumstances that existed as of the
      acquisition date that, if known, would have affected the amounts
      recognized as of that date.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The measurement period is the period from the date of
      acquisition to the date the Group obtains complete information about facts
      and circumstances that existed as of the acquisition date - and is subject
      to a maximum of one year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Page 7

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | The interest of non-controlling shareholders in the
      acquiree is initially measured at the non- controlling shareholders
      proportion of the net fair value of the assets, liabilities and contingent
      liabilities recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(e) | Interests in Joint Ventures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | A joint venture is a contractual arrangement whereby the
      Group and other parties undertake an economic activity that is subject to
      joint control (i.e. when the strategic financial and operating policy
      decisions relating to the activities of the joint venture require the
      unanimous consent of the parties sharing control).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Joint venture arrangements that involve the establishment
      of a separate entity in which each venturer has an interest are referred
      to as jointly controlled entities. The Group reports its interests in a
      jointly controlled entity ("JCE"), under the equity method of accounting,
      except when the investment is classified as held for sale, in which case
      it is accounted for in accordance with IFRS 5, Non-current Assets Held
        for Sale and Discontinued Operations. Under the equity method, the
      Groups interest in the JCE is carried in the consolidated financial
      statement of financial position at cost as adjusted for post-acquisition
      changes in the Groups share of the net assets of the JCE less any
      impairment in the value of the investment. Losses in excess of the Groups
      interest in that JCE are recognized only to the extent that the Group has
      incurred legal or constructive obligations or made payments on behalf of
      the JCE.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Any excess of the cost of the acquisition over the
      Groups share of the fair value of the identifiable assets, liabilities
      and contingent liabilities of the JCE recognized at the date of the
      acquisition is recognized as goodwill. The goodwill is included within the
      carrying amount of the JCE and is assessed for impairment as part of that
      JCE. Any excess of the Groups share of the net fair value of the
      identifiable assets, liabilities and contingent liabilities over the cost
      of acquisition, after reassessment, is recognized immediately in profit or
      loss.                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | When a group entity transacts with a JCE of the Group,
      unrealized profits and losses are eliminated to the extent of the Groups
      interest in the joint venture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(f) | Foreign Currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The functional currency is the currency of the primary
      economic environment in which the entity operates and has been determined
      for each entity within the Group. The functional currency of the Pebble
      Partnership is US dollars and for all other entities within the Group, the
      functional currency is Canadian dollars. The functional currency
      determinations were conducted through an analysis of the consideration
      factors identified in IAS 21, The Effects of Changes in Foreign
        Exchange Rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Transactions in currencies other than
      the functional currency are recorded at the rates of exchange prevailing
      on dates of transactions. At the end of each reporting period, monetary
      assets and liabilities that are denominated in foreign currencies are
      translated at the rates prevailing at that date. Non-monetary assets and
      liabilities carried at fair value that are denominated in foreign
      currencies are translated at rates prevailing at the date when the fair
      value was determined. Non-monetary items that are measured in terms of
      historical cost in a foreign currency are not
      retranslated.                                                                                                                                                                                                                                                                                                                                                                       

Page 8

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(g) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Non-derivative financial
      assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Group has the following non-derivative financial
      assets:financial assets at fair value through profit or
      loss, available-for-sale financial assets, and loans and
      receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Financial assets at fair value
      through profit or loss("FVTPL")                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | A financial asset is classified at
      fair value through profit or loss if it is classified as held for trading
      or is designated as such upon initial recognition. Financial assets are
      designated as at FVTPL if the Group manages such investments and makes
      purchase and sale decisions based on their fair value in accordance with
      the Groups documented risk management or investment strategy.
      Attributable transaction costs are recognized in profit or loss when
      incurred. Financial assets at fair value through profit or loss are
      measured at fair value, and changes therein are recognized in profit or
      loss.                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Available-for-sale financial
      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Available-for-sale ("AFS") financial assetsare non-derivatives that are
      either designated as AFS or are not classified as (i) loans and
      receivables, (ii) held-to-maturity investments or (iii) financial assets
      as at FVTPL. The Groups investments in marketable
        securities are classified as AFS financial assets. Subsequent to initial
        recognition, they are measured at fair value and changes therein, other
        than impairment losses and foreign currency differences on AFS monetary
        items, are recognized in other comprehensive income or loss. When an
        investment is derecognized, the cumulative gain or loss in the investment
        revaluation reserve is transferred to profit or loss.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The fair value of AFS monetary assets
      denominated in a foreign currency is determined in that foreign currency
      and translated at the spot rate at the end of the reporting period. The
      change in fair value attributable to translation differences that result
      from the amortized cost of the monetary asset is recognized in profit or
      loss. The change in fair value of AFS equity investments is recognized in
      other comprehensive income or loss.                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Loans and
      receivables                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Loans and receivables are financial
      assets with fixed or determinable payments that are not quoted in an
      active market. Such assets are initially recognized at fair value plus any
      directly attributable transaction costs. Subsequent to initial recognition
      loans and receivables are measured at amortized cost using the effective
      interest method, less any impairment losses.                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Loans and receivables comprise
      amounts receivable including the loan receivable from Liberty Star (note
      5(a)) and balances receivable from a related party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Cash and Cash Equivalents (note (j))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Non-derivative financial
      liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The group has the following
      non-derivative financial liabilities: amounts payable and other
      liabilities and balances payable to a related
      party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Page 9

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

Such financial
  liabilities are recognized initially at fair value net of any directly
  attributable transaction costs. Subsequent to initial recognition these
  financial liabilities are measured at amortized cost using the effective
  interest method.

Impairment of
  financial assets:

When an AFS
  financial asset is considered to be impaired, cumulative gains or losses
  previously recognized in other comprehensive income or loss are reclassified to
  profit or loss in the period. Financial assets are assessed for indicators of
  impairment at the end of each reporting period. Financial assets are impaired
  when there is objective evidence that, as a result of one or more events that
  occurred after the initial recognition of the financial assets, the estimated
  future cash flows of the investments have been impacted. For marketable
  securities classified as AFS, a significant or prolonged decline in the fair
  value of the securities below their cost is considered to be objective evidence
  of impairment.

For all other
  financial assets objective evidence of impairment could include:

- significant financial
      difficulty of the issuer or counterparty; or
- default or delinquency in
      interest or principal payments; or
- it becoming probable that the
      borrower will enter bankruptcy or financial re-organization.

For certain
  categories of financial assets, such as amounts receivable, assets that are
  assessed not to be impaired individually are subsequently assessed for
  impairment on a collective basis. The carrying amount of financial assets is
  reduced by the impairment loss directly for all financial assets with the
  exception of amounts receivable, where the carrying amount is reduced through
  the use of an allowance account. When an amount receivable is considered
  uncollectible, it is written off against the allowance account. Subsequent
  recoveries of amounts previously written off are credited against the allowance
  account. Changes in the carrying amount of the allowance account are recognized
  in profit or loss.

With the exception
  of AFS equity instruments, if, in a subsequent period, the amount of the
  impairment loss decreases and the decrease can be related objectively to an
  event occurring after the impairment was recognized, the previously recognized
  impairment loss is reversed through profit or loss to the extent that the
  carrying amount of the investment at the date the impairment is reversed does
  not exceed what the amortized cost would have been had the impairment not been
  recognized. In respect of AFS equity securities, impairment losses previously
  recognized through profit or loss are not reversed through profit or loss. Any
  increase in fair value subsequent to an impairment loss is recognized directly
  in equity.

When an AFS
  financial asset is considered to be impaired, cumulative gains or losses
  previously recognized in other comprehensive income are reclassified to profit
  or loss in the period.

