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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

T A B L E O F C O N T E N T S

|1.1    | DATE                                                                        | 2                                        
|------ | --------------------------------------------------------------------------- | -----------------------------------------
|1.2    | OVERVIEW                                                                    | 3                                        
|1.2.1  | SUMMARY                                                                     | 3                                        
|1.2.2  | LIMITED PARTNERSHIP
      ESTABLISHED TO ADVANCE THE PEBBLE PROJECT         | 4                                        
|1.2.3  | TECHNICAL PROGRAMS                                                          | 5                                        
|       | EXPLORATION AND
      RESOURCE DRILLING                                     | 5                                        
|       | ENGINEERING                                                                 | 7                                        
|       | ENVIRONMENTAL AND
      SOCIOECONOMIC STUDIES                               | 7                                        
|       | PLANS FOR 2009                                                              | 9                                        
|1.2.4  | CORPORATE MATTERS                                                           | 9                                        
|1.2.5  | MARKET TRENDS                                                               | 9                                        
|1.3    | SELECTED ANNUAL
      INFORMATION                                           | 10                                       
|1.4    | SUMMARY OF QUARTERLY RESULTS                                                | 11                                       
|1.5    | RESULTS OF
      OPERATIONS                                                 | 12                                       
|1.6    | LIQUIDITY                                                                   | 13                                       
|1.7    | CAPITAL RESOURCES                                                           | 14                                       
|1.8    | OFF-BALANCE SHEET ARRANGEMENTS                                              | 14                                       
|1.9    | TRANSACTIONS WITH
      RELATED PARTIES                                     | 14                                       
|1.10   | FOURTH QUARTER                                                              | 15                                       
|1.11   | PROPOSED
      TRANSACTIONS                                                 | 15                                       
|1.12   | CRITICAL ACCOUNTING ESTIMATES                                               | 15                                       
|1.13   | CHANGES IN
      ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION             | 17                                       
|       | (A)                                                                         | NEWLY
      ADOPTED ACCOUNTING POLICIES  
|       | (B)                                                                         | ACCOUNTING POLICIES NOT YET
      ADOPTED
|1.14   | FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS                                 | 26                                       
|1.15   | OTHER MD&A
      REQUIREMENTS                                               | 26                                       
|1.15.1 | ADDITIONAL DISCLOSURE FOR VENTURE ISSUERS WITHOUT
      SIGNIFICANT REVENUE | 26                                       
|1.15.2 | DISCLOSURE OF
      OUTSTANDING SHARE DATA                                  | 27                                       
|1.15.3 | INTERNAL CONTROLS OVER FINANCIAL REPORTING PROCEDURES                       | 28                                       
|1.15.4 | DISCLOSURE
      CONTROLS AND PROCEDURES                                    | 28                                       

Page 1

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.1 | Date
|--- | ----

This Management Discussion and Analysis ("MD&A") should be
read in conjunction with the audited consolidated financial statements of
Northern Dynasty Minerals Ltd. ("Northern Dynasty" or the "Company") for the
year ended December 31, 2008, as publicly filed on SEDAR at www.sedar.com.

This MD&A is prepared as of March 30, 2009. All dollar
figures stated herein are expressed in Canadian dollars, unless otherwise
specified.

This discussion includes certain statements that may be
      deemed "forward-looking statements". These forward-looking
      statements constitute "forward-looking statements" within the meaning of
      Section 27A of the Securities Act of 1933and Section
      21E of theSecurities Exchange Act of 1934.All statements, other than statements of historical
      facts, especially those that address estimated resource quantities, grades
      and contained metals, are forward-looking statements because they are
      generally made on the basis of estimation and extrapolation from a limited
      number of drill holes and metallurgical studies. Although diamond drill
      hole core provides valuable information about the size, shape and geology
      of an exploration project, there will always remain a significant degree
      of uncertainty in connection with these valuation factors until a deposit
      has been extensively drilled on closely spaced centers, which has occurred
      only in specific areas on the Pebble Project. Although the Company
      believes the expectations expressed in its forward-looking statements are
      based on reasonable assumptions, such statements should not be in any way
      construed as guarantees of the ultimate size, quality or commercial
      feasibility of the Pebble Project or of the Companys future performance.
      The likelihood of future mining at the Pebble Project is subject to a
      large number of risks and will require achievement of a number of
      technical, economic and legal objectives, including obtaining necessary
      mining and construction permits, completion of pre-feasibility and final
      feasibility studies, preparation of all necessary engineering for
      underground workings and processing facilities as well as receipt of
      significant additional financing to fund these objectives as well as
      funding mine construction. Such funding may not be available to the
      Company on acceptable terms or on any terms at all. There is no known ore
      at the Pebble Project and there is no assurance that the mineralization at
      the Pebble Project will ever be classified as ore. The need for compliance
      with extensive environmental and socio- economic rules and practices and
      the requirement for the Company to obtain government permitting can cause
      a delay or even abandonment of a mineral project. The Company is also
      subject to the specific risks inherent in the mining business as well as
      general economic and business conditions.


Unless otherwise noted, Northern Dynasty is solely
responsible for the content of the disclosure set out herein.

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Cautionary Note to Investors
      Concerning Estimates of Measured and Indicated ResourcesThe following section uses the terms measured resources
      and indicated resources. The Company advises investors that although
      those terms are recognized and required by Canadian regulations, the U.S.
      Securities and Exchange Commission does not recognize them. Investors
      are cautioned not to assume that any part or all of mineral
      deposits in these categories will ever be converted into reserves.


Cautionary Note to Investors
      Concerning Estimates of Inferred ResourcesThe following section uses the term inferred resources.
      The Company advises investors that although this term is recognized and
      required by Canadian regulations, the U.S. Securities and Exchange
      Commission does not recognize it. Inferred resources have a great amount
      of uncertainty as to their existence, and as to their economic and legal
      feasibility. It cannot be assumed that all or any part of a mineral
      resource will ever be upgraded to a higher category. Under Canadian rules,
      estimates of Inferred Mineral Resources may not form the basis of economic
      studies, except in rare cases. Investors are cautioned not to assume
      that any part or all of an inferred resource exists, or is
      economically or legally mineable.


|1.2   | Overview
|----- | --------
|      |         
|1.2.1 | Summary 

Northern Dynasty is a mineral exploration company whose major
assets are a 50% share of the Pebble Copper-Gold-Molybdenum Project (the
Project) and a stream of financing being provided towards the further
exploration and, if warranted, development of the Project.

The Pebble property is located in Alaska, 19 miles (30
kilometers) from the villages of Iliamna and Newhalen, and approximately 200
miles (320 kilometers) southwest of the city of Anchorage.

An extensive, northeast-trending mineralized system underlies
the Pebble property. Mineralization was discovered and an initial mineral
resource outlined in the Pebble West area through drilling by a previous
operator during the period 1987-1997. Northern Dynasty acquired the right to
earn an interest in the Pebble property in late 2001, and carried out an initial
exploration program that discovered two other porphyry copper-gold-molybdenum
deposits, a porphyry copper zone and a gold-copper skarn occurrence along the
mineralized trend. Several high-grade gold veins are also known to occur.

Since 2002, most work has been focused on the Pebble
deposit1, resulting in discovery of the higher grade mineralization
that occurs in the Pebble East area and an overall expansion of the deposit.
Comprehensive technical programs, including engineering, environmental and
socioeconomic studies, have been underway since 2004.

In mid 2007, Northern Dynasty and Anglo American plc (Anglo)
established a strategic 50:50 partnership (Pebble Limited Partnership, see
section 1.2.2) to engineer, permit, construct and operate a modern, long-life
mine at Pebble, based on a staged investment by Anglo tied to key project
milestones.

_______________________________1Previously
thought to be two deposits called Pebble West and Pebble East, the Pebble
deposit is now considered to be a single deposit comprising near-surface
mineralization in the west and extending to a higher grade and deeper zone to
the east.

Page 3

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

The Pebble Partnership Board of Directors approved a US$140.1
million budget for the Pebble Project in 2008, including US$61.6 million for
site operations and drilling; US$30.2 million for engineering to advance a
prefeasibility study; US$24.9 million on an environmental program; and US$14.8
million for community engagement, workforce and business development and public
affairs.

Drilling in 2008 substantiated the volume, grade and continuity
of mineralization in the Pebble East area. An estimate of the mineral resources
in the overall Pebble deposit was announced in December 2008. The overall
estimate for the deposit facilitates integrated mine planning for the Project
and allows for benchmarking with other large porphyry deposits world-wide. The
results at a 0.30% copper equivalent (CuEQ)2 cut-off are:

- 5.1 billion tonnes of Measured and Indicated Mineral Resources grading
  0.77% CuEQ, containing 48 billion pounds of copper, 57 million ounces of gold,
  and 2.9 billion pounds of molybdenum; and
- 4.0 billion tonnes of Inferred Mineral Resources grading 0.55% CuEQ,
  containing 24 billion pounds of copper, 37 million ounces of gold and 1.9
  billion pounds of molybdenum.

