##### 









MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

(Stated in U.S. dollars)




INTRODUCTION

This managements discussion and analysis
(MD&A) provides a detailed analysis of the
financial condition and results of operations of Ivanhoe Mines
Ltd. (the Company) and compares its 2003 financial
results with those of the previous year. The MD&A should be
read in conjunction with the Companys annual Consolidated
Financial Statements and related notes for the year ended
December 31, 2003, which have been prepared in accordance
with generally accepted accounting principles in Canada. The
effective date of this MD&A is March 29, 2004.

Additional information about the Company,
including its Annual Information Form, is available at
www.sedar.com.




FORWARD LOOKING STATEMENTS

Except for statements of historical fact relating
to Ivanhoe Mines, certain information contained herein
constitutes forward-looking statements within the meaning of the
United States Private Securities Litigation Reform Act of 1995,
Section 21E of the United States Securities Exchange Act of
1934, as amended, and Section 27A of the United States
Securities Act of 1933, as amended. Forward-looking statements
include, but are not limited to, statements concerning estimates
of expected capital expenditures, statements relating to
expected future production and cash flows, statements relating
to the continued advancement of Ivanhoe Mines exploration,
development and production projects, and other statements which
are not historical facts. When used in this document, the words
such as could, plan,
estimate, expect, intend,
may, potential, should, and
similar expressions are forward-looking statements. Although
Ivanhoe Mines believes that its expectations reflected in these
forward-looking statements are reasonable, such statements
involve risks and uncertainties and no assurance can be given
that actual results will be consistent with these
forward-looking statements. Important factors that could cause
actual results to differ from these forward-looking statements
include the potential that Ivanhoe Mines projects will
experience technological and mechanical problems, geological
conditions in the deposits may not result in commercial levels
of mineral production, changes in product prices, changes in
political conditions, changes in the availability to obtain
project financing and other risks. Forward-looking statements
are based on the opinions and estimates of management at the
date the statements are made, and are subject to a variety of
risks and uncertainties and other factors that could cause
actual events or results to differ materially from those
projected in the forward-looking statements. The Company
undertakes no obligation to update forward-looking statements if
circumstances or managements estimates or opinions should
change. The reader is cautioned not to place undue reliance on
forward-looking statements.

This MD&A contains references to estimates of
mineral resources. The estimation of reserves and resources is
inherently uncertain and involves subjective judgments about
many relevant factors. The accuracy of any such estimates is a
function of the quantity and quality of available data, and of
the assumptions made and judgments used in engineering and
geological interpretation, which may prove to be unreliable.
There can be no assurance that these estimates of reserves and
mineral resources will be accurate, and that reserves and
mineral resources could be mined or processed profitably.