Derivative
  financial assets:

The loan advance
  provided by the Group as part of its consideration for claims purchased (note 4)
  has an equity conversion option. This equity conversion feature has been
  determined to be an embedded derivative which requires separation from the loan
  receivable. For embedded derivatives identified for separation, the fair value
  of the derivative must be calculated as of the inception date and at each

Page 10

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | reporting date subsequent to the
      inception date. The Group has determined that the fair value of the equity
      conversion option at the date of inception and at December 31, 2010, is of
      nominal value as the earn-in and joint venture agreement ("JV Agreement") has not been
        entered into and the first US$1 million has still to be incurred by the
        Group in respect to the JV Agreement claims (note 5(a)).                                                                                                                                                                                                       
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(h) | Exploration and Evaluation Expenditure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Exploration and evaluation
      expenditures include the costs of acquiring licenses, costs associated
      with exploration and evaluation activity, and the acquisition date fair
      value of exploration and evaluation assets acquired in a business
      combination. Exploration and evaluation expenditures are expensed as
      incurred except for expenditures associated with the acquisition of
      exploration and evaluation assets through a business combination or an
      asset acquisition. Costs incurred before the Group has obtained the legal
      rights to explore an area are recognized in profit or
      loss.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Acquisition costs, including general and administrative
      costs, are only capitalized to the extent that these costs can be related
      directly to operational activities in the relevant area of interest where
      it is considered likely to be recoverable by future exploitation or sale
      or where the activities have not reached a stage which permits a
      reasonable assessment of the existence of reserves.                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Exploration and evaluation ("E&E") assets are
      assessed for impairment only when facts and circumstances suggest that the
      carrying amount of an E&E asset may exceed its recoverable amount and
      when the Group has sufficient information to reach a conclusion about
      technical feasibility and commercial viability.                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Industry-specific indicators for an impairment review
      arise typically when one of the following circumstances applies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Once the technical feasibility and commercial viability
      of the extraction of mineral resources in an area of interest are
      demonstrable, exploration and evaluation assets attributable to that area
      of interest are first tested for impairment and then reclassified to
      mining property and development assets within property, plant and
      equipment.                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Recoverability of the carrying amount of any exploration
      and evaluation assets is dependent on successful development and
      commercial exploitation, or alternatively, sale of the respective areas of
      interest.                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(i) | Property, Plant and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Property, plant and equipment ("PPE")
      are carried at cost, less accumulated depreciation and accumulated
      impairment losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Page 11

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | The cost of an item of PPE consists
      of the purchase price, any costs directly attributable to bringing the
      asset to the location and condition necessary for its intended use and an
      initial estimate of the costs of dismantling and removing the item and
      restoring the site on which it is located.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Depreciation is provided at rates
      calculated to write off the cost of PPE, less their estimated residual
      value, using the declining balance method at various rates ranging from
      20% - 30% per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | An item of PPE is derecognized upon
      disposal or when no future economic benefits are expected to arise from
      the continued use of the asset. Any gain or loss arising on disposal of
      the asset, determined as the difference between the net disposal proceeds
      and the carrying amount of the asset, is recognized in profit or
      loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Where an item of plant and equipment
      consists of major components with different useful lives, the components
      are accounted for as separate items of plant and equipment. Expenditures
      incurred to replace a component of an item of PPE that is accounted for
      separately, including major inspection and overhaul expenditures, are
      capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Residual values and estimated useful
      lives are reviewed at least annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(j) | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Cash and cash equivalents in the statement of financial
      position comprise cash and investments held at major financial
      institutions which are readily convertible into a known amount of cash.
      The Groups cash and cash equivalents are invested in business and savings
      accounts and guaranteed investment certificates which are available on
      demand by the Group for its programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(k) | Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | At the end of each reporting period the carrying amounts
      of the Groups assets are reviewed to determine whether there is any
      indication that those assets are impaired. If any such indication exists,
      the recoverable amount of the asset is estimated in order to determine the
      extent of the impairment, if any. Where it is not possible to estimate the
      recoverable amount of an individual asset, the Group estimates the
      recoverable amount of the cash-generating unit to which the asset belongs.
      The recoverable amount is the higher of fair value less costs to sell and
      value in use. Fair value is determined as the amount that would be
      obtained from the sale of the asset in an arms length transaction between
      knowledgeable and willing parties. In assessing value in use, the
      estimated future cash flows are discounted to their present value using a
      pre-tax discount rate that reflects current market assessments of the time
      value of money and the risks specific to the asset. If the recoverable
      amount of an asset is estimated to be less than its carrying amount, the
      carrying amount of the asset is reduced to its recoverable amount and the
      impairment loss is recognized in the profit or loss for the period. For an
      asset that does not generate largely independent cash inflows, the
      recoverable amount is determined for the cash generating unit to which the
      asset belongs.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Where an impairment loss subsequently
      reverses, the carrying amount of the asset (or cash- generating unit) is
      increased to the revised estimate of its recoverable amount, but to an
      amount that does not exceed the carrying amount that would have been
      determined had no impairment loss been recognized for the asset (or
      cash-generating unit) in prior years. A reversal of an impairment loss is
      recognized immediately in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Page 12

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(l) | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Common shares are classified as equity. Transaction costs
      directly attributable to the issue of common shares and share purchase
      options are recognized as a deduction from equity, net of any tax
      effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(m) | Share-based Payment Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The share purchase option plan allows Group employees and
      consultants to acquire shares of the Group. The fair value of share
      purchase options granted is recognized as an employee or consultant
      expense with a corresponding increase in equity. An individual is
      classified as an employee when the individual is an employee for legal or
      tax purposes (direct employee) or provides services similar to those
      performed by a direct employee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The fair value is measured at grant date for each tranche
      which is expensed on a straight line basis over the vesting period with a
      corresponding increase in equity. The fair value of the share purchase
      options granted is measured using the Black-Scholes option pricing model
      taking into account the terms and conditions upon which the share purchase
      options were granted and forfeiture rates as appropriate. At the end of
      each reporting period, the amount recognized as an expense is adjusted to
      reflect the actual number of share purchase options that are expected to
      vest.                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(n) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Income tax on the profit or loss for the periods
      presented comprises current and deferred tax. Income tax is recognized in
      profit or loss except to the extent that it relates to items recognized in
      other comprehensive income or loss or directly in equity, in which case it
      is recognized in other comprehensive income or loss or equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Current tax expense is the expected tax payable on the
      taxable income for the year, using tax rates enacted or substantively
      enacted at year end, adjusted for amendments to tax payable with regards
      to previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Deferred tax is provided using the balance sheet
      liability method, providing for unused tax loss carryforwards and
      temporary differences between the carrying amounts of assets and
      liabilities for financial reporting purposes and the amounts used for
      taxation purposes. The following temporary differences are not provided
      for: goodwill not deductible for tax purposes; the initial recognition of
      assets or liabilities that affect neither accounting nor taxable profit;
      and differences relating to investments in subsidiaries, associates, and
      joint ventures to the extent that they will probably not reverse in the
      foreseeable future. The amount of deferred tax provided is based on the
      expected manner of realization or settlement of the carrying amount of
      assets and liabilities, using tax rates enacted or substantively enacted
      at the end of the reporting period applicable to the period of expected
      realization or settlement.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | A deferred tax asset is recognized only to the extent
      that it is probable that future taxable profits will be available against
      which the asset can be utilized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Page 13

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|    | Additional income taxes that arise from the distribution
      of dividends are recognized at the same time as the liability to pay the
      related dividend.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Deferred tax assets and liabilities are offset when there
      is a legally enforceable right to set off current tax assets against
      current tax liabilities and when they relate to income taxes levied by the
      same taxation authority and the Group intends to settle its current tax
      assets and liabilities on a net basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(o) | Restoration, Rehabilitation, and Environmental
      Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | An obligation to incur restoration, rehabilitation and
      environmental costs arises when environmental disturbance is caused by the
      exploration or development of a mineral property interest. Such costs
      arising from the decommissioning of plant and other site preparation work,
      discounted to their net present value, are provided for and capitalized at
      the start of each project to the carrying amount of the asset, along with
      a corresponding liability as soon as the obligation to incur such costs
      arises. The timing of the actual rehabilitation expenditure is dependent
      on a number of factors such as the life and nature of the asset, the
      operating license conditions and, when applicable, the environment in
      which the mine operates.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Discount rates using a pre-tax rate that reflects the
      time value of money are used to calculate the net present value. These
      costs are charged against profit or loss over the economic life of the
      related asset, through amortization using either the unit-of-production or
      the straight line method. The corresponding liability is progressively
      increased as the effect of discounting unwinds creating an expense
      recognized in profit or loss.                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Decommissioning costs are also adjusted for changes in
      estimates. Those adjustments are accounted for as a change in the
      corresponding capitalized cost, except where a reduction in costs is
      greater than the unamortized capitalized cost of the related assets, in
      which case the capitalized cost is reduced to nil and the remaining
      adjustment is recognized in profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The operations of the Group have been, and may in the
      future be, affected from time to time in varying degree by changes in
      environmental regulations, including those for site restoration costs.
      Both the likelihood of new regulations and their overall effect upon the
      Group are not predictable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Group has no material restoration, rehabilitation and
      environmental obligations as the disturbance to date is
      immaterial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(p) | Loss per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Group presents basic and diluted loss per share data
      for its common shares, calculated by dividing the loss attributable to
      common shareholders of the Group by the weighted average number of common
      shares outstanding during the period. Diluted loss per share does not
      adjust the loss attributable to common shareholders or the weighted
      average number of common shares outstanding when the effect is
      anti-dilutive.                                                                                                                                                                                                                                                                                                                                                   