Engineering, environmental and socioeconomic studies were also
successfully advanced in 2008. Currently, it is expected that a prefeasibility
study will be completed for the project and permitting initiated in 2010.

Deterioration of global economic conditions in late 2008
resulted in high volatility and significant weakening of exchange traded
commodity prices. Deterioration in credit market conditions also increased the
cost of obtaining capital and limited the availability of funds. Funding for the
Pebble Project is currently being provided by Anglo (as described below).
Northern Dynasty has cash and equivalents on hand in excess of $40 million for
its operating requirements. The Company believes that with the project being
fully funded and given its holdings of cash and equivalents it has sufficient
sources to cover the likely short and long term cash requirements.

|1.2.2 | Limited Partnership
      Established to Advance the Pebble Project
|----- | -------------------------------------------------------------------

On July 26, 2007, the Company converted a wholly-owned general
partnership that held its Pebble Property interests into a limited partnership,
the Pebble Limited Partnership (the Partnership). An indirect wholly-owned
subsidiary of Anglo subscribed for 50% of the Partnership's equity effective
July 31, 2007. Each of the Company and Anglo effectively has equal rights in the
Partnership through wholly-owned affiliates. To maintain its 50% interest in the
Partnership, Anglo is required to make staged cash investments into the
Partnership aggregating to US$1.425 billion as described below.

Anglos staged investment requirements include an initial
minimum expenditure of US$125 million to be expended towards a prefeasibility
study (funding completed as of 2008), plus a requirement to fund additional
expenditures approved by the board of the general partner (Pebble Mines Corp.)
unless Anglo elects to terminate its rights and relinquish all its interests in
the Partnership. After the completion and approval by the general partner of the
prefeasibility study, Anglo is required, in order to retain its 50% interest in
the Partnership, to commit to further expenditures which bring its total
investment to at least US$450 million which amount is to be expended in
producing a final feasibility study and in related activities, the completion

______________________________2Information on
copper equivalent calculation is given in Note 1 to the Mineral Resoures table
in section 1.2.3.

Page 4

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

of which is expected to take the Partnership to a production
decision. Upon an affirmative decision by the Partnership to develop a mine,
Anglo is required to commit to the remainder of the total investment of US$1.425
billion in order to retain its interest in the Partnership. Following completion
of the US$1.425 billion expenditure, any further expenditure will be funded by
Anglo and the Company on a 50:50 basis (subject to dilution for
non-contribution). If the feasibility study is completed after 2011, Anglos
overall funding requirement increases from US$1.425 billion to US$1.5 billion.
The partnership agreement provides for equal project control rights with no
operators fees payable to either party.

The Company determined that the Partnership is a variable
interest entity (VIE) in accordance with Accounting Guideline 15
(AcG-15), Consolidation of Variable Entities. AcG-15 prescribes the
application of consolidation principles for entities that meet the definition of
a VIE. The Company concluded that it is the primary beneficiary of the VIE and
consequently has consolidated the activities of the Partnership from August 1,
2007. Expenditures incurred on the Pebble Project through the Partnership are
included in the consolidated statement of operations. Anglos cash contribution
since the formation of the Partnership on July 31, 2007 to December 31, 2008 has
been $224.0 million (US$183.9 million) (year ended December 31, 2008  $188.5
million (US$148.0 million)). Anglos contributions have been recorded as a
non-controlling interest in the Companys financial statements.

Senior management of the Pebble Limited Partnership is largely
in place in Anchorage, Alaska, and includes several of the states most
respected resource development professionals. This includes CEO John Shively,
former Commissioner of the Alaska Department of Natural Resources, and
Vice President, Environment, Ken Taylor, former Deputy Commissioner of the
Alaska Department of Fish & Game. The Alaska-based operations are
guided by the board of the general partner with equal representation from Anglo
and Northern Dynasty.

|1.2.3 | Technical
      Programs
|----- | ------------------------

Exploration and Resource Drilling

The 2008 drilling program at Pebble was designed to upgrade the
resource classification of a portion of the Pebble East mineral resources to an
indicated category in preparation for prefeasibility mine planning studies, and
to test for the outside limits of the deposit. The program also included
metallurgical, geotechnical and environmental drilling. A total of approximately
179,300 feet in 234 holes were drilled as tabulated below:

Type
    No. of Holes
    Length (ft)Delineation &
      Infill
    26
    119,293Metallurgical
    15
    14,511Geotechnical (cored)
    111
    41,665Rotary (chips)
    82
    6,748


The indicated lengths for oriented and acoustic holes are
      already included in the total for exploration and delineation holes and
      geotechnical holes. Six oriented holes, totalling 25,236 ft,and 32
      acoustic holes, totaling 96,921 ft, were drilled Oriented and acoustically
      logged holes are used for several purposes, including exploration and
      geotechnical studies.


The Pebble Mineral Resource estimate announced in early
December 2008 was prepared by the technical staff of the Pebble Partnership and
audited by industry leading geological and mining consultants at Scott Wilson
Roscoe Postle Associates Inc., under the direction of David W. Rennie, P. Eng.,
an independent qualified person. The estimate utilized results from 476 holes
completed across the deposit to July 2008.

Page 5

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

The mineral resources are reported within a defined volume and
at various cut-off grades as presented below.

PEBBLE DEPOSIT MINERAL RESOURCES2

MEASURED MINERAL RESOURCES

Cut-Off
    Size
    Grade
    Contained MetalCuEQ1,3 %
    Million Tonnes
    Copper %
    Gold g/t
    Molybdenum ppm
    CuEQ1 %
    Copper B lb
    Gold M oz
    Molybdenum M lb0.30
    526
    0.33
    0.35
    178
    0.62
    3.8
    5.9
    2100.40
    499
    0.34
    0.36
    181
    0.63
    3.7
    5.7
    2000.60
    239
    0.42
    0.43
    207
    0.76
    2.2
    3.3
    1101.00
    21
    0.64
    0.63
    305
    1.14
    0.3
    0.4
    10


INDICATED MINERAL RESOURCES

Cut-Off
    Size
    Grade
    Contained MetalCuEQ1,3 %
    Million Tonnes
    Copper %
    Gold g/t
    Molybdenum ppm
    CuEQ1 %
    Copper B lb
    Gold M oz
    Molybdenum M lb0.30
    4,570
    0.44
    0.35
    265
    0.78
    44.6
    51.3
    2,6700.40
    4,120
    0.48
    0.37
    273
    0.83
    43.2
    48.7
    2,4800.60
    2,851
    0.57
    0.42
    307
    0.98
    36.1
    38.2
    1,9301.00
    1,135
    0.79
    0.53
    340
    1.28
    19.8
    19.3
    850


MEASURED + INDICATED MINERAL RESOURCES

Cut-Off
    Size
    Grade
    Contained MetalCuEQ1,3 %
    Million Tonnes
    Copper %
    Gold g/t
    Molybdenum ppm
    CuEQ1 %
    Copper B lb
    Gold M oz
    Molybdenum M lb0.30
    5,096
    0.43
    0.35
    256
    0.77
    48.5
    57.2
    2,8700.40
    4,619
    0.46
    0.37
    263
    0.81
    46.9
    54.4
    2,6800.60
    3,090
    0.56
    0.42
    300
    0.96
    38.3
    41.5
    2,0401.00
    1,156
    0.79
    0.53
    340
    1.27
    20.1
    19.7
    850


INFERRED MINERAL RESOURCES

Cut-Off
    Size
    Grade
    Contained MetalCuEQ1,3 %
    Million Tonnes
    Copper %
    Gold g/t
    Molybdenum ppm
    CuEQ1 %
    Copper B lb
    Gold M oz
    Molybdenum M lb0.30
    3,968
    0.27
    0.29
    220
    0.55
    23.7
    36.9
    1,9200.40
    2,267
    0.37
    0.35
    260
    0.71
    18.6
    25.5
    1,3000.60
    1,160
    0.53
    0.43
    303
    0.93
    13.4
    16.0
    7701.00
    413
    0.74
    0.50
    400
    1.24
    6.7
    6.6
    360


| | Note 1 | Copper equivalent calculations used metal prices of
      US$1.80/lb for copper, US$800/oz for gold and US$10/lb for molybdenum and
      metallurgical recoveries of 91% for copper, 75% for gold and 90% for
      molybdenum in the Pebble West area and 93% for copper, 80% for gold and
      94% for molybdenum in the Pebble East area. Revenue is calculated for each
      metal based on grades, recoveries and selected metal prices; accumulated
      revenues are then divided by the revenue at 1% copper. Recoveries for gold
      and molybdenum are normalized to the copper recovery, as shown below:
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |        | CuEQ (Pebble West) = Cu % + (Au g/t x 75%/91% x
      25.72/39.68) + (Mo % x 90%/91% x 220.46/39.68)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |        | CuEQ (Pebble East) = Cu % + (Au g/t x 80%/93% x
      25.72/39.68) + (Mo % x 94%/93% x 220.46/39.68).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Note 2 | The mineral resources fall within a volume or shell
      defined by long-term metal price estimates of US$2.50/lb for copper,
      US$900/oz for gold and US$25/lb for molybdenum.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Note 3 | Pebble West has been considered for an open pit mining
      scenario and Pebble East for underground bulk mining. For bulk underground
      mining, cut-offs such as 0.60% CuEQ, are typically used for bulk
      underground mining operations at copper porphyry deposits located around
      the world. A 0.30% CuEQ cut-off is considered to be comparable to that
      used for porphyry deposit open pit mining operations in the Americas. All
      mineral resource estimates, cut-offs and potential mining scenarios are
      subject to a feasibility study.                                           

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Engineering

Engineering work in 2008 focused on the following areas:

- Collection of additional site and underground geotechnical data to support
  ongoing design work;
- Continuation of metallurgical testwork on both Pebble West and Pebble East
  to optimize conventional processing systems and designs;
- Continuation of assessments of the major infrastructure elements (access
  road, port and power) in order to establish the optimum alternatives and
  designs for these Project components; and
- Assessment of potential project mine plans that would extract portions of
  the extensive mineral resources available to determine likely scenarios for
  the prefeasibility study.