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##### 









SELECTED FINANCIAL
INFORMATION

|                                                           |                            |                               |                        |           |      |      |       |           |      |      |       |           |      |      | 
|---------------------------------------------------------- | -------------------------- | ----------------------------- | ---------------------- | --------- | ---- | ---- | ----- | --------- | ---- | ---- | ----- | --------- | ---- | ---- | 
|                                                           |                            |                              
|                                                           |                            | Years ended December 31,     
|                                                           |                            |                              
|(All amounts in millions of U.S. dollars, except per share |                            | 2003                          |                        | 2002      |      | 2001
|information)                                               |                            |                               |                        |           |      |     
|Revenue                                                    |                            |                               |                        |           |      |      |       |           |      |      |       |          
|                                                           | Copper                     |                               |                        | 22.9      |      |      |       | 20.2      |      |      |       | 19.6      |     
|                                                           | Iron                       |                               |                        | 66.8      |      |      |       | 66.9      |      |      |       | 55.8      |     
|                                                          
|                                                           |                            |                               | Total Revenue          |           |      | 89.7 |       |           |      | 87.1 |       |           |      | 75.4 | 
|Operating profit (loss)                                    |                            |                               |                        |           |      |      |       |           |      |      |       |          
|                                                           | Copper                     |                               |                        | 5.0       |      |      |       | 4.7       |      |      |       | 6.3       |     
|                                                           | Iron                       |                               |                        | (2.0      | )    |      |       | 5.9       |      |      |       | 3.7       |     
|                                                          
|                                                           |                            |                               | Total operating profit |           |      | 3.0  |       |           |      | 10.6 |       |           |      | 10.0 | 
|Exploration expenses                                       |                            |                               | 68.0                   |           |      |      | 34.0  |           |      |      | 7.2   |          
|Write-down of assets                                       |                            |                               | 1.2                    |           |      |      | 19.9  |           |      |      | 59.2  |          
|Gain on settlement of debt                                 |                            |                               |                       |           |      |      | 32.5  |           |      |      |      |          
|Net loss                                                   |                            |                               | 73.0                   |           |      |      | 31.0  |           |      |      | 85.0  |          
|Net loss per share                                         |                            | $                             | 0.30                   |           |      | $    | 0.16  |           |      | $    | 0.66  |          
|Total assets                                               |                            |                               | 455.7                  |           |      |      | 276.0 |           |      |      | 247.8 |          
|Total long-term financial liabilities                      |                            |                               | 31.4                   |           |      |      | 24.2  |           |      |      | 53.2  |          
|                                                          
|Units sold  tonnes                                        |                            |                               |                        |           |      |      |       |           |      |      |       |          
|                                                           | Copper cathode  50% share |                               |                        | 13,808    |      |      |       | 13,875    |      |      |       | 12,933    |     
|                                                           | Iron ore pellets           |                               |                        | 2,180,000 |      |      |       | 2,269,773 |      |      |       | 1,820,699 |     
|Units produced  tonnes                                    |                            |                               |                        |           |      |      |       |           |      |      |       |          
|                                                           | Copper cathode  50% share |                               |                        | 13,935    |      |      |       | 13,771    |      |      |       | 13,013    |     
|                                                           | Iron ore pellets           |                               |                        | 2,255,938 |      |      |       | 2,139,186 |      |      |       | 2,024,285 |     
|                                                          
|                                                           | Sale price                 |                               |                        |           |      |      |       |           |      |      |       |           |     
|                                                           |                            | Copper cathode  US$/pound    |                        | $         | 0.79 |      |       | $         | 0.70 |      |       | $         | 0.73 |     
|                                                           |                            | Iron ore pellets   US$/tonne |                        | $         | 31   |      |       | $         | 29   |      |       | $         | 31   |     
|                                                          