Page 14

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(q) | Segment Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Group operates in a single reportable operating
      segment  the acquisition, exploration and development of mineral
      properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Groups core mineral property interest, the Pebble
      Project, held through the 50% interest in the Pebble Partnership, is
      located in Alaska, USA. The new claims recently purchased during the year
      are located adjacent to the Pebble Project (note 4). All other significant
      assets are held within Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(r) | Significant Accounting Estimates and
      Judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The preparation of these consolidated
      financial statements requires management to make certain estimates,
      judgments and assumptions that affect the reported amounts of assets and
      liabilities at the date of the financial statements and reported amounts
      of expenses during the reporting period. Actual outcomes could differ from
      these estimates. These consolidated financial statements include estimates
      which, by their nature, are uncertain. The impacts of such estimates are
      pervasive throughout theconsolidated financial statements, and may
      require accounting adjustments based on future occurrences. Revisions to
      accounting estimates are recognized in the period in which the estimate is
      revised and future periods if the revision affects both current and future
      periods. These estimates are based on historical experience, current and
      future economic conditions and other factors, including expectations of
      future events that are believed to be reasonable under the
      circumstances.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Critical accounting estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Significant assumptions about the future and other
      sources of estimation uncertainty that management has made at the end of
      the reporting period, that could result in a material adjustment to the
      carrying amounts of assets and liabilities, in the event that actual
      results differ from assumptions made, relate to, but are not limited to,
      the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | i.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | ii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | iii.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | iv.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | v.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Critical accounting judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The determination of categories of financial assets and
      financial liabilities has been identified as an accounting policy which
      involves assessments made by management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Page 15

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(s) | Accounting Standards, Interpretations and
        Amendments to Existing Standards                                                                                                                                                                                                                                                          
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                             
|    | Effective January 1, 2010, the Group adopted
        new and revised IFRS that were issued by the IASB. The application of
        these new and revised IFRS has not had any material impact on the amounts
        reported for the current and prior years but may affect the accounting
        for future transactions or arrangements.
|    |                                                                                                                                                                                                                                                                                                                                             
|    | (a)                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    | (b)                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    | (c)                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             
|    | (d)                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                             

Page 16

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| | (e) | Amendments to IAS 7 Statement of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The amendments clarify that only expenditures
        that result in the recognition of an asset can be classified as a cash
        flow from investing activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (f) | Amendments to IAS 17 Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The IASB deleted guidance stating that a lease
        of land with an indefinite economic life normally is classified as an
        operating lease, unless at the end of the lease term title is expected
        to pass to the lessee. The amendments also clarify that when a lease includes
        both the land and building elements, an entity should determine the classification
        of each element taking into account the fact that land normally has an
        indefinite economic life.                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (g) | Amendments to IAS 27 Consolidated and Separate
        Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The main amendments to IAS 27 Consolidated
        and Separate Financial Statementsare as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | (iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (h) | Amendments to IAS 36 Impairment of Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The amendments clarify that the largest unit
        to which goodwill should be allocated is the operating segment level.
        This amendment applies prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (i) | Amendments to IAS 38 Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The amendments clarify that an intangible asset
        that is separable only together with a related contract, identifiable
        asset or liability is recognized separately from goodwill together with
        the related item, and that complementary intangible assets with similar
        useful lives may be recognized as a single asset. The amendments also
        describe valuation techniques commonly used by entities when measuring
        the fair value of intangible assets acquired in a business combination
        for which no active market exists. These amendments are applied prospectively.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (j) | Amendments to IAS 39 Financial Instruments:
        Recognition and Measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The main amendments consist of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Page 17

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| | (i)   | Additional guidance provided to help determine whether
      loan prepayment penalties result in an embedded derivative that needs to
      be separated.                                                                                                                                                                                                         
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii)  | Clarification that the scope exemption is restricted to
      forward contracts between an acquirer and a selling shareholder to buy or
      sell an acquiree that will result in a business combination at a future
      acquisition date within a reasonable period normally necessary to obtain
      any required approvals and to complete the transaction.
| | (iii) | Clarification that the gains or losses on a cash flow
      hedge should be reclassified from other comprehensive income to profit or
      loss during the period that the hedged forecast cash flows impact profit
      or loss.                                                                                                                               

The amendments apply prospectively to
  all unexpired contracts from the date of adoption.

Accounting standards issued but
  not yet effective

| | (i)  | Effective for annual periods beginning on or after
      February 1, 2010
| | ---- | -------------------------------------------------------------------------
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| | (ii) | Effective for annual periods beginning on or after
      July 1, 2010    
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          
| |      |                                                                          

Page 18

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| | (iii) | Effective for annual periods beginning on or after
      January 1, 2011
| | ----- | ------------------------------------------------------------------------
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| | (iv)  | Effective for annual periods beginning on or after
      July 1, 2011   
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         
| | (v)   | Effective for annual periods beginning on or after
      January 1, 2013
| |       |                                                                         
| |       |                                                                         
| |       |                                                                         

The Group has not early adopted these
  revised standards and is currently assessing the impact that these standards
  will have on the consolidated financial statements.

Page 19

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|3. | INVESTMENT IN THE PEBBLE LIMITED PARTNERSHIP
|-- | --------------------------------------------

On July 26, 2007, the Group converted a
  wholly-owned general partnership, formed in 2006 to hold its Pebble Property
  interest, into a limited partnership, the Pebble Partnership, so that an
  indirect wholly-owned subsidiary of Anglo American plc ("Anglo American") could
  subscribe for 50% of the Pebble Partnership's equity effective July 31, 2007.
  Each of the Group and Anglo American has equal rights in the Pebble Partnership
  through wholly-owned affiliates. The purpose of the Pebble Partnership is to
  engineer, permit, construct and operate a modern, long-life mine at the Pebble
  Project. The Pebble Partnership's assets include the shares of two Alaskan
  subsidiaries which hold registered title to the claims. To maintain its 50%
  interest in the Pebble Partnership, Anglo American is required to make staged
  cash investments into the Pebble Partnership aggregating to US$1.425 billion,
  potentially increasing to US$1.5 billion, as discussed below.

Anglo Americans staged investment
  requirements include an initial minimum expenditure of US$125 million (completed
  in 2008) towards a prefeasibility report. The prefeasibility report is to be
  approved by the Board of the general partner (Pebble Mines Corp.), and is to
  summarize all previous prefeasibility studies and provide approved alternatives
  for a final feasibility study. After approval of a receipt of the approved
  Prefeasibility Report, Anglo American is required, in order to retain its 50%
  interest in the Pebble Partnership, to commit to further expenditures which
  bring Anglo Americans total investment to at least US$450 million, which amount
  is to be expended in producing a final feasibility study and in related
  activities, including to obtain relevant permits contemplated for current and
  planned activities, the completion of which is expected to take the Pebble
  Partnership to a production decision. Upon an affirmative decision by the Pebble
  Partnership to develop a mine, Anglo American is required to commit to the
  remainder of the total investment of US$1.425 billion in order to retain its
  interest in the Pebble Partnership. Following completion of the US$1.425 billion
  expenditure, any further expenditure will be funded by Anglo American and
  Northern Dynasty on a 50:50 basis. If the feasibility study is completed after
  2011, Anglo Americans overall funding requirement increases from US$1.425
  billion to US$1.5 billion. To December 31 2010, Anglo American has funded
  US$319.9 million ($340.2 million). The Pebble Partnership agreement provides for
  equal project control rights for both partners with no operators fees payable
  to either party.