Metallurgy

Testwork continued through much of 2008, utilizing drill core
samples collected in 2007 or earlier. The focus of the program was on assessing
the response of Pebble West material, in particular, the potential for plant
feed from the supergene (enriched copper) horizon in the Pebble West area, to
the flowsheet that had been defined for Pebble East. Blends of Pebble East and
Pebble West materials were also tested. Additional drilling was completed to
obtain material for further metallurgical testing.

Pebble East Geotechnical Data

The Pebble East geotechnical data collection program is
directed by an internationally recognized independent consultant. The objective
of this program is to collect geotechnical data to support design of an
underground mine at Pebble East.

The program consists of data collection and analysis of
standard geotechnical parameters from all core holes, detailed logging of
oriented core from one of the exploration rigs, and down-hole logging using an
acoustic probe. A program to collect surface geotechnical data commenced early
in the second quarter. This program is intended to collect supplemental data for
the design of site infrastructure, tailings and water management systems. The
program was completed in mid October.

Infrastructure

A base case for the project infrastructure has been developed
in conjunction with the ongoing prefeasibility study program. Infrastructure for
the project includes port, road, and power options that will be necessary to
support any future mine operations. Assessments of alternatives to the base case
were also completed during the year.

Environmental and Socioeconomic Studies

Environmental and socioeconomic baseline data studies have now
been completed for five consecutive years. In addition, environmental baseline
information that was collected by the prior operator has been included to expand
the database.

Comprehensive environmental and socioeconomic base-line study
programs continued in 2008, with the objectives of collecting data in the Pebble
East area and comparing annual variability. This data provides a foundation for
the sound environmental design of the project and preparation of state and
federal permit

Page 7

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

applications in future years. The primary areas of focus of the
2008 field programs were water, aquatic habitat/fish resources, terrestrial
habitat/wildlife resources, wetlands, and subsistence/traditional use.

Seventy-eight holes were drilled for environmental data
collection purposes during the year. These holes are testing the resource and
planned infrastructure areas to map out groundwater flow regimes and to
understand groundwater chemistry.

The environmental baseline document remains on schedule to be
finalized in 2010. This document will be submitted with permit applications,
targeted for 2010, once mine engineering and a proposed development plan is
completed. The permitting process for the Pebble Project under the National
Environmental Policy Act is expected to take three or more years.

Cultural Studies

Archaeological studies have been carried out on all areas that
might be disturbed by the project, with the exception of possible road and port
locations. Examination of the road and port sites are not expected until 2009 or
later, once a decision is made regarding the exact location of these project
features.

Community Engagement

Hundreds of public meetings and project presentations were
conducted throughout the region and around the state in 2008, as well as some 50
stakeholder tours of the Pebble Project site and operating mines in Alaska and
other jurisdictions. In addition, the Keystone Center  a non-profit
organization that specializes in developing stakeholder dialogue processes  has
agreed to work with the Partnership to design and facilitate an independent,
stakeholder-driven dialogue process around the Pebble Project to begin in 2009.
It is envisaged that the program will include recruitment of independent
technical and scientific experts to review the Pebble Partnerships work and
serve as a credible and objective arbiter for project stakeholders.

The Pebble Partnership has a number of other initiatives
underway to enhance stakeholder relationships. This includes investment in
community socio-economic development programs like the Pebble Fund for
Sustainable Bristol Bay Fisheries & Communities  a five-year, US$5 million
endowment to enhance the health and sustainability of regional fisheries and the
communities they support. It also includes the Pebble Project Pre-Permitting
Environmental & Socio-Economic Data Release Series  a voluntary initiative
to share the preliminary findings of the Partnerships comprehensive
environmental study program with project stakeholders prior to the beginning of
project permitting.

Workforce development and education efforts planned for 2009
include additional training in the areas of equipment operations, health, safety
and environment, and other areas. College scholarship programs for high school
students are also being continued. Contract and full-time personnel working at
the Pebble Project site near Iliamna, Alaska peaked at 232 in the summer of
2008. Some 130 individuals from local communities worked on the project in
2008.

Page 8

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|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Plans for 2009

A US$59 million program has been approved for 2009. The purpose
of the program is to advance a Prefeasibility Study and prepare the Pebble
Project for permitting in 2010, and includes the following:

- a site investigation program to undertake resource drilling and support
  environmental studies;
- an engineering program to finalize trade-off studies in preparation for the
  completion of a Prefeasibility Study;
- an environmental study program to continue baseline data collection in key
  areas (e.g. hydrology, water quality, fish resources), and to compile and
  analyze collected data from previous years toward the completion of the
  Environmental Baseline Document in 2010;
- a public affairs program to engage communities and project stakeholders,
  and to advance initiatives in the areas of workforce development, business
  development and public education; and
- corporate and administrative costs.

These approved expenditures are expected to be supplemented by
additional engineering and site investigation activities in the latter half of
2009, including geotechnical and metallurgical drilling.

|1.2.4 | Corporate
      Matters
|----- | -----------------------

On August 1, 2008, Marchand Snyman became Chief Financial
Officer and Director of the Company.

|1.2.5 | Market Trends
|----- | -------------

Copper prices had been on an overall upward trend between late
2003 and October 2008, but have decreased significantly since then as a result
of uncertainty in global financial markets. The average price in 2008 was
US$3.15/lb, compared to an average price of US$3.22/lb in 2007. Prices
stabilized in January 2009, ranging from US$1.40/lb to US$1.50/lb and averaging
US$1.48/lb.

Precious metals prices had been on an overall uptrend for more
than three years. Gold prices were volatile in late 2008, dropping below $800/oz
for a two-week period in September, and again from mid October through November.
The average gold price for the year was US$871/oz. Prices in January 2009 have
averaged US$858/oz. As global economic and other market conditions are
uncertain, market experts have forecast strong gold prices through 2009.

Molybdenum prices increased from US$7.60/lb in 2003 and peaked
in 2005 at an average price of US$34/lb. Prices decreased in 2006, averaging
US$25.53/lb over the year, and strengthened again in 2007, averaging US$30.47/lb
for the year. Molybdenum prices dropped significantly in late 2008, but averaged
US$28.98/lb based on strength earlier in the year. Prices continued to drop in
2009, averaging US$9.30/lb in January but have stabilized around that price
since that time.

Page 9

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.3 | Selected Annual
      Information
|--- | ---------------------------------

The consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles, and are
expressed in thousands of Canadian dollars, except per share amounts.

|                                                     |   | As at       |   |   | As at       |   |   | As at       |  
|---------------------------------------------------- | - | ----------- | - | - | ----------- | - | - | ----------- | -
|                                                     |   | December 31 |   |   | December 31 |   |   | December 31 |  
|                                                     |   | 2008        |   |   | 2007        |   |   | 2006        |  
|Current assets                                       | $ | 60,312      |   | $ | 41,381      |   | $ | 98,112      |  
|Mineral property interests                           |   | 168,222     |   |   | 168,222     |   |   | 168,222     |  
|Other assets                                         |   | 619         |   |   | 674         |   |   | 633         |  
|Total
      assets                                   |   | 229,153     |   |   | 210,277     |   |   | 266,967     |  
|                                                     |   |             |   |   |             |   |   |             |  
|Current liabilities                                  |   | 13,343      |   |   | 7,628       |   |   | 7,839       |  
|Other liabilities                                    |   | 251,935     |   |   | 93,338      |   |   | 61,601      |  
|Shareholders
      (deficiency) equity              |   | (36,125     | ) |   | 109,311     |   |   | 197,527     |  
|Total liabilities and shareholders equity           |   | 229,153     |   |   | 210,277     |   |   | 266,967     |  
|                                                     |   |             |   |   |             |   |   |             |  
|Working capital                                      |   | 46,969      |   |   | 33,753      |   |   | 90,273      |  
|                                                     |   |             |   |   |             |   |   |             |  
|Expenses (income)                                    |   |             |   |   |             |   |   |             |  
|Amortization                                         |   | 182         |   |   | 146         |   |   | 124         |  
|Conference and travel                                |   | 1,756       |   |   | 1,161       |   |   | 936         |  
|Exploration                                          |   | 140,603     |   |   | 86,424      |   |   | 50,613      |  
|Legal, accounting and audit                          |   | 1,141       |   |   | 1,649       |   |   | 931         |  
|Office and administration                            |   | 10,657      |   |   | 5,062       |   |   | 3,041       |  
|Shareholder communication                            |   | 384         |   |   | 623         |   |   | 386         |  
|Trust and filing                                     |   | 235         |   |   | 485         |   |   | 149         |  
|Foreign exchange loss (gain)                         |   | (9,168      | ) |   | 3,878       |   |   | (773        | )
|Future income tax recovery                           |   | (33         | ) |   | (3,815      | ) |   | (637        | )
|Loss on disposal of fixed assets                     |   |            |   |   | 11          |   |   |            |  
|Gain on disposal of marketable securities            |   |            |   |   | (1          | ) |   | (194        | )
|Interest income                                      |   | (1,268      | ) |   | (2,749      | ) |   | (2,238      | )
|Stock-based compensation  exploration               |   | 1,641       |   |   | 4,644       |   |   | 1,882       |  
|Stock-based compensation  administration            |   | 3,776       |   |   | 6,489       |   |   | 4,163       |  
|Loss for the
      year                              | $ | 149,906     |   | $ | 104,007     |   | $ | 58,383      |  
|                                                     |   |             |   |   |             |   |   |             |  
|Basic and diluted loss per common share              | $ | 1.62        |   | $ | 1.13        |   | $ | 0.75        |  
|                                                     |   |             |   |   |             |   |   |             |  
|Weighted average number of common shares outstanding |   | 92,543,639  |   |   | 91,978,571  |   |   | 77,708,870  |  