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SELECTED QUARTERLY
DATA

|                                |                            |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |       |      |  
|------------------------------- | -------------------------- | ------------- | ---- | ---------- | ---- | ------ | ---- | ------ | ---- | ------ | ---- | ----- | ---- |  | ---- | ----- | ---- | - | ---- | ----- | ---- | -
|                                |                            |               |      |           
|                                |                            | Quarter Ended |      |           
|                                |                            |               |      | Year Ended
|($ in millions except per share |                            | Mar-31        |      | Jun-30     |      | Sep-30 |      | Dec-31 |      | Dec-31
|information)                    |                            |               |      |            |      |        |      |        |      |       
|2003                            |                            |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |      
|                                | Revenue                    |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |       |     
|                                |                            | Copper        |      |            | 4.6  |        |      |        | 5.5  |        |      |       | 6.1  |  |      |       | 6.7  |   |      |       | 22.9 |  
|                                |                            | Iron          |      |            | 16.0 |        |      |        | 17.5 |        |      |       | 14.5 |  |      |       | 18.8 |   |      |       | 66.8 |  
|                               
|                                |                            |               | 20.6 |            |      |        | 23.0 |        |      |        | 20.6 |       |      |  | 25.5 |       |      |   | 89.7 |      
|                                | Operating profit (loss)    |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |       |     
|                                |                            | Copper        |      |            | 1.2  |        |      |        | (2.7 | )      |      |       | 2.0  |  |      |       | 4.5  |   |      |       | 5.0  |  
|                                |                            | Iron          |      |            | (0.7 | )      |      |        | (2.6 | )      |      |       | 0.8  |  |      |       | 0.5  |   |      |       | (2.0 | )
|                               
|                                |                            |               | 0.5  |            |      |        | (5.3 | )      |      |        | 2.8  |       |      |  | 5.0  |       |      |   | 3.0  |      
|                                | Exploration expenses       |               |      | (10.8      | )    |        |      | (15.2  | )    |        |      | (20.8 | )    |  |      | (21.2 | )    |   |      | (68.0 | )   
|                                | Write-down of assets       |               |      |           |      |        |      |       |      |        |      |      |      |  |      | (1.2  | )    |   |      | (1.2  | )   
|                                | Net income (loss)          |               |      | (9.0       | )    |        |      | (19.7  | )    |        |      | (27.0 | )    |  |      | (17.3 | )    |   |      | (73.0 | )   
|                                | Net loss per share         |               | $    | 0.04       |      |        | $    | 0.08   |      |        | $    | 0.11  |      |  | $    | 0.07  |      |   | $    | 0.30  |     
|                               
|2002                            |                            |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |      
|                                | Revenue                    |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |       |     
|                                |                            | Copper        |      |            | 4.7  |        |      |        | 5.4  |        |      |       | 5.1  |  |      |       | 5.0  |   |      |       | 20.2 |  
|                                |                            | Iron          |      |            | 17.1 |        |      |        | 19.4 |        |      |       | 14.1 |  |      |       | 16.3 |   |      |       | 66.9 |  
|                               
|                                |                            |               | 21.8 |            |      |        | 24.8 |        |      |        | 19.2 |       |      |  | 21.3 |       |      |   | 87.1 |      
|                                | Operating profit (loss)    |               |      |            |      |        |      |        |      |        |      |       |      |  |      |       |      |   |      |       |     
|                                |                            | Copper        |      |            | 1.2  |        |      |        | 1.7  |        |      |       | 1.4  |  |      |       | 0.4  |   |      |       | 4.7  |  
|                                |                            | Iron          |      |            | 3.3  |        |      |        | 3.8  |        |      |       | 0.9  |  |      |       | (2.1 | ) |      |       | 5.9  |  
|                               
|                                |                            |               | 4.5  |            |      |        | 5.5  |        |      |        | 2.3  |       |      |  | (1.7 | )     |      |   | 10.6 |      
|                                | Exploration expenses       |               |      | (2.9       | )    |        |      | (5.4   | )    |        |      | (10.0 | )    |  |      | (15.7 | )    |   |      | (34.0 | )   
|                                | Gain on settlement of debt |               |      |           |      |        |      |       |      |        |      | 32.5  |      |  |      |      |      |   |      | 32.5  |     
|                                | Write-down of assets       |               |      |           |      |        |      |       |      |        |      | (18.0 | )    |  |      | (1.9  | )    |   |      | (19.9 | )   
|                                | Net income (loss)          |               |      | 0.2        |      |        |      | (2.9   | )    |        |      | 0.4   |      |  |      | (28.7 | )    |   |      | (31.0 | )   
|                                | Net loss per share         |               | $    | 0.00       |      |        | $    | 0.01   |      |        | $    | 0.00  |      |  | $    | 0.15  |      |   | $    | 0.16  |     
|                               



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OVERVIEW &
CORPORATE STRATEGY

Ivanhoe Mines Ltd. is an international mining
company whose principal current activity is exploring a major
discovery of copper and gold at the Oyu Tolgoi (Turquoise Hill)
project in southern Mongolia. It also has regional exploration
programs targeting gold and copper, principally in Mongolia and
China. The Company, together with its subsidiaries and joint
venture (collectively referred to as Ivanhoe Mines)
also produces copper, gold and iron ore products from various
mines in the Asia Pacific region.

The Companys current priority is to focus
the majority of its financial resources on continuing the
exploration and development of the Oyu Tolgoi project. In 2003,
the Company began to explore opportunities to rationalize
assets, including the possibility of spinning off assets through
partial sales or joint ventures. During the first quarter of
2004, as part of its plans to finance the development of the Oyu
Tolgoi project, the Company indicated its intention to consider
selling existing non-core assets. The Company also indicated
that it also may, in the future, extend a minority participation
in the Oyu Tolgoi project to one or more strategic partners. No
assurances can be given that any agreement can or will be
reached in connection with any such transaction or transactions.