The Group has determined that its
  investment in the Pebble Partnership qualifies as an interest in a jointly
  controlled entity under IAS 31, Interests in Joint Ventures, and has
  elected to apply the equity method in accounting for its interest in the Pebble
  Partnership. The Group has not recognized any share of the losses in the Pebble
  Partnership since inception as the Group has no obligation in respect to these
  losses as the agreement with Anglo American states that the distribution of
  losses funded by Anglo American are allocated 100% to Anglo American until the
  total investment of US$1.425 billion is met. For the year ended December 31,
  2010, the Pebble Partnership has incurred losses totaling $68,803 (2009 
  $68,330). Cumulative losses since inception of the Pebble Partnership to
  December 31, 2010 total $332,856 (2009  $264,053). The accounting policies of
  the Pebble Partnership are the same as those followed by the Group. The Groups
  investment in the Pebble Partnership is carried in US dollars. Exchange
  differences arising from the translation of the Groups investment in the Pebble
  Partnership are taken directly to the foreign currency translation reserve in
  other comprehensive loss.

Page 20

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| | Investment in the
      Pebble Partnership     |   | As at
      December 31 |   |   | As at
      December 31 |  
| | ---------------------------------------------- | - | ----------------------- | - | - | ----------------------- | -
| |                                                |   | 2010                    |   |   | 2009                    |  
| | Carrying value at the beginning of the year    | $ | 104,937                 |   | $ | 121,611                 |  
| | Foreign currency
      translation (note 7(d)) |   | (5,631                  | ) |   | (16,674                 | )
| | Carrying value at the end of the period        | $ | 99,306                  |   | $ | 104,937                 |  

Summary financial information for the
  equity accounted investee, not adjusted for the percentage ownership held by the
  Group, is as follows:

| | Assets and
      Liabilities |   | As at
      December 31 |  |   | As at
      December 31 | 
| | ---------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                              |   | 2010                    |  |   | 2009                    | 
| | Ownership                    |   | 50%                     |  |   | 50%                     | 
| |                              |   |                         |  |   |                         | 
| | Non-current assets           | $ | 99,451                  |  | $ | 104,820                 | 
| | Current assets               |   | 14,825                  |  |   | 6,691                   | 
| | Total assets                 | $ | 114,276                 |  | $ | 111,511                 | 
| |                              |   |                         |  |   |                         | 
| | Current liabilities          |   | 5,011                   |  |   | 3,268                   | 
| | Total
      liabilities      | $ | 5,011                   |  | $ | 3,268                   | 

| | Losses                |   | For
      the year ended December 31 | 
| | --------------------- | - | ------------------------------------ | 
| |                       |   | 2010                                 | 
| | Net loss for the year | $ | 68,803                               | 
| | Net cumulative losses |   | 332,856                              | 

The net loss or the cumulative losses
  of the Pebble Partnership have not been included in the financial statements of
  the Group.

|4. | MINERAL PROPERTY INTEREST
|-- | -------------------------

On June 29, 2010, the Group entered
  into a binding letter agreement with Liberty Star Uranium & Metals Corp. and
  its subsidiary, Big Chunk Corp. (together, "Liberty Star"), pursuant to which
  Liberty Star sold 60.7 square kilometers of mineral claims located to the west
  of the Pebble Project in consideration for a US$1 million (approximately $1.1
  million) cash payment and a loan advance of US$3 million (approximately $3.1
  million). The purchase of the claims and the loan advance are interdependent
  (note 5(a)). The Pebble Partnership had the right, for a limited period which
  has now expired, to acquire these claims but has declined to exercise that
  right.

Page 21

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|5. | AMOUNTS RECEIVABLE AND OTHER ASSETS
|-- | -----------------------------------

| |                            |   | As at
      December 31 |  |   | As at
      December 31 | 
| | -------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                            |   | 2010                    |  |   | 2009                    | 
| | Amounts receivable         | $ | 132                     |  | $ | 39                      | 
| | Loan receivable (a)        |   | 3,136                   |  |   |                        | 
| | Other assets  prepayments |   | 140                     |  |   | 142                     | 
| | Total                      | $ | 3,408                   |  | $ | 181                     | 

|(a) | Loan receivable                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The loan receivable from Liberty Star earns 10% interest
      per annum calculated monthly. To date $157 has been recognized in interest
      income and included in the loan receivable. Other significant terms of the
      loan receivable include:
|    | i.                                                                                                                                                                                                                                                       
|    | ii.                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                          
|    | iii.                                                                                                                                                                                                                                                     
|    | iv.                                                                                                                                                                                                                                                      
|    | v.                                                                                                                                                                                                                                                       
|    | vi.                                                                                                                                                                                                                                                      

Page 22

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|6. | CASH AND CASH EQUIVALENTS
|-- | -------------------------

| |                                          |   | As at
      December 31 |  |   | As at
      December 31 | 
| | ---------------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                          |   | 2010                    |  |   | 2009                    | 
| | Business and savings accounts            | $ | 31,207                  |  | $ | 39,688                  | 
| | Guaranteed
      Investment Certificates |   | 9,195                   |  |   | 5,207                   | 
| | Total                                    | $ | 40,402                  |  | $ | 44,895                  | 

|7.  | CAPITAL AND RESERVES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(a) | Authorized Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | At December 31, 2010, the authorized share capital
      comprised an unlimited (2009  unlimited) number of common shares. The
      common shares do not have a par value. All issued shares are fully paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(b) | Issued Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | At December 31, 2010 the issued share capital comprised
      94,177,066 common shares (2009  93,173,976).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | In 2009, the Group donated shares to the Britannia Beach
      Historical Society, a registered charitable organization that owns and
      operates the British Columbia Museum of Mining. The Group recognized $437
      as the cost of the donation of the shares along with the corresponding
      share capital value based on the quoted market value per common share on
      date of issue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(c) | Share Purchase Option Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Group has a share purchase option plan approved by
      the Groups shareholders that allows the Board of Directors to grant share
      purchase options, subject to regulatory terms and approval, to its
      officers, directors, employees, and service providers. The share purchase
      option plan (the "2008 Rolling Option Plan") is based on the maximum
      number of eligible shares equalling a rolling percentage of 10% of the
      Group's outstanding common shares, calculated from time to time. Pursuant
      to the 2008 Rolling Option Plan, if outstanding share purchase options are
      exercised or expire, and/or the number of issued and outstanding common
      shares of the Group increases, then the share purchase options available
      to grant under the plan increase proportionately. The exercise price of
      each share purchase option is set by the Board of Directors at the time of
      grant but cannot be less than the market price, being the 5-day volume
      weighted average trading price as calculated pursuant to TSX policies.
      Share purchase options can have a maximum term of ten years and typically
      terminate 90 days following the termination of the optionees employment
      or engagement, except in the case of retirement or death. The vesting
      period for share purchase options is at the discretion of the Board of
      Directors at the time the options are granted.