Page 10

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.4 | Summary of Quarterly
      Results
|--- | ----------------------------------

Expressed in thousands of Canadian dollars, except per-share
amounts. Small differences are due to rounding.

|                            |   | Dec 31  |   |   | Sep 30  |   |   | Jun 30  |   |   | Mar 31  |   |   | Dec 31   |   |   | Sep 30  |   |   | Jun 30  |   |   | Mar 31  |  
|--------------------------- | - | ------- | - | - | ------- | - | - | ------- | - | - | ------- | - | - | -------- | - | - | ------- | - | - | ------- | - | - | ------- | -
|                            |   | 2008    |   |   | 2008    |   |   | 2008    |   |   | 2008    |   |   | 2007     |   |   | 2007    |   |   | 2007    |   |   | 2007    |  
|Current assets              | $ | 60,312  |   | $ | 51,115  |   | $ | 51,551  |   | $ | 49,780  |   | $ | 41,381   |   | $ | 46,068  |   | $ | 59,913  |   | $ | 82,611  |  
|Mineral property interests  |   | 168,222 |   |   | 168,222 |   |   | 168,222 |   |   | 168,222 |   |   | 168,222  |   |   | 168,222 |   |   | 168,222 |   |   | 168,222 |  
|Other assets                |   | 619     |   |   | 776     |   |   | 773     |   |   | 785     |   |   | 674      |   |   | 594     |   |   | 669     |   |   | 715     |  
|Total assets                |   | 229,153 |   |   | 220,113 |   |   | 220,546 |   |   | 218,787 |   |   | 210,277  |   |   | 214,884 |   |   | 228,804 |   |   | 251,548 |  
|                            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Current liabilities         |   | 13,343  |   |   | 14,363  |   |   | 11,403  |   |   | 9,227   |   |   | 7,628    |   |   | 7,199   |   |   | 7,311   |   |   | 5,821   |  
|Other liabilities           |   | 251,935 |   |   | 205,499 |   |   | 156,445 |   |   | 119,175 |   |   | 93,338   |   |   | 74,441  |   |   | 58,663  |   |   | 60,619  |  
|Shareholders equity        |   | (36,125 | ) |   | 251     |   |   | 52,698  |   |   | 90,385  |   |   | 109,311  |   |   | 133,244 |   |   | 162,830 |   |   | 185,108 |  
|Total liabilities and       |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|shareholders equity        |   | 229,153 |   |   | 220,113 |   |   | 220,546 |   |   | 218,787 |   |   | 210,2778 |   |   | 214,884 |   |   | 228,804 |   |   | 251,548 |  
|                            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Working capital             |   | 46,969  |   |   | 36,752  |   |   | 40,148  |   |   | 40,553  |   |   | 33,753   |   |   | 38,869  |   |   | 52,602  |   |   | 76,790  |  
|                            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Expenses                    |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Amortization                |   | 92      |   |   | 20      |   |   | 30      |   |   | 40      |   |   | 34       |   |   | 36      |   |   | 47      |   |   | 30      |  
|Conference and travel       |   | 431     |   |   | 589     |   |   | 432     |   |   | 304     |   |   | 434      |   |   | 278     |   |   | 281     |   |   | 168     |  
|Exploration                 |   | 39,516  |   |   | 48,205  |   |   | 34,606  |   |   | 18,275  |   |   | 23,529   |   |   | 27,396  |   |   | 21,761  |   |   | 13,738  |  
|Legal, accounting and audit |   | 426     |   |   | 351     |   |   | 246     |   |   | 118     |   |   | 692      |   |   | 495     |   |   | 175     |   |   | 287     |  
|Office and administration   |   | 2,829   |   |   | 4,128   |   |   | 2,175   |   |   | 1,525   |   |   | 1,241    |   |   | 1,710   |   |   | 826     |   |   | 1,285   |  
|Shareholder communication   |   | 167     |   |   | 79      |   |   | 86      |   |   | 52      |   |   | 125      |   |   | 115     |   |   | 263     |   |   | 119     |  
|Trust and filing            |   | 9       |   |   | 39      |   |   | 16      |   |   | 171     |   |   | 216      |   |   | 39      |   |   | 138     |   |   | 92      |  
|Total before undernoted     |   | 43,470  |   |   | 53,411  |   |   | 37,591  |   |   | 20,485  |   |   | 26,271   |   |   | 30,069  |   |   | 23,490  |   |   | 15,719  |  
|Foreign exchange loss       |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|(gain)                      |   | (7,630  | ) |   | (766    | ) |   | 362     |   |   | (1,133  | ) |   | 767      |   |   | 1,266   |   |   | 1,947   |   |   | (102    | )
|Interest income             |   | (368    | ) |   | (207    | ) |   | (265    | ) |   | (428    | ) |   | (401     | ) |   | (560    | ) |   | (821    | ) |   | (968    | )
|Loss on disposal of fixed   |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|assets                      |   |        |   |   |        |   |   |        |   |   |        |   |   |         |   |   | 11      |   |   |        |   |   |        |  
|Gain on disposal of         |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|marketable securities       |   |        |   |   |        |   |   |        |   |   |        |   |   | (1       | ) |   |        |   |   |        |   |   |        |  
|Total before undernoted     |   | 35,472  |   |   | 52,438  |   |   | 37,688  |   |   | 18,924  |   |   | 26,636   |   |   | 30,786  |   |   | 24,616  |   |   | 14,649  |  
|Stock-based compensation    |   | 983     |   |   | 429     |   |   | 4,056   |   |   | (51     | ) |   | 1,644    |   |   | 2,384   |   |   | 3,168   |   |   | 3,937   |  
|Future income tax recovery  |   | (33     | ) |   |        |   |   |        |   |   |        |   |   | (43      | ) |   | (832    | ) |   | (1,956  | ) |   | (982    | )
|Loss for the period         | $ | 36,422  |   | $ | 52,867  |   | $ | 41,744  |   | $ | 18,873  |   | $ | 28,237   |   | $ | 32,338  |   | $ | 25,828  |   | $ | 17,604  |  
|                            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Basic and diluted loss per  |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|common share                | $ | 0.39    |   | $ | 0.58    |   | $ | 0.45    |   | $ | 0.20    |   | $ | 0.31     |   | $ | 0.35    |   | $ | 0.28    |   | $ | 0.19    |  
|                            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|Weighted average number     |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|of common shares            |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|outstanding YTD             |   |         |   |   |         |   |   |         |   |   |         |   |   |          |   |   |         |   |   |         |   |   |         |  
|(thousands)                 |   | 92,544  |   |   | 92,544  |   |   | 92,544  |   |   | 92,544  |   |   | 92,264   |   |   | 91,968  |   |   | 91,922  |   |   | 91,756  |  

Page 11

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.5 | Results of
      Operations
|--- | ---------------------------

Please refer to note 3(o) of the notes to the audited
consolidated financial statements for an explanation of the method of accounting
for the 50:50 partnership interest in the Pebble Limited Partnership.

These results of operations include the accounts of the Company
  and its wholly-owned subsidiaries. The Company has determined that its 50:50
  partnership with Anglo in the Pebble Project qualifies as a variable interest
  entity and concluded that the Company is the primary beneficiary and accordingly
  has consolidated the activities of the Partnership. Expenditures incurred on
  the Pebble Project through the Partnership, while funded 100% by Anglo, have
  been included in the consolidated statement of operations. Anglos contributions
  for the year ended December 31, 2008 of $158.6 million (US$148.0 million) (August
  1 to December 31, 2007  $35.6 million (US$35.9 million)) have been recorded
  as a non-controlling interest in the Partnership.