Since its inception, the Company has relied on
capital markets (and in particular, equity markets) to fund its
exploration activities and expects, in 2004 and thereafter, to
continue to rely on these markets in order to continue funding
the development of the Oyu Tolgoi project. The Company does not
expect to receive any cash distributions in 2004 from its two
producing mines, as any available surplus cash generated by each
mine will be used to either repay third-party loans or
commitments or to expand existing operating mine capacity.
Capital markets are subject to significant volatilities and
uncertainties. There can be no assurance that Ivanhoe
Mines undeveloped or partially developed projects can be
fully developed in whole or in part, since factors beyond
Ivanhoe Mines control may adversely affect its access to
funding or its ability to recruit third-party participants.



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EXECUTIVE
SUMMARY  2003 YEAR

The Company recorded a net loss of
US$73 million (or $0.30 per share) in 2003, compared to a
net loss of US$31 million (or $0.16 per share) in 2002.
Major factors in the 2003 results included an operating profit
from mining operations totalling US$3.0 million and
exploration expenses of US$68 million. Exploration
expenditures were primarily incurred on the Oyu Tolgoi
(Turquoise Hill) Project and other projects in Mongolia. The
increase in exploration expenses is attributed to Ivanhoes
accelerated drilling activities on the Oyu Tolgoi project,
especially on the Hugo Dummett deposit, and additional
engineering costs in the second half of 2003 related to the
Preliminary Assessment of Oyu Tolgoi.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January, 2004, John Macken was appointed
    President of Ivanhoe, with the primary task of overseeing the
    construction of a mine at Oyu Tolgoi. Mr. Macken, 52,
    joined Ivanhoe after a 19-year career with mining giant Freeport
    McMoran Copper and Gold, most recently as Freeports Senior
    Vice-President of Strategic Planning and Development, based in
    New Orleans. He spent a total of 13 years with
    Freeports operating unit, P.T. Freeport Indonesia
    (PTFI), culminating in the position of Executive Vice-President
    and General Manager at Freeports Grasberg mining complex
    in Papua, the worlds largest single copper and gold mine.
    Between 1996 and 1998, Mr. Macken headed an expansion
    valued at almost $1 billion at the Grasberg open pit and
    underground mining complex in a joint venture between Freeport
    and Rio Tinto, of London. The expansion was completed ahead of
    schedule and under budget.
|
| |  | During 2003, Ivanhoe spent a total of
    US$59.5 million on exploration and development of its
    Mongolian copper and gold projects, most of which was invested
    in the Oyu Tolgoi discovery. To date, Ivanhoe has expensed all
    exploration, development and engineering costs related to its
    Mongolian projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In February, 2004, Ivanhoe released an
    independently prepared Preliminary Assessment of the Oyu Tolgoi
    Project that confirmed its potential to become a new, long-life
    copper and gold producer that could rank among the largest in
    the world. Ivanhoe intends to complete a final feasibility study
    on the first stage of a two-stage development scenario. The
    Preliminary Assessment estimated that a capital investment of
    US$529 million would be required to build the first stage.
    If construction is initiated in early 2005 as currently
    anticipated, the first copper-concentrate shipments would be
    expected in late 2006 or early 2007. Electronic copies of the
    Preliminary Assessment Report are available at www.sedar.com.                                                                                                                                                                                               
|
| |  | In November, 2003, Ivanhoe acquired from BHP
    Minerals International Exploration Inc. the 2% net smelter
    return royalty interest on the Oyu Tolgoi project for
    US$37 million. The acquisition was a strategic move to
    consolidate Ivanhoes control over all aspects of the
    project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In December, 2003, Ivanhoe purchased
    US$50 million of one-year treasury bills issued by the
    Government of Mongolia as part of the governments effort
    to retire its Soviet-era debt to the Russian Federation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | In March, 2004, the discovery of the Hugo Dummett
    Deposit at Oyu Tolgoi was recognized as the most significant,
    recent mineral discovery in the world during the annual
    conference of the Prospectors and Developers Association of
    Canada (PDAC) in Toronto. The PDACs inaugural Thayer
    Lindsley International Discovery Award was presented to
    Ivanhoes Douglas Kirwin, Executive VP, Exploration,
    Charles Forster, Senior VP, Oyu Tolgoi Project, and Garamjav
    Dondog, Senior Geologist.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The joint-venture Monywa Copper Project in
    Myanmar produced 27,870 tonnes of copper cathode
    (13,935 tonnes net to Ivanhoe), approximately the same
    amount as 2002. The average copper price received in 2003 was
    79 cents (US) a pound, compared to 70 cents (US) a
    pound in 2002. Minegate cash costs in 2003 were approximately
    39 cents (US) a pound. Copper production for 2004 is
    estimated at 32,000 tonnes at minegate cash costs of
    approximately 38 cents (US) a pound. The current copper
    price is approximately US$1.35 a pound, an increase of 71%
    compared to the average price received in 2003. The project
    receives a premium of approximately US$38 tonne of copper
    (1.7 cents (US) a pound) for its LME Grade A quality.                                                                                                                                                                                            