Page 23

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The continuity of share purchase
  options for the year ended December 31, 2010 was as follows:

| |                                                           |  | Exercise  |      |  |           |      |  |           |       |  |            |      |  |           |      |  |           | 
| | --------------------------------------------------------- |  | --------- | ---- |  | --------- | ---- |  | --------- | ----- |  | ---------- | ---- |  | --------- | ---- |  | --------- | 
| |                                                           |  | price per |      |  | Dec 31    |      |  |           |       |  |            |      |  |           |      |  | Dec 31    | 
| | Expiry date                                               |  | share     |      |  | 2009      |      |  | Granted   |       |  | Exercised  |      |  | Forfeited |      |  | 2010      | 
| | April 14, 2011                                            |  | $ 9.74    |      |  | 27,500    |      |  |          |       |  | (5,000     | )    |  |          |      |  | 22,500    | 
| | April 30, 2011                                            |  | $ 7.25    |      |  | 180,000   |      |  |          |       |  |           |      |  |          |      |  | 180,000   | 
| | October 27, 2011                                          |  | $ 3.00    |      |  | 134,908   |      |  |          |       |  | (45,806    | )    |  | (4,409    | )    |  | 84,693    | 
| | February 2, 2012                                          |  | $ 5.00    |      |  | 474,834   |      |  |          |       |  | (109,166   | )    |  |          |      |  | 365,668   | 
| | February 4, 2012                                          |  | $ 5.00    |      |  | 1,737,202 |      |  |          |       |  | (548,482   | )    |  | (62,835   | )    |  | 1,125,885 | 
| | February 20, 2012                                         |  | $10.95    |      |  | 150,000   |      |  |          |       |  |           |      |  |          |      |  | 150,000   | 
| | March 26, 2012                                            |  | $ 8.25    |      |  | 25,000    |      |  |          |       |  |           |      |  |          |      |  | 25,000    | 
| | April 11, 2013                                            |  | $ 9.74    |      |  | 75,000    |      |  |          |       |  |           |      |  |          |      |  | 75,000    | 
| | May 27, 2013                                              |  | $ 7.59    |      |  |          |      |  | 1,702,000 |       |  | (99,970    | )    |  |          |      |  | 1,602,030 | 
| | August 22, 2013                                           |  | $ 5.35    |      |  | 40,000    |      |  |          |       |  |           |      |  |          |      |  | 40,000    | 
| | October 27, 2013                                          |  | $ 3.00    |      |  | 130,000   |      |  |          |       |  | (23,000    | )    |  |          |      |  | 107,000   | 
| | February 2, 2014                                          |  | $ 5.00    |      |  | 2,018,000 |      |  |          |       |  | (25,000    | )    |  |          |      |  | 1,993,000 | 
| | February 4, 2014                                          |  | $ 5.00    |      |  | 220,000   |      |  |          |       |  | (146,666   | )    |  |          |      |  | 73,334    | 
| | May 27, 2015                                              |  | $ 7.59    |      |  |          |      |  | 951,000   |       |  |           |      |  |          |      |  | 951,000   | 
| |                                                           |  |           |      |  | 5,212,444 |      |  | 2,653,000 |       |  | (1,003,090 | )    |  | (67,244   | )    |  | 6,795,110 | 
| |                                                           |  |           |      |  |           |      |  |           |       |  |            |      |  |           |      |  |           | 
| | Weighted average exercise price per
      share           |  | $         | 5.26 |  | $         | 7.59 |  | $         | 5.14  |  | $          | 4.87 |  | $         | 6.19 | 
| | Weighted average contractual remaining
      life (years) |  |           | 2.99 |  |           |      |  |           |       |  |            |      |  |           | 2.50 | 
| | Weighted average share price per share on exercise        |  |           |      |  |           |      |  | $         | 10.20 |  |            |      |  |           |      | 

During the year, the Group granted
  2,653,000 share purchase options to purchase common shares at an exercise price
  of $7.59 per common share. Of the share purchase options granted, 25,000 were
  issued to a non employee for the provision of investor relations advisory
  services. The Group determined that given the nature of the services being
  provided, it could not determine the fair value of these services reliably. As a
  consequence, the Group estimated that the value of these services approximates
  the fair value of the share purchase options granted measured using the Black
  Scholes option pricing model which at December 31, 2010 amounted to $94.

The Group also cancelled 67,244 share
  purchase options due to forfeitures as a result of terminations and
  resignations, with an average exercise price of $4.87 and with expiry dates of
  October 27, 2011 and February 4, 2012.

Page 24

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The continuity of share purchase
  options for the year ended December 31, 2009 was as follows:

| |                                                           |  | Exercise  |      |  |           |      |  |           |      |  |           |      |  |             |      |  |           | 
| | --------------------------------------------------------- |  | --------- | ---- |  | --------- | ---- |  | --------- | ---- |  | --------- | ---- |  | ----------- | ---- |  | --------- | 
| |                                                           |  | price per |      |  | Dec 31    |      |  |           |      |  |           |      |  | Forfeited / |      |  | Dec 31    | 
| | Expiry date                                               |  | share     |      |  | 2008      |      |  | Granted   |      |  | Exercised |      |  | cancelled   |      |  | 2009      | 
| | April 30, 2009                                            |  | $ 7.25    |      |  | 359,400   |      |  |          |      |  | (15,000   | )    |  | (344,400    | )    |  |          | 
| | April 30, 2009                                            |  | $ 9.81    |      |  | 50,000    |      |  |          |      |  |          |      |  | (50,000     | )    |  |          | 
| | April 30, 2009                                            |  | $10.32    |      |  | 593,000   |      |  |          |      |  |          |      |  | (593,000    | )    |  |          | 
| | April 14, 2011                                            |  | $ 9.74    |      |  | 1,461,668 |      |  |          |      |  |          |      |  | (1,434,168  | )    |  | 27,500    | 
| | April 30, 2011                                            |  | $ 7.25    |      |  | 945,000   |      |  |          |      |  |          |      |  | (765,000    | )    |  | 180,000   | 
| | October 27, 2011                                          |  | $ 3.00    |      |  | 221,877   |      |  |          |      |  | (80,340   | )    |  | (6,629      | )    |  | 134,908   | 
| | February 2, 2012                                          |  | $ 5.00    |      |  |          |      |  | 529,000   |      |  | (54,166   | )    |  |            |      |  | 474,834   | 
| | February 4, 2012                                          |  | $ 5.00    |      |  |          |      |  | 2,168,200 |      |  | (350,831  | )    |  | (80,167     | )    |  | 1,737,202 | 
| | February 20, 2012                                         |  | $10.95    |      |  | 828,000   |      |  |          |      |  |          |      |  | (678,000    | )    |  | 150,000   | 
| | March 26, 2012                                            |  | $ 8.25    |      |  |          |      |  | 25,000    |      |  |          |      |  |            |      |  | 25,000    | 
| | April 11, 2013                                            |  | $ 9.74    |      |  | 753,000   |      |  |          |      |  |          |      |  | (678,000    | )    |  | 75,000    | 
| | August 22, 2013                                           |  | $ 5.35    |      |  | 40,000    |      |  |          |      |  |          |      |  |            |      |  | 40,000    | 
| | October 27, 2013                                          |  | $ 3.00    |      |  | 140,000   |      |  |          |      |  | (10,000   | )    |  |            |      |  | 130,000   | 
| | February 2, 2014                                          |  | $ 5.00    |      |  |          |      |  | 2,063,000 |      |  | (45,000   | )    |  |            |      |  | 2,018,000 | 
| | February 4, 2014                                          |  | $ 5.00    |      |  |          |      |  | 220,000   |      |  |          |      |  |            |      |  | 220,000   | 
| |                                                           |  |           |      |  | 5,391,945 |      |  | 5,005,200 |      |  | (555,337  | )    |  | (4,629,364  | )    |  | 5,212,444 | 
| |                                                           |  |           |      |  |           |      |  |           |      |  |           |      |  |             |      |  |           | 
| | Weighted average exercise price per share                 |  | $         | 8.90 |  | $         | 5.02 |  | $         | 4.74 |  | $         | 9.30 |  | $           | 5.26 | 
| | Weighted average contractual remaining
      life (years) |  |           | 2.44 |  |           |      |  |           |      |  |           |      |  |             | 2.99 | 
| | Weighted
      average share price per share on exercise  |  |           |      |  |           |      |  | $         | 8.74 |  |           |      |  |             |      | 

During 2009, the Group granted
  5,005,200 share purchase options to purchase common shares at an average
  exercise price of $5.02 per common share. The Group also cancelled 4,629,364
  share purchase options with exercise prices between $3.00 and $10.95 and with
  various expiry dates between April 30, 2009 and April 11, 2013. The Group
  determined that of the share purchase options granted, 2,243,700 were
  replacement options for 4,462,400 of the cancelled options and determined that a
  modification of these cancelled options had occurred for accounting purposes.
  For modified options, the compensation expense is based on the fair value of the
  options on the modification date less the fair value of the original options
  based on the shorter of the remaining life of the old option or the expected
  life of the modified option.

Included in the 2009 share purchase
  options were 25,000 share purchase options to a non employee for geological
  advisory services. The Group determined that the services that were provided and
  services to be provided could not be measured reliably. As a result the Group
  estimated the fair value of these services approximated the fair value of the
  share purchase options granted measured using the Black Scholes option pricing
  model and amounted to $20.