Loss for the year ended December 31, 2008 was $149.9 million,
compared to a loss of $104.0 million in the previous fiscal year due to higher
exploration activity.

Expenses, excluding stock-based compensation, foreign exchange
and future income taxes, increased to $154.9 million from $95.5 million in the
same period in the previous year.

Exploration costs increased to $140.6 million from $86.4
million in the previous year. The main exploration expenditures during the year
were:

- engineering (2008  $28.6 million; 2007  $4.5 million);
- environmental planning and testing (2008  $26.3 million; 2007  $19.6
  million);
- drilling (2008  $26.0 million; 2007  $17.7 million);
- site activities (2008  $23.0 million; 2007  $18.6 million);
- logistics and transportation (2008  $14.6 million; 2007  $11.6 million);
- public affairs (2008  $9.5 million; 2007  $nil); and
- socioeconomic initiatives (2008  $3.1 million; 2007  $7.8 million)

The increase in exploration costs is due to increased
environmental planning and testing work with the ongoing environmental data
collection in the Pebble East area as well as increased community engagement and
public affairs programs to enhance stakeholder relationships, public education
and project support. Furthermore, there was an increase in engineering
activities compared to the prior year to advance the prefeasibility study,
described more fully in section 1.2.3, Technical programs.

Office and administration costs increased to $10.7 million from
$5.1 million in the previous year mainly due to increased administrative
activities required at the Anchorage office to support work at the Pebble site
and advisory fees. Legal, accounting and audit decreased slightly to $1.1
million from $1.6 million due to legal advisory services incurred for regulatory
and environmental matters, and accounting and tax services related to the
transaction with Anglo in the previous year.

Stock-based compensation decreased to $5.4 million for the year
ended December 31, 2008, compared to $11.1 million in the previous year due
mainly to the volatility of prices in the current year and the vesting of
options in the prior year.

Page 12

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

The Company recorded a foreign exchange gain of $9.2 million
for the year compared to a loss of $3.9 million in the previous year, due to the
Companys holdings of US dollar cash and equivalents, most of which were
converted into Canadian dollars during the fourth quarter .

A future income tax recovery of $33,000 was recognized as
compared to $3.8 million in the prior year. This is because the Company was
financing exploration activities prior to Anglo subscribing for 50% of the
Partnership equity in July 2007 and as a result, recognized future income tax
expense on the mineral property.

|1.6 | Liquidity
|--- | ---------

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 or options. The Company's
access to financing when the financing is not transaction specific is always
uncertain. There can be no assurance of continued access to significant equity
funding.

The funding of expenditures on the Pebble Project is through
the Partnership which is currently being provided by Anglo (described below).
Excluding cash and equivalents in the Partnership, Northern Dynasty has excess
of $40 million in cash and equivalents for its own operating requirements.

As discussed in section 1.2.2. , the Company is in a 50:50
partnership with Anglo. Each of the Company and Anglo effectively has equal
rights in the Partnership through wholly-owned affiliates. To maintain its 50%
interest in the Partnership, Anglo is required to make staged cash investments
into the Partnership aggregating to US$1.425 billion over a period of several
years. This includes an initial minimum expenditure of US$125 million to be
expended towards a prefeasibility study (funding completed as of 2008), plus a
requirement to fund any additional expenditures approved. Thereafter in order to
retain its 50% interest, Anglo is required to commit to further expenditures
which 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 Partnership to a production
decision. Upon an affirmative decision to develop a mine Anglo is required to
commit to the remainder of the total investment of US$1.425 billion in order to
retain its 50% interest in the Partnership.

At December 31, 2008, the Company had working capital of
approximately $47.0 million as compared to $33.8 million at December 31,
2007.

Other than disclosed in the financial statements, the Company
has no long term debt, capital lease obligations, operating leases or any other
long term obligations, other than maintenance payments on the Pebble property
and routine office leases.

The Company through the Partnership, also has purchase orders
for goods and services relating to engineering, environmental, stakeholder
affairs and site operations activities on the Pebble Project. These purchase
orders are funded through existing cash resources in the Partnership which are
being funded by Anglo and are in the normal course of operations.

Page 13

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.7 | Capital
      Resources
|--- | -----------------------

The Company has no long-term debt and had 92,543,639 common
shares issued and outstanding at December 31, 2008.

The Company had no commitments for material capital
expenditures as of December 31, 2008 except for the US$4 million commitment by
the Partnership to the Pebble Fund for Sustainable Bristol Bay Fisheries &
Communities over the next four years.

The Company has no lines of credit or other sources of
financing which have been arranged but as yet unused.

|1.8 | Off-Balance Sheet
      Arrangements
|--- | ------------------------------------

None.

|1.9 | Transactions with
      Related Parties
|--- | ---------------------------------------

Hunter Dickinson Services Inc. ("HDSI") (formerly Hunter
Dickinson Inc.) is a private company owned equally by eight public companies,
one of which is Northern Dynasty. HDSI has certain directors in common with the
Company and carries out geological, corporate development, administrative,
financial management services including raising of funds, investor relations,
and other management activities for, and incurs third party costs on behalf of,
the Company. The Company reimburses HDSI on a full cost-recovery basis.

Costs for services rendered by HDSI to the Company were $10.7
million for the year ended December 31, 2008 as compared to $5.4 million for the
year ended December 31, 2007. The increase over 2007 is due to the increased
level of activity of the Company that saw additional resources being provided by
HDSI to assist with the Companys exploration and development activities mainly
through the Partnership. Included in the total of services provided by HDSI for
the year ended December 31, 2008 is $8.5 million invoiced to the Partnership for
services.

During the year ended December 31, 2008, the Company paid $0.17
million (2007  $0.20 million) to a private company controlled by a former
director of Pebble East Claims Corp. (formerly Northern Dynasty Mines Inc., a
wholly owned subsidiary of the Partnership), for project management
services.

Page 14

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.10 | Fourth
      Quarter
|---- | --------------------

The Company recorded a loss for the fourth quarter of 2008 of
$36.5 million as compared to $28.2 million in the fourth quarter of 2007.

The increase in loss was due largely to exploration expenses
and office and administration expenses which increased from $23.5 million to
$39.5 million and from $1.2 million to $2.8 million respectively. This was
offset by a forex gain of $7.6 million recorded in the fourth quarter, the
result of the Company converting most of its US dollar holdings of cash and
equivalents into Canadian dollars.

The increase in exploration expenditures over last year was due
to the various technical programs required with the advancement of the
prefeasibility study as discussed more fully in section 1.2.3. The main
exploration expenditures during the quarter were:

- engineering (2008  $9.9 million; 2007  $1.8 million);
- site activities (2008  $7.2 million; 2007  $5.0 million);
- drilling (2008  $7.1 million; 2007  $4.5 million);
- environmental planning and testing (2008  $6.6 million; 2007  $5.0
  million); and
- logistics and transportation (2008  $3.6 million; 2007  $2.7 million).

The increase in office and administration costs is due to
administrative activities required at the Anchorage office to support work at
the Pebble site and advisory fees.

Stock-based compensation decreased to $1.0 million for the
quarter compared to $1.6 million in the previous year due mainly to the
volatility of prices in the current quarter.

|1.11 | Proposed
      Transactions
|---- | ---------------------------

There are no proposed asset or business acquisitions or
dispositions, other than those in the ordinary course, before the board of
directors for consideration.

|1.12 | Critical Accounting
      Estimates
|---- | -----------------------------------

The Company's accounting policies are presented in notes 3 and
4 of the audited consolidated financial statements for the year ended December
31, 2008. The preparation of consolidated financial statements in accordance
with generally accepted accounting principles requires management to select
accounting policies and make estimates. Such estimates may have a significant
impact on the financial statements. These estimates include:

- mineral resources and reserves,
- the carrying values of mineral properties,
- the carrying values of property, plant and equipment,
- the valuation of stock-based compensation expense, and
- asset retirement obligations.

Actual amounts could differ from the estimates used and,
accordingly, affect the results of operations.

Page 15

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Mineral resources and reserves, and the carrying values of
mineral properties, and of property, plant and equipment

Mineral resources and reserves are
estimated by professional geologists and engineers in accordance with recognized
industry, professional and regulatory standards. These estimates require inputs
such as future metals prices, future operating costs, and various technical
geological, engineering, and construction parameters. Changes in any of these
inputs could cause a significant change in the resources and reserves estimates
which in turn could have a material effect on the carrying value of property,
plant and equipment.

The carrying value of mineral
properties is also dependant on the valuation used for the common shares and
warrants of the Company issued for the acquisition of mineral properties. The
value of the common shares issued is the price of the common shares of the
Company at the date of issuance to effect the acquisition. The Company uses the
Black-Scholes pricing model to estimate a value for the warrants issued upon the
acquisition of a property. This model, and other models which are used to value
options and warrants, require inputs such as expected volatility, expected life
to exercise, and interest rates. Changes in any of these inputs could cause a
significant change in the carrying value initially recorded for mineral
properties.