5






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| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company raised approximately
    US$215 million in 2003. The majority of the proceeds will
    be used to finance Mongolian exploration and development
    activities. Cash at December 31, 2003 was
    US$108 million.
|
| |  | In November, 2003, the common shares of the
    Company began trading in the US on the NASDAQ National Market
    System, trading under the symbol HUGO.                                                                     

The financial results include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The joint-venture Monywa Copper Project in
    Myanmar reported a net profit of US$2.1 million, compared
    to a net profit of US$2.6 million in 2002. The project
    produced 27,870 tonnes of copper cathode
    (13,935 tonnes net to Ivanhoe) in 2003, approximately the
    same amount as 2002. The average copper price received in 2003
    was 79 cents (US) a pound, compared to 70 cents (US) a
    pound in 2002. Minegate cash costs in 2003 were approximately
    39 cents (US) a pound. Increased sales revenue in 2003 was
    offset by the increase in the cost of operations, primarily
    related to increased activities on mining, crushing and
    agglomeration, and the provision for income taxes required in
    2003 due to the end of the projects tax holiday. Following
    the debt obligation payment at the end of February, 2004, the
    balance on the original US$90 million project debt was
    reduced to US$22.5 million. Projected copper production for
    2004 is estimated at 32,000 tonnes at minegate cash costs
    of approximately 38 cents (US) a pound. The current copper
    price is approximately US$1.35 a pound, an increase of 71%
    compared to the average price received in 2003. The project
    receives a premium of approximately US$38 tonne of copper
    (1.7 cents (US) a pound) for its LME Grade A quality.
|
| |  | ABM Minings Savage River Mine in Australia
    reported a net loss of US$4.7 million in 2003, due mainly
    to the negative impact on operating costs of the rise in the
    Australian dollar vis-à-vis the US dollar. The exchange
    rate for the Australian dollar against the US dollar at the end
    of 2003 was 74.9 cents (US), up 33% from a rate of
    56.1 cents (US) at the beginning of 2003. The mine produced
    approximately 2.3 million tonnes of iron ore pellets during
    2003, a 5% increase over 2002 production. Pellet prices received
    by Savage River in 2003 were approximately US$31 a tonne,
    compared to approximately US$29 tonne in 2002. Pellet prices at
    Savage River are negotiated once a year and are priced in US
    dollars. Most of Savage Rivers annual pellet price
    adjustments become effective in the second half of the year.
    Planned pellet production for 2004 is estimated at
    2.3 million tonnes at an estimated price of
    approximately US$34.30 a tonne, based on a negotiated pellet
    price increase that is 19.5% higher than 2003 prices.                                                                                                                                                                                                                                                        
|
| |  | Exploration expenses for all projects in 2003
    totalled US$68.0 million, compared to US$33.9 million
    in 2002. The US$34.1 million increase in costs was mainly
    due to the cost of engineering evaluation studies initiated in
    2003 on the Oyu Tolgoi project and increased drilling and
    exploration activities at Oyu Tolgoi and other Mongolian
    properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Foreign exchange gains of US$10.5 million.
    The foreign exchange gain during the quarter was mainly
    attributed to the strengthening of the Canadian dollar against
    the US dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | General and administrative expenses of
    US$17.5 million. These expenditures include stock-based
    compensation, legal, audit and regulatory fees related to the
    listing of the Companys shares on NASDAQ, expenses related
    to site inspections, additional office charges in Asia and
    travel related to financing activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Care-and-maintenance costs at the Bakyrchik Gold
    Mine in Kazakhstan of US$3.4 million. Ivanhoe is discussing
    strategic alternatives for the Bakyrchik Mine with advisors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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QUARTERLY ANALYSIS
Q403 vs. Q402