Page 25

---

|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The following share purchase options
  were exercisable at December 31, 2010 and 2009:

At December 31, 2010
      
      
      At December 31, 2009Number of
      
      
      Number of
      
      
      Number of
      
      
      Number ofExercise price
      
      
      options
      
      
      options
      
      
      options
      
      
      optionsExpiry date
      
      per
        share
      
      
      outstanding
      
      
      exercisable
      
      
      outstanding
      
      
      exercisableApril 14, 2011
      
      $ 9.74
      
      
      22,500
      
      
      22,500
      
      
      27,500
      
      
      18,333April 30, 2011
      
      $ 7.25
      
      
      180,000
      
      
      180,000
      
      
      180,000
      
      
      180,000October 27, 2011
      
      $ 3.00
      
      
      84,693
      
      
      84,693
      
      
      134,908
      
      
      64,578February 2, 2012
      
      $ 5.00
      
      
      365,668
      
      
      189,335
      
      
      474,834
      
      
      122,167February 4, 2012
      
      $ 5.00
      
      
      1,125,885
      
      
      510,718
      
      
      1,737,202
      
      
      365,869February 20, 2012
      
      $10.95
      
      
      150,000
      
      
      150,000
      
      
      150,000
      
      
      150,000March 26, 2012
      
      $ 8.25
      
      
      25,000
      
      
      16,667
      
      
      25,000
      
      
      8,333April 11, 2013
      
      $ 9.74
      
      
      75,000
      
      
      75,000
      
      
      75,000
      
      
      50,000May 27, 2013
      
      $ 7.59
      
      
      1,602,030
      
      
      467,363
      
      
      
      
      
      August 22, 2013
      
      $ 5.35
      
      
      40,000
      
      
      40,000
      
      
      40,000
      
      
      26,667October 27, 2013
      
      $ 3.00
      
      
      107,000
      
      
      107,000
      
      
      130,000
      
      
      83,333February 2, 2014
      
      $ 5.00
      
      
      1,993,000
      
      
      1,305,333
      
      
      2,018,000
      
      
      642,667February 4, 2014
      
      $ 5.00
      
      
      73,334
      
      
      
      
      
      220,000
      
      
      73,333May 27, 2015
      
      $ 7.59
      
      
      951,000
      
      
      317,000
      
      
      
      
      
      6,795,110
      
      
      3,465,609
      
      
      5,212,444
      
      
      1,785,280Weighted average exercise price per share
      
      $
      6.19
      
      $
      6.00
      
      $
      5.26
      
      $
      5.76


The weighted average fair value of the
  share purchase options granted during the year is $3.88 (2009  $2.14) . Options
  were priced based on the Black-Scholes option pricing model using the following
  weighted average assumptions to estimate the fair value of options granted:

| |                         |   | Years Ended December 31 | 
| | ----------------------- | - | ----------------------- | 
| |                         |   | 2010                    | 
| | Risk-free interest rate |   | 2.36%                   | 
| | Expected life           |   | 3.72 years              | 
| | Expected volatility     |   | 65%                     | 
| | Grant date share price  | $ | 7.87                    | 
| | Expected dividend yield |   | Nil                     | 

Option pricing models require the input
  of highly subjective assumptions including the expected price volatility. The
  Group determines volatility using historical closing prices as a basis for
  expected volatility from three to five years. Changes in the subjective input
  assumptions can materially affect the fair value estimate, and therefore the
  existing models do not necessarily provide a reliable measure of the fair value
  of the Group's share purchase options.

Page 26

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|(d) | Foreign Currency Translation Reserve
|--- | ------------------------------------

| |                                                          |   | 2010   |   |   | 2009    |  
| | -------------------------------------------------------- | - | ------ | - | - | ------- | -
| | Balance at beginning of year                             | $ | 5,743  |   | $ | 21,808  |  
| | Exchange loss on translation of investment in the Pebble |   |        |   |   |         |  
| | Partnership                                              |   | (5,631 | ) |   | (16,674 | )
| | Deferred income
      tax on investment (note 13)        |   | 204    |   |   | 609     |  
| | Balance at the end of year                               | $ | 316    |   | $ | 5,743   |  

The foreign currency translation
  reserve represents accumulated exchange differences arising on the translation
  of the investment in the Pebble Partnership which has a US dollar functional
  currency and related tax effect that have been recognized in other comprehensive
  loss.

|(e) | Investment Revaluation Reserve
|--- | ------------------------------

| |                                                                      |   | 2010 |   |   | 2009 |  
| | -------------------------------------------------------------------- | - | ---- | - | - | ---- | -
| | Balance at beginning of year                                         | $ |     |   | $ | (14  | )
| | Loss on revaluation of investment in AFS marketable
      securities |   | (1   | ) |   | (1   | )
| | Cumulative loss reclassified to loss on
      Impairment of AFS      |   |      |   |   |      |  
| | marketable
      securities                                          |   |     |   |   | 15   |  
| | Balance at the end of year                                           | $ | (1   | ) | $ |     |  

The investment revaluation reserve
  represents accumulated gains and losses arising on the revaluation of AFS
  marketable securities that have been recognized in other comprehensive loss.
  During the year ended December 31, 2009, the Group determined that these
  marketable securities were impaired due to the prolonged decline in the market
  price since receipt of the marketable securities and the balance was
  reclassified to loss.

|8. | RELATED PARTY BALANCES AND TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | A number of key management personnel, or their related
      parties, hold positions in other entities that result in them having
      control or significant influence over the financial or operating policies
      of those entities.                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The following entities transacted with the Group in the
      reporting period. The terms and conditions of the transactions with key
      management personnel and their related parties were no more favourable
      than those available, or which might reasonably be expected to be
      available, on similar transactions to non-key management personnel related
      entities on an arms length basis.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Transactions with Key Management
      Personnel                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The aggregate value of transactions with key management
      personnel being directors and senior management comprising the senior Vice
      President ("VP"), Corporate Development; VP, Engineering and VP, Public
      Affairs were as follows:                                                                                                                                                               

Page 27

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| |                          |   | For the Years Ended December 31 | 
| | ------------------------ | - | ------------------------------- | 
| | Compensation             |   | 2010                            | 
| | Salaries                 | $ | 1,046                           | 
| | Share-based compensation |   | 4,148                           | 
| | Total                    | $ | 5,194                           | 

Transactions with other Related
  Parties

The aggregate value of transactions and
  outstanding balances with related parties were as follows:

| |                                                                       |   | For the Years Ended December 31 |  
| | --------------------------------------------------------------------- | - | ------------------------------- | -
| | Transactions                                                          |   | 2010                            |  
| |                                                                       |   |                                 |  
| | Services rendered to the Group:                                       |   |                                 |  
| | Hunter Dickinson Services Inc. (a)                                    | $ | 2,783                           |  
| | Sidev Holdings Ltd. (b)                                               |   |                                |  
| | Total for services
      rendered                                     | $ | 2,783                           |  
| |                                                                       |   |                                 |  
| | Reimbursement of third party expenses incurred on behalf
      of the |   |                                 |  
| | Group:                                                                |   |                                 |  
| | Hunter Dickinson Services Inc. (a)                                    | $ | 714                             |  
| | Total reimbursed by the Group                                         | $ | 714                             |  
| |                                                                       |   |                                 |  
| | Reimbursement of third party expenses
      incurred by the Group:    |   |                                 |  
| | Pebble Partnership (c)                                                | $ | (134                            | )
| | Total reimbursed (to) the Group                                       | $ | (134                            | )

| |                                         |   | As at December 31 |  |   | As at December 31 | 
| | --------------------------------------- | - | ----------------- |  | - | ----------------- | 
| | Related party
      balances receivable |   | 2010              |  |   | 2009              | 
| |                                         |   |                   |  |   |                   | 
| | Hunter Dickinson Services Inc. (a)      | $ |                  |  | $ | 55                | 
| | Pebble Partnership
      (c)            |   | 75                |  |   |                  | 
| | Total                                   | $ | 75                |  | $ | 55                | 

| |                                      |   | As at December 31 |  |   | As at December 31 | 
| | ------------------------------------ | - | ----------------- |  | - | ----------------- | 
| | Related party
      balances payable |   | 2010              |  |   | 2009              | 
| | Hunter Dickinson Service Inc. (a)    | $ | 102               |  | $ |                  | 

| | (a) | Hunter Dickinson Services Inc. ("HDSI") is a private
      company which was previously owned equally by eight public companies, one
      of which was the Group. During the year, the Group sold its interest in
      HDSI for nominal value. HDSI has certain directors in common with the
      Group and provides geological, corporate development, administrative and
      management services to, and incurs third party costs on behalf of, the
      Group and its subsidiaries pursuant to annually set
      rates.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 28