Impairment of long-lived assets

Long-lived assets, including mineral
properties and equipment, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed, if any, are presented separately
on the balance sheet and reported at the lower of the carrying amount and the
fair value less costs to sell, and are no longer amortized.

Due to the recent drop in commodity
prices, the Company completed an impairment analysis as at December 31, 2008
which considered the indicators of impairment in accordance with Section 3063,
Impairment of Long-lived Assets as well as EIC-126, Accounting by
Exploration Companies for Exploration Costs and AcG-11, Enterprises in
the Development Stage. Management concluded that no impairment charge was
required because there have been no significant changes in the legal factors or
climate that affects the value of the property, all property rights remain in
good standing, there have been no significant changes in the projections for the
property and exploration results continue to be positive, the Company intends to
continue its exploration and development plans on its property, and project
funding continue to be provided by its partner.

Stock-based compensation expense

From time to time, the Company grants
share purchase options to directors, employees and service providers. The
Company uses the Black-Scholes option pricing model to estimate a value for
these options. This model, and other models which are used to value options,
require inputs such as expected volatility, expected life to exercise, and
interest rates. Changes in any of these inputs could cause a significant change
in the stock-based compensation expense charged in a period.

Page 16

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Asset retirement obligations

The Company recognizes statutory,
contractual or other legal obligations related to the retirement of tangible
long-lived assets when such obligations are incurred, if a reasonable estimate
of fair value can be made. These obligations are measured initially at fair
value and the resulting costs capitalized to the carrying value of the related
asset. In subsequent periods, the liability is adjusted for any changes in the
amount or timing and for the discounting of the underlying future cash flows.
The capitalized asset retirement cost is amortized to operations over the life
of the asset.

|1.13 | Changes in Accounting
      Policies including Initial Adoption
|---- | ---------------------------------------------------------------

|(a) | Newly Adopted Accounting Policies
|--- | ---------------------------------

Effective January 1, 2008, the Company
adopted the following new accounting standards issued by the Canadian Institute
of Chartered Accountants (CICA) relating to financial instruments. As required
by the transitional provisions of these new standards, these new standards have
been adopted on a prospective basis with no restatement to prior period
financial statements.

| | (i) | Capital Disclosures (Section 1535)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | This standard requires disclosure of an entity's
      objectives, policies and processes for managing capital, quantitative data
      about what the entity regards as capital and whether the entity has
      complied with any externally imposed capital requirements and, if it has
      not complied, the consequences of such non-compliance.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | The Company's objectives when managing capital are to
      safeguard the Company's ability to continue as a going concern, so that it
      can explore and develop its projects for the benefit of its shareholders
      and other stakeholders. The Company considers the components of
      shareholders equity, as well as its cash and equivalents, as capital. The
      Company manages the capital structure and makes adjustments to it in the
      light of changes in economic conditions and the risk characteristics of
      the underlying assets. The Company may issue new shares through private
      placements and public offerings in order to maintain or adjust the capital
      structure. The Company is not subject to externally imposed capital
      requirements.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     | In order to facilitate the management of its capital
      requirements, the Company prepares annual expenditure budgets that are
      updated as necessary depending on various factors, including successful
      capital deployment and general industry conditions. The Company expects
      its current capital resources will be sufficient to carry its exploration
      and development plans and operations through its current operating period.
      There were no changes to the Companys approach to capital management
      during the year ended December 31, 2008.                                                                                                                                                                                                             

Page 17

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

| | (ii) | Financial Instruments  Disclosure (Section 3862) and
      Presentation (Section 3863)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | These standards replace CICA 3861, Financial
      Instruments  Disclosure and Presentation. They increase the
      disclosures currently required, which will enable users to evaluate the
      significance of financial instruments for an entity's financial position
      and performance, including disclosures about fair value. In addition,
      disclosure is required of qualitative and quantitative information about
      exposure to risks arising from financial instruments, including specified
      minimum disclosures about credit risk, liquidity risk and market risk. The
      quantitative disclosures must provide information about the extent to
      which the entity is exposed to risk, based on information provided
      internally to the entitys key management personnel.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | Financial Instrument Risk Exposure and Risk
      Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | The Company 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 treasury policies,
      counterparty limits, controlling and reporting structures. The types 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 Company
      if a counterparty to a financial instrument fails to meet its contractual
      obligations. The Companys credit risk is primarily attributable to its
      liquid financial assets, including cash and equivalents, amounts
      receivable and balances receivable from related parties. The Company
      limits the exposure to credit risk by only investing its cash and
      equivalents with high-credit quality financial institutions and government
      treasury bills. The carrying value of the Companys cash and cash
      equivalents and amounts receivable represent the maximum exposure to
      credit risk. The Company does not have financial assets that are invested
      in asset backed commercial paper.            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | Liquidity Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | Liquidity risk is the risk that the Company will not be
      able to meet its financial obligations when they become due. The Company
      ensures, as far as reasonably possible, it will have sufficient capital in
      order to meet short term business requirements, after taking into account
      cash flows from operations and the Companys holdings of cash and
      equivalents. The Company believes that these sources will be sufficient to
      cover the likely short and long term cash requirements. The Companys cash
      and equivalents are invested in business accounts, bankers acceptances,
      government treasury bills, which are available on demand by the Company
      for its programs and which are not invested in any asset backed
      deposits/investments.         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | Foreign exchange risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |      | The Company is exposed to foreign exchange risk as its
      operating expenses are primarily incurred in US dollars and its
      liabilities are primarily denominated in US dollars. The results of the
      Companys operations are subject to currency transaction risk and currency
      translation risk. The operating results and financial position of the
      Company are reported in Canadian                                                                                                                                                                                                                                                                                                                                                                                                          

Page 18

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

| |       | dollars in the Company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
      Company and may also affect the value of the Companys assets and the
      amount of shareholders equity.                                                                                                                                                              
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | The Company has not entered into any agreements or
      purchased any instruments to hedge possible currency risks at this
      time.                                                                                                                                                                                                                                                                                                                                                     
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | The Company is subject to interest rate risk with respect
      to its investments in cash equivalents. The Companys policy is to invest
      cash at fixed rates of interest and cash reserves are to be maintained in
      cash equivalents in order to maintain liquidity, while achieving a
      satisfactory return for shareholders. Fluctuations in interest rates when
      the cash equivalents mature impact interest income earned.                                         
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | Commodity price risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | While the value of the Companys core mineral resource
      property, the Pebble Property, is related to the price of gold, copper and
      molybdenum and the outlook for these minerals, the Company 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 historically have
      fluctuated widely and are affected by numerous factors outside of the
      Company'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.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (iii) | Going Concern  Amendments to Section
  1400                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | CICA 1400, General Standards of Financial Statement
      Presentation, was amended to include requirements to assess and disclose
      an entity's ability to continue as a going concern.                                                                                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | The Companys management has assessed the Companys
      ability to continue as a going concern and has concluded that this
      assumption is appropriate in the preparation of these consolidated
      financial statements as ongoing exploration activities are being financed
      by the Companys partner in the Partnership and the Company has sufficient
      cash and equivalents to fund its anticipated
  expenditures.                                                   

Page 19

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|(b) | Accounting Policies Not Yet Adopted
|--- | -----------------------------------
|    |                                    
|    | (i)                                
|    |                                    
|    |                                    
|    |                                    
|    | (ii)                               
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    
|    |                                    

Page 20

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

The IFRS convergence project
instituted consists of three primary phases, which in certain cases will occur
concurrently as IFRS is applied to specific areas:

- Initial Scoping and Impact Assessment Analysis:to isolate key areas that will be impacted by the transition to IFRS.
- Evaluation and Design:to identify specific
  changes required to existing accounting policies, information systems and
  business processes, together with an analysis of policy alternatives allowed
  under IFRS and development of draft IFRS financial statements.
- Implementation and Review: to execute the
  changes to information systems and business processes, completing formal
  authorization processes to approve recommended accounting policy changes and
  training programs across the Companys finance and other staff, as necessary.
  This will culminate in the collection of financial information necessary to
  compile IFRS compliant financial statements, including embedding IFRS
  principles in business processes, and Audit Committee review and approval of
  the financial statements.

A detailed timetable has been prepared
to manage the transition and the Company is currently on schedule. At the date
of preparing this MD&A, the Company has met the objectives of the project
plan. The Companys analysis of IFRS and comparison with GAAP has identified a
number of differences which are discussed under the heading Impact of adoption
of IFRS on Financial Reporting below.

First-time Adoption of
International Financial Reporting Standards

IFRS 1, First-time Adoption of
International Financial Reporting Standards (IFRS 1), sets forth guidance
for the initial adoption of IFRS. Commencing for the period ended March 31, 2009
the Company will restate its comparative fiscal 2008 financial statements for
annual and interim periods to be consistent with IFRS. In addition, the Company
will reconcile equity and net earnings from the previously reported fiscal 2008
GAAP amounts to the restated 2008 IFRS amounts.