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenue
    The Savage River Mine and the S&K Mine both experienced
    increases in revenue in Q403 over Q402. The increase
    in iron ore pellet sales from the Savage River Mine in
    Q403 is due to a 6% increase in tonnage sold and a 9%
    increase in pellet prices. The increase in total cathode copper
    sales from the S&K Mine in Q403 is due to a 1%
    increase in tonnage sold and a 33% increase in copper prices.                                                                                                                                                                                        
| 
| | Operating
    profit In Q403, the
    S&K Mine experienced a reduction in operating costs. The
    cost reduction was a result of a decrease in process costs
    attributed to lower chemical charges and an increase in the
    estimated ore on leach pads. The increase in ore on leach pads
    in Q403 is a result of a 61% increase in copper grade
    mined during the quarter and an upward adjustment to the total
    ore on leach pads estimated at the end of September 2003. These
    higher copper grade levels currently are not expected to extend
    beyond the end of the first quarter of 2004.              
| 
|  | The Savage River Mines operating costs are
    largely denominated in Australian dollars. In Q403, when
    valued in U.S. currency, the mines operating costs
    increased by 6% over the same period in 2002. The majority of
    the increase in operating costs during the quarter is the net
    result of the strengthening of the Australian dollar, offset by
    a decrease in Australian dollar denominated costs. The decrease
    in Australian denominated costs is mainly the result of an
    increase in the grade of ore mined during the quarter and the
    resulting 13% increase in pellet tonnage production.
| 
| | Exploration
    Total exploration expenses in Q403 were consistent with
    total exploration costs incurred in Q303. Exploration
    expenditures were primarily incurred on the Oyu Tolgoi project
    and other projects in Mongolia. The increase in exploration
    expenses over the last two years is attributed to Ivanhoe
    Mines accelerated drilling activities on the Oyu Tolgoi
    project, especially on the Hugo Dummett deposit, and additional
    engineering costs in the second half of 2003 related to the
    scoping study.                                                                              
| 
| | Administrative
    costs The increase in
    administrative costs in Q403 is primarily attributed to
    the expensing of stock-based compensation for new stock options
    granted during the quarter.                                                                                                                                                                                                                                                                                                                                                                                                                             
| 
| | Foreign exchange
    gain In Q403, the
    Company maintained most of its cash resources in Canadian
    dollars (Cdn$). The foreign exchange gain during the
    quarter is mainly attributed to the strengthening of the
    Canadian dollar against the U.S. dollar.                                                                                                                                                                                                                                                                                                                                                            



7






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##### 









REVIEW OF OPERATIONS

A) EXPLORATION

Exploration expenses in 2003 totalled
$68.0 million, compared to $33.9 million in 2002. The
$34.1 million increase in costs is mainly due to the cost
of engineering evaluation studies initiated in 2003 on the Oyu
Tolgoi project and increased drilling and exploration activities
on the Oyu Tolgoi project and other Mongolian properties.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | Mongolia
    At the end of 2003, Ivanhoe Mines held direct and indirect
    interests in 129 exploration licences covering approximately
    11.2 million hectares. In 2003, Ivanhoe Mines spent
    $59.5 million on its Mongolian properties. The main focus
    of exploration activities was the Oyu