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

| | (b) | Sidev Holdings Ltd. is a private company controlled by a
      former director of Pebble East Claims Corp., a wholly owned private US
      subsidiary of the Pebble Partnership, which provided project management
      services at market rates.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                    
| | (c) | The Group paid consultants fees on behalf of the Pebble
      Partnership in the normal course of
      operations.                                                                                                                                

|9. | AMOUNTS PAYABLE AND OTHER LIABILITIES
|-- | -------------------------------------

| |                             |   | As at December 31 |  |   | As at December 31 | 
| | --------------------------- | - | ----------------- |  | - | ----------------- | 
| | Falling due within the year |   | 2010              |  |   | 2009              | 
| | Trade payables              | $ | 452               |  | $ | 193               | 

|10. | SUBSIDIARIES
|--- | ------------

Proportion of OwnershipName of Subsidiary
      Place of Incorporation
      Interest
      Principal Activity3537137 Canada
        Inc.
      British
        Columbia, Canada
      100%
      Holding
        Group0796412 BC Ltd.
      British Columbia,
        Canada
      100%
      Not activeNorthern Dynasty
        Partnership1
      Alaska,
        USA
      100%
      Holding
        GroupU5 Resources Inc.2
      Nevada, USA
      100%
      Holding Company


| | 1. | The Groups affiliate which holds the Groups 50%
      interest in the Pebble Partnership (note 3).
| | -- | ----------------------------------------------------------------------------------------------------
| | 2. | The Groups subsidiary which holds the claims purchased
      from Liberty Star (note 4).           

|11. | BASIC AND DILUTED LOSS PER SHARE                                                                                                                                                                                                                                                                                                                                                                    
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The calculation of basic and diluted loss per share for
      the year ended December 31, 2010 was based on the loss attributable to
      common shareholders of $14,115 (2009  $12,740) and the weighted average
      number of common shares outstanding of 93,778,967 (2009 92,828,293)
      respectively.                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Diluted loss per share did not include the effect of
      6,795,110 (2009  5,212,444) share purchase options as they are
      anti-dilutive.                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|12. | FINANCIAL RISK MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Group is exposed in varying degrees to a variety of
      financial instrument related risks. The Board approves and monitors the
      risk management processes, inclusive of documented investment policies,
      counterparty limits, and controlling and reporting structures. The type of
      risk exposure and the way in which such exposure is managed is provided as
      follows:
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Credit Risk                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Credit risk is the risk of potential loss to the Group if
      a counterparty to a financial instrument fails to meet its contractual
      obligations. The Groups credit risk is primarily attributable to its
      liquid financial                                                                                                                                                           

Page 29

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

assets, including cash and cash
  equivalents, amounts receivable and balances receivable from related parties.
  The Group limits the exposure to credit risk by only investing its cash and cash
  equivalents with high-credit quality financial institutions in business and
  saving accounts, guaranteed investment certificates, and in government treasury
  bills which are available on demand by the Group for its programs.

The Groups loan receivable from
  Liberty Star (note 5(a)) is secured over other claims and assets owned by
  Liberty Star in Alaska, USA. Management has assessed the recoverability of the
  loan as at the end of the reporting period and based on financial information
  available on Liberty Star, management has concluded that there is no objective
  evidence of impairment to the loan and considers the full amount to be
  recoverable.

Liquidity Risk

Liquidity risk is the risk that the
  Group will not be able to meet its financial obligations when they become due.
  The Group ensures, as far as reasonably possible, it will have sufficient
  capital in order to meet short to medium term business requirements, after
  taking into account cash flows from operations and the Groups holdings of cash
  and cash equivalents. The Groups cash and cash equivalents are currently
  invested in business accounts and guaranteed investment certificates which are
  available on demand.

Historically, the Company's sole source
  of funding has been the issuance of equity securities for cash, primarily
  through private placements to sophisticated investors and institutions. Except
  for 2008, the Company has issued common shares in each of the past few years
  pursuant to private placement financings and the exercise of warrants and/or
  share purchase options. The Company's access to financing is always uncertain.
  There can be no assurance of continued access to significant equity funding.

The funding of expenditures on the
  Pebble Project held through the Pebble Partnership is currently being provided
  by Anglo American. Excluding cash and cash equivalents in the Pebble
  Partnership, Northern Dynasty has approximately $40 million in cash and cash
  equivalents for its own operating requirements. With the Pebble Project being
  funded by Anglo American for 2011, and given the Companys holdings of cash and
  cash equivalents, the Company believes it has sufficient sources to cover its
  short to medium term cash requirements.

As discussed in Note 3, the Company is
  in a 50:50 limited partnership with Anglo American. Each of the Company and
  Anglo American effectively has equal rights in the Pebble Partnership through
  wholly-owned affiliates. To maintain its 50% interest in the Pebble Partnership,
  Anglo American is required to make staged cash investments into the Pebble Partnership
  aggregating to US$1.425 billion, increasing to US$1.5 billion if the feasibility
  study is completed past 2011, over a period of several years. Anglo American
  completed the initial US$125 million commitment to fund prefeasibility study
  expenditures in 2008, plus additional expenditures approved. If a prefeasibility
  study is completed and the decision is to proceed, in order to retain its 50%
  interest, Anglo American is required to commit to further expenditures which
  will bring its total investment to at least US$450 million, which amount is
  to be expended producing a final feasibility study and in related activities,
  the completion of which is expected to take the Pebble Partnership to a production
  decision. Upon an affirmative decision to develop a mine, Anglo American is
  required to commit to the remainder of the total investment of US$1.425 billion
  to US$1.5 billion in order to retain its 50% interest in the Pebble Partnership.

Page 30

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

At December 31, 2010, the Company had
  working capital of approximately $43.3 million as compared to $44.9 million
  at December 31, 2009.

The Group has no contractual
  obligations other than current trade and related party payables (notes 8 and
  9).

Foreign exchange risk

The Group is exposed to foreign
  exchange risk as some of its cash and cash equivalents are held in US dollars.
  Also certain of the Groups corporate expenses are incurred in US dollars. As a
  consequence, the Groups results from its operations are subject to currency
  transaction risk and currency translation risk. The operating results and
  financial position of the Group are reported in Canadian dollars in the Groups
  consolidated financial statements. The fluctuation of the US dollar in relation
  to the Canadian dollar will consequently have an impact upon the losses incurred
  by the Group and may also affect the value of the Groups assets and the amount
  of shareholders equity.

The Group has not entered into any
  agreements or purchased any instruments to hedge possible currency risks at this
  time.

The exposure of the Groups cash and
  cash equivalents, amounts receivable and amounts receivable from related parties
  to foreign exchange risk is as follows:

| | Currency                     |   | As at December 31, 2010 |  |   | As at December 31, 2009 | 
| | ---------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                              |   | Foreign currency        |  |   | Amount in               | 
| |                              |   | amount                  |  |   | Canadian dollars        | 
| | US dollars                   |   |                         |  |   |                         | 
| | Amounts receivable           | $ | 3,153                   |  | $ | 3,136                   | 
| | Cash and cash equivalents    |   | 49                      |  |   | 48                      | 
| | Total financial
      assets | $ | 3,202                   |  | $ | 3,184                   | 

The exposure of the Groups amounts
  payable and other liabilities and amounts due to related parties to foreign
  exchange risk is as follows:

| | Currency                          |   | As at December 31, 2010 |  |   | As at December 31, 2009 | 
| | --------------------------------- | - | ----------------------- |  | - | ----------------------- | 
| |                                   |   | Foreign currency        |  |   | Amount in               | 
| |                                   |   | amount                  |  |   | Canadian dollars        | 
| | US dollars                        |   |                         |  |   |                         | 
| | Amounts payable and other         |   |                         |  |   |                         | 
| | liabilities                       | $ | 1                       |  | $ | 1                       | 
| | Total financial
      liabilities | $ | 1                       |  | $ | 1                       | 

Based on the above net exposures and
  assuming that all other variables remain constant, a 10% depreciation of the
  Canadian dollar against the US dollar would result in a decrease in the loss
  of approximately $318 in the year (2009  $68). This sensitivity analysis
  includes only outstanding foreign currency denominated monetary items, and excludes
  the effect of any translation adjustments for the investment in the Pebble Partnership.