IFRS 1 generally requires that
first-time adopters retrospectively apply all IFRS standards and interpretations
in effect as at the first annual reporting date. IFRS 1 provides for certain
mandatory exceptions and optional exemptions to this general principle. The
Company elected to take the following IFRS 1 optional exemptions:

- to apply the requirements of IFRS 3 Business
  Combinationsprospectively from the transition date.
- to only apply the requirements of IFRS 2,
  Share-based payments(IFRS 2) to equity instruments granted after
  November 7, 2002 which had not vested as of the transition date.
- to transfer all foreign currency translation
  differences, recognized as a separate component of equity to retained earnings
  as at the transition date including those foreign currency differences which
  arise on application of IFRS.

Page 21

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Changes to estimates previously made
are not permitted. The estimates previously made by the Company under GAAP will
not be revised for application of IFRS except where necessary to reflect any
changes resulting from differences in accounting policies.

Impact of Adoption of IFRS on Financial
  Reporting (expressed in thousands of Canadiandollars)

While GAAP is in many respects similar
to IFRS, conversion will result in differences in recognition, measurement, and
disclosure in the financial statements. For the Company, the accounting policies
and financial statement accounts identified as being significantly affected by
the adoption of IFRS are discussed below:

| | 1. | Basis of Consolidation
| | -- | ----------------------

Under GAAP, the Company accounts for
its interest in the Pebble Limited Partnership (PLP) as a variable interest
entity with the Company as the primary beneficiary. Accordingly, the Company has
consolidated 100% of PLP.

IFRS does not include the concept of a
variable interest entity. IFRS requires the Company to consolidate entities
including Special Purpose Entities (SPE) only where the Company has the power
to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.

On application of IFRS, the Company
has determined that it has joint control of PLP. Accordingly, under IFRS, the
Company can elect to use either the equity method or proportionate consolidation
method to account for its interest in PLP.

The Company has elected to apply the
equity method to account for its interest in PLP. The balance sheet and income
statement presentation will be significantly different as the entity will now be
only recognizing its interest in the net assets and losses of the PLP using the
equity method. Please refer to the unaudited proforma IFRS financial statements
below.

| | 2. | Functional Currency
| | -- | -------------------

Under GAAP the functional currency of
the Company and its subsidiaries is the Canadian dollar. IFRS requires that the
functional currency of each entity of the Group be determined separately.

The Company has determined that as at
the transition date the Canadian dollar was the functional currency of all
entities in the Group except PLP which has a US dollar functional currency. In
accordance with IFRS 1 optional exemptions, the Company elected to transfer the
foreign currency translation differences, recognized as a separate component of
equity, to deficit at the transition date. As a result, the deficit will be
increased by $7,554 at the transition date with a corresponding decrease to the
equity investment in PLP. For the year ended December 31, 2008, shareholders
equity will increase due to an increase in the cumulative translation reserve of
$22,635 with a corresponding increase in the equity investment in PLP.

Page 22

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

| | 3. | Share-based Payment
| | -- | -------------------

Currently, the Company measures
stock-based compensation related to stock-options at the fair value of the
options granted using the Black-scholes option pricing formula and recognizes
this expense over the vesting period of the options. For the purpose of
accounting for share based payment transactions an individual is classified as
an employee when the individual is consistently represented to be an employee
under law. The fair value of the options granted to employees is measured on the
date of grant. The fair value of options granted to contractors and consultants
are measured on the date the services are completed. Forfeitures are recognized
as they occur.

IFRS 2, similar to GAAP, requires the
Company to measure stock-based compensation related to stock-options granted to
employees at the fair value of the options on the date of grant and to recognize
such expense over the vesting period of the options. However, for options
granted to non-employees, IFRS requires that stock-based compensation be
measured at the fair value of the services received unless the fair value cannot
be reliably measured. For the purpose of accounting for share based payment
transactions 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. This definition of an employee
is broader than that currently applied by the Company and will result in certain
contractors and consultants being classified as employees under IFRS. Based on
the IFRS definition of an employee, the Company will reclassify a number of
individuals previously classified as non-employees to employees. For the stock
options granted to the individuals reclassified, changes in fair value after the
grant date previously recognized for GAAP purposes will be adjusted for. The
adjustments will be calculated only for unvested options issued and outstanding
as of and after January 1, 2008 (refer First Time Adoption of IFRS). As a
result, contributed surplus will decrease by $504 at the transition date with a
corresponding decrease in deficit. For the period ended December 31, 2008,
contributed surplus will increase by $1,239 with a corresponding increase in
deficit. Please refer to the unaudited proforma IFRS financial statements
below.

| | 4. | Deferred Tax on Mineral Properties
| | -- | ----------------------------------

Currently the Company, in
determination of the net earnings (loss) from its interest in PLP, recognizes a
future income tax liability on temporary differences arising on the initial
recognition of the PLP mineral property interest (where the fair value of the
asset acquired exceeds its tax basis) in a transaction which was not a business
combination and affected neither accounting profit / (loss) nor taxable profit /
(loss). IAS 12, Income Taxes (IAS 12) does not permit the recognition
of deferred taxes on such transactions.

As of the transition date and December
31, 2008, the Company will derecognize the impacts of all future income tax
liabilities which had previously been recognized on the initial acquisition of
the PLP mineral property through transactions deemed not to be business
combinations and affecting neither accounting profit / (loss) nor taxable profit
/ (loss). As a result mineral property interests as of the transition date and
December 31, 2008 will be reduced by $62,239 with a decrease in the future
income tax liability of $57,753 and an increase in deficit of $4,452. For the
year ended December 31, 2008, $33 in future tax

Page 23

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

recoveries was reversed for IFRS
purposes. Please refer to the unaudited proforma IFRS consolidated financial
statements below.

| | 5. | Impairment of Non-financial Assets
| | -- | ----------------------------------

Under Canadian GAAP, for assets other
than financial assets, a write-down to estimated fair value is recognized if the
estimated undiscounted future cash flows from an asset or group of assets are
less than their carrying value.

IAS 36, Impairment of Assets
(IAS 36), requires a write-down to be recognized if the recoverable amount,
determined as the higher of the estimated fair value less costs to sell or value
in use (discounted cash-flow basis) is less than carrying value.

The Company performed impairment
assessments as of the transition date to determine whether an impairment charge
would be recognized under IFRS on the transition date and has concluded that
there is no impairment charge under IFRS as of the transition date and December
31, 2008.

The known or reliably estimable
impacts on the consolidated balance sheet as at the transition date and December
31, 2008; and the consolidated statement of operations for the year ended
December 31, 2008 have been prepared using IFRS and are set out below. While
these reconciliations do not represent an official adoption of IFRS, it provides
an indication of the major differences identified to date based on managements
best knowledge of expected standards and interpretations, and current facts,
relative to our historical financial statements.

Page 24

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

December 31, 2008 Proforma IFRS
Consolidated Balance Sheet and Comprehensive Statement of Income/(Loss) and
January 1, 2008 Opening IFRS Balance Sheet: (Unaudited - Expressed in thousands
of Canadian Dollars):

|                                                             |  |                                             |          |   | December 31  |         |   | January 1     |  
|------------------------------------------------------------ |  | ------------------------------------------- | -------- | - | ------------ | ------- | - | ------------- | -
|                                                             |  |                                             |          |   | 2008         |         |   | 2008          |  
|                                                             |  |                                             |          |   | Revised      |         |   | Opening       |  
|                                                             |  |                                             |          |   | Comparatives |         |   | Balance Sheet |  
|                                                             |  |                                             |          |   |              |         |   | at Transition |  
|                                                             |  |                                             |          |   |              |         |   | Date          |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Assets per Canadian
      GAAP                         |  | $                                           | 229,153  |   | $            | 210,277 |  
|Deferred tax adjustment                                      |  | - Mineral property interest                 |          |   | (62,239      | )       |   | (62,239       | )
|Deconsolidation of PLP                                       |  | - Mineral property interest                 |          |   | (105,983     | )       |   | (105,983      | )
|Deconsolidation of PLP                                       |  | - other assets of PLP                       |          |   | (14,634      | )       |   | (804          | )
|Equity Investment in PLP                                     |  |                                             |          |   | 121,611      |         |   | 98,976        |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Assets per IFRS                                        |  |                                             |          | $ | 167,908      |         | $ | 140,227       |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Liabilities per Canadian GAAP                          |  | $                                           | 265,278  |   | $            | 100,966 |  
|Deferred tax adjustment                                      |  | - Mineral property interest                 |          |   | (57,753      | )       |   | (57,786       | )
|Deconsolidation of PLP                                       |  | - NCI and PLP liabilities                   |          |   | (207,377     | )       |   | (41,527       | )
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Liabilities per IFRS                                   |  |                                             |          | $ | 148          |         | $ | 1,653         |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Shareholders' Equity
      (Deficit) per Canadian GAAP |  | $                                           | (36,125  | ) | $            | 109,311 |  
|Deferred tax adjustment                                      |  | - Retained deficit                          |          |   | (4,485       | )       |   | (4,452        | )
|Deconsolidation of PLP                                       |  |                                             |          |   | 193,289      |         |   | 41,269        |  
|Functional currency adjustment                               |  | - Retained deficit                          |          |   | (7,554       | )       |   | (7,554        | )
|                                                             |  | - Cumulative translation
      adjustment   |          |   | 22,635       |         |   | -             |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Shareholders' Equity per
      IFRS                    |  | $                                           | 167,760  |   | $            | 138,574 |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Liabilities and
      Shareholders' Equity             |  |                                             | 167,908  |   |              | 140,227 |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Comprehensive Loss per Canadian GAAP                   |  | $                                           | (150,853 | ) |              |         |  
|Deconsolidation of PLP                                       |  | - Expenses                                  |          |   | 151,084      |         |   |               |  
|                                                             |  | - Reversal of exchange difference on PLP    |          |   | 936          |         |   |               |  
|Equity investment in PLP                                     |  | - Exchange difference on translation of PLP |          |   | 22,635       |         |   |               |  
|Stock based compensation adjustments                         |  |                                             |          |   | (1,239       | )       |   |               |  
|Deferred tax adjustment                                      |  | - Future income tax recovery                |          |   | (33          | )       |   |               |  
|                                                             |  |                                             |          |   |              |         |   |               |  
|Total Comprehensive Income per IFRS                          |  | $                                           | 22,530   |   |              |         |  

Page 25

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

IFRS Impact on Our
Organization

The conversion to IFRS will impact the
way the Company presents its financial results. The first financial statements
prepared using IFRS (i.e. interim financial statements for the three months
ended March 31, 2009) will be required to include numerous notes disclosing
extensive transitional information and full disclosure of all new IFRS
accounting policies.

The Company has obtained an
understanding of IFRS from intensive training and preparation of reconciliations
of historical GAAP financial statements to IFRS. Further, our finance personnel
include employees who have prepared financial statements under IFRS previously.

The Company believes that the impact
of the conversion on its accounting systems is minimal since the Company is
still in the exploration phase. Based on the analysis and differences identified
to date, the Company believes its systems can accommodate the required changes.

In addition, the Companys internal
and disclosure control processes, as currently designed, will not need
significant modifications as a result of its conversion to IFRS.

We have assessed the impacts of
adopting IFRS on our contractual arrangements, and have not identified any
material compliance issues.

We have considered the impacts that
the transition will have on our internal planning process and compensation
arrangements and have not identified any significant impacts to date.

|1.14 | Financial Instruments
      and Other Instruments
|---- | -------------------------------------------------

Refer to the notes to the financial statements.

|1.15 | Other MD&A
      Requirements
|---- | -----------------------------

Additional information relating to the Company, including the
Company's Annual Information Form, is available on SEDAR at www.sedar.com.

|1.15.1 | Additional Disclosure
      for Venture Issuers without Significant Revenue
|------ | ---------------------------------------------------------------------------

Not applicable. The Company is a non-venture issuer.

Page 26

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.15.2 | Disclosure of
      Outstanding Share Data
|------ | ------------------------------------------

The following details the share capital structure as of the
date of this MD&A, subject to minor accounting adjustments.

|                       |  | Expiry
      date |  |   | Exercise price |  |  | Number    |  |  | Number     | 
|---------------------- |  | ----------------- |  | - | -------------- |  |  | --------- |  |  | ---------- | 
|Common shares          |  |                   |  |   |                |  |  |           |  |  | 92,628,877 | 
|                       |  |                   |  |   |                |  |  |           |  |  |            | 
|Share purchase options |  | April 30, 2009    |  | $ | 7.25           |  |  | 15,000    |  |  |            | 
|                       |  | April 30, 2009    |  | $ | 10.32          |  |  | 50,000    |  |  |            | 
|                       |  | April 14, 2011    |  | $ | 9.74           |  |  | 64,334    |  |  |            | 
|                       |  | April 30, 2011    |  | $ | 7.25           |  |  | 180,000   |  |  |            | 
|                       |  | October 27,2011   |  | $ | 3.00           |  |  | 210,332   |  |  |            | 
|                       |  | February 2, 2012  |  | $ | 5.00           |  |  | 529,000   |  |  |            | 
|                       |  | February 4, 2012  |  | $ | 5.00           |  |  | 2,158,200 |  |  |            | 
|                       |  | February 20, 2012 |  | $ | 10.95          |  |  | 150,000   |  |  |            | 
|                       |  | April 11, 2013    |  | $ | 9.74           |  |  | 75,000    |  |  |            | 
|                       |  | August 22, 2013   |  | $ | 5.35           |  |  | 40,000    |  |  |            | 
|                       |  | October 27, 2013  |  | $ | 3.00           |  |  | 140,000   |  |  |            | 
|                       |  | February 2, 2014  |  | $ | 5.00           |  |  | 2,063,000 |  |  |            | 
|                       |  | February 4, 2014  |  | $ | 5.00           |  |  | 220,000   |  |  | 5,894,866  | 

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

|1.15.3 | Internal Controls over
      Financial Reporting Procedures
|------ | -----------------------------------------------------------

The management of the Company is responsible for establishing
and maintaining adequate internal controls over financial reporting. The
Companys internal control system was designed to provide reasonable assurance
to the Companys management and the board of directors regarding the preparation
and fair presentation of published financial statements. 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 GAAP, 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. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined effective can provide only reasonable assurance with respect
to financial statement preparation and presentation.

The Companys management, with the participation of the Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of internal control over financial reporting based on the
framework and criteria established in Internal Control  Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management has concluded that internal control
over financial reporting was effective as of December 31, 2008 to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP.

During the year ended December 31, 2008, a new Accounting &
Financial Reporting system was implemented at Pebble Limited Partnership
(PLP), in which the Company has a 50% interest (described above). In
connection with this system implementation, the Company updated its internal
controls over financial reporting, as necessary, to accommodate modifications to
its business processes and accounting procedures. PLPs financial statements
constitute approximately 80% of the Companys total assets and approximately 95%
of expenditures for the year ended December 31, 2008. Other than the system
implementation at PLP, no other changes in internal controls over financial
reporting occurred during the most recent fiscal quarter that have materially
affected or are reasonably likely to materially affect the Companys internal
control over financial reporting.

|1.15.4 | Disclosure Controls and
      Procedures
|------ | ----------------------------------------

As of the end of the period covered by this report, our
management carried out an evaluation, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934(the Exchange Act)). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in reports that we file or submit under the Exchange Act.

It should be noted that while our Chief Executive Officer and
our Chief Financial Officer believe that our disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that our disclosure controls and procedures or internal control over
financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system will be met.

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|                                    
|------------------------------------
|YEAR ENDED DECEMBER 31, 2008        
|MANAGEMENT'S DISCUSSION AND ANALYSIS
|                                    

Cautionary (forward looking)

The following are the principal risk factors and uncertainties
which, in management's opinion, are likely to most directly affect the ultimate
feasibility of the Pebble project. The mineralized material at the Pebble
project is currently classified as a mineral resource and it is not a reserve.
Considerable additional work, including in-fill drilling, additional process
tests, and other engineering and geologic work will be required to determine if
the mineralized material is an economically exploitable reserve. There can be no
assurance that this mineralized material can become a reserve or that the amount
may be converted to a reserve or the grade thereof. Final feasibility work has
not been done to confirm the pit design, mining methods, and processing methods.
Final feasibility could determine that the currently assumed pit design, mining
methods, and processing methods are not correct. Construction and operation of
the mine and processing facilities depends on securing environmental and other
permits on a timely basis. No permits have been applied for and there can be no
assurance that required permits can be secured or secured on a timely basis.
Data is incomplete and cost estimates have been developed in part based on costs
at projects believed to be comparable, and not based on firm price quotes.
Costs, including design, procurement, construction, and on-going operating costs
and metal recoveries could be materially different from those currently assumed.
There can be no assurance that mining can be conducted at assumed rates and
grades. The project requires the development of port facilities, roads and
electrical generating and transmission facilities. Although Northern Dynasty
believes that the State of Alaska favors the development of these facilities,
there can be no assurance that these infrastructure facilities can be developed
on a timely and cost-effective basis. Energy risks include the potential for
significant increases in the cost of fuel and electricity. The project has been
evaluated using projected long-term price levels for copper, gold, silver and
molybdenum. Prices for these commodities are historically volatile, and Northern
Dynasty has no control of or influence on those prices, all of which are
determined in international markets. There can be no assurance that the prices
of these commodities will continue at current levels or that they will not
decline below the projected prices. Prices for copper, gold, silver, and
molybdenum have been below the projected prices at times during the past ten
years, and for extended periods of time. Changes in, or the introduction of new,
government regulations relating to mining, including laws and regulations
relating to the protection of the environment could impact the projects ability
to secure appropriate permits to operate. The project will require major
financing, probably a combination of debt and equity financing. There can be no
assurance that debt and/or equity financing will be available on acceptable
terms. A significant increase in costs of capital could materially and adversely
affect the value and feasibility of constructing the project. Other general
risks include those ordinary to large construction projects including the
general uncertainties inherent in engineering and construction cost, compliance
with generally increasing environmental obligations, and accommodation of local
and community concerns.

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