Page 31

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

Interest rate risk

The Group is subject to interest rate
  risk with respect to its investments in cash and cash equivalents. The Groups
  policy is to invest cash at fixed rates of interest and cash reserves are to be
  maintained in cash and cash equivalents in order to maintain liquidity, while
  achieving a satisfactory return for shareholders. Fluctuations in interest rates
  when the cash and cash equivalents mature impact interest income earned.

Assuming that all other variables
  remain constant, a 100 basis points change representing a 1% increase or decrease in interest rates would
  have resulted in a decrease or increase in the loss of approximately $400 in the
  year (2009  $385).

Commodity price risk

While the value of the Groups core
  mineral resource property, held through its 50% interest in the Pebble
  Partnership, is related to the price of gold, copper and molybdenum and the
  outlook for these minerals, the Group currently does not have any operating
  mines and hence does not have any hedging or other commodity based risks in
  respect of its operational activities.

Gold, copper, and molybdenum prices
  have historically fluctuated widely and are affected by numerous factors outside
  of the Group's control, including, but not limited to, industrial and retail
  demand, central bank lending, forward sales by producers and speculators, levels
  of worldwide production, short-term changes in supply and demand because of
  speculative hedging activities, and certain other factors related specifically
  to gold.

Capital Management

The Group's policy is to maintain a
  strong capital base so as to maintain investor and creditor confidence and to
  sustain future development of the business. The capital structure of the Group
  consists of equity, comprising share capital, net of accumulated deficit.

There were no changes in the Group's
  approach to capital management during the year.

The Group is not subject to any
  externally imposed capital requirements.

Fair value

The fair value of the Groups financial
  assets and liabilities approximates the carrying amount.

Financial instruments measured at fair
  value are classified into one of three levels in the fair value hierarchy
  according to the relative reliability of the inputs used to estimate the fair
  values. The three levels of the fair value hierarchy are:

- Level 1  Unadjusted quoted prices in active
      markets for identical assets or liabilities;

Page 32

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

- Level 2  Inputs other than quoted prices that are
      observable for the asset or liability either directly or indirectly; and
- Level 3  Inputs that are not based on observable
      market data.

Financial assets at fair value as at
        December 31, 2010Level 1
      
      
      Level 2
      
      
      Level 3
      
      
      TotalAvailable for sale financial assetsMarketable
        securities
      $
      1
      
      $
      
      
      $
      
      
      $
      1Total financial assets at fair value
      $
      1
      
      $
      
      
      $
      
      
      $
      1


Financial assets at fair value as at
        December 31, 2009Level 1
      
      
      Level 2
      
      
      Level 3
      
      
      TotalAvailable for sale financial assetsMarketable
        securities
      $
      2
      
      $
      
      
      $
      
      
      $
      2Total financial assets at fair value
      $
      2
      
      $
      
      
      $
      
      
      $
      2


Page 33

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

|13. | INCOME TAX EXPENSE
|--- | ------------------

| |                                           |   | Years Ended December 31 | 
| | ----------------------------------------- | - | ----------------------- | 
| |                                           |   | 2010                    | 
| | Current tax expense                       |   |                         | 
| | Current period                            | $ |                        | 
| |                                           |   |                         | 
| | Deferred tax expense (recovery)           |   |                         | 
| | Current period                            |   | 30                      | 
| | Deferred income
      tax liabilities     |   | 30                      | 
| |                                           |   |                         | 
| | Total income tax
      expense (recovery) | $ | 30                      | 

| |                                                  |  | Years Ended December 31 | 
| | ------------------------------------------------ |  | ----------------------- | 
| | Reconciliation of effective tax rate             |  | 2010                    | 
| |                                                  |  |                         | 
| | (Loss) for the period                            |  |                         | 
| | Total income tax expense (recovery)              |  |                         | 
| | (Loss) excluding income tax                      |  |                         | 
| | Income tax using the Company's domestic tax rate |  | 28.5 %                  | 
| | Non-deductible expenses                          |  | (17.2)%                 | 
| | Reduction in statutory tax rates                 |  | (1.4)%                  | 
| | Foreign exchange                                 |  | (1.4)%                  | 
| | Other                                            |  | 1.2 %                   | 
| | Deferred income tax assets not recognized        |  | (9.9)%                  | 
| |                                                  |  | (0.2)%                  | 

| | Deferred income
      tax assets (liabilities) |   | As at
      December 31 |   |   | As at
      December 31 |  
| | ---------------------------------------------- | - | ----------------------- | - | - | ----------------------- | -
| |                                                |   | 2010                    |   |   | 2009                    |  
| | Resource pool                                  | $ | 19,861                  |   | $ | 20,987                  |  
| | Tax losses                                     |   | 1,817                   |   |   | 1,508                   |  
| | Net deferred income tax assets                 |   | 21,678                  |   |   | 22,495                  |  
| | Investment in the
      Pebble Partnership     |   | (25,311                 | ) |   | (26,302                 | )
| | Net deferred income tax liability              | $ | (3,633                  | ) | $ | (3,807                  | )

At December 31, 2010, the Group had
  available non- capital losses for income tax purposes in Canada totaling
  approximately $19.4 million (2009  $14.5 million), expiring in various years
  from 2026 to 2030 assuming none are recoverable in one year. At December 31,
  2010 the Group had available net operating losses from its branch operations in
  the United States of $70.9 million (2009  $58.3 million), expiring in various
  years from 2022 to 2030.

The Group had approximately $202.5
  million (2009  $202.3 million) of resource tax pools available in Canada, which
  may be carried forward and utilized to reduce future taxes related to certain
  resource income. In addition, the Group had approximately $105.3 million (2009 
  $122.9 million) of resource tax pools available from its investment in the
  Pebble Partnership, which may be used to shelter certain resource income in the
  United States.

Page 34

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|Northern Dynasty Minerals Ltd.                                             
|---------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                             
|For the years ended December 31, 2010 and 2009                             
|(Expressed in
      thousands of Canadian Dollars, unless otherwise stated)

The Group had the following temporary
  differences at December 31, 2010 in respect of which no deferred tax asset has
  been recognized:

| |                   |   |                  |  |   |          |  |   | Investment  |  |   |       | 
| | ----------------- | - | ---------------- |  | - | -------- |  | - | ----------- |  | - | ----- | 
| | Expiry            |   |                  |  |   | Resource |  |   | in Pebble   |  |   |       | 
| |                   |   | Tax
      Losses |  |   | Pools    |  |   | Partnership |  |   | Other | 
| | Within one year   | $ |                 |  | $ |         |  | $ |            |  | $ |      | 
| | One to five years |   |                 |  |   |         |  |   |            |  |   |      | 
| | After five years  |   | 85,910           |  |   |         |  |   |            |  |   |      | 
| | No expiry date    |   | 169              |  |   | 110,407  |  |   | 19,257      |  |   | 952   | 
| |                   | $ | 86,079           |  | $ | 110,407  |  | $ | 19,257      |  | $ | 952   | 

|14. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | Due to the nature of the Groups operations, various
      legal and tax matters are outstanding from time to time. In the opinion of
      management, there are no matters that could have a material effect on the
      Groups consolidated financial position or results of operations which
      require additional disclosure of in these consolidated financial
      statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|15. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Group issued 567,063 common shares pursuant to the
      exercise of share purchase options with a weighted average exercise price
      of $5.56 per common share from January through March 28, 2011. The Group
      also cancelled 33,000 share purchase options which were forfeited on
      resignation with an exercise price of $7.59 during the same
      period.           
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Group granted 2,198,000 share purchase options at an
      exercise price of $15.44 per common share with expiry dates of March 15,
      2014 and 2016.                                                                                                                                                                                                                               

Page 35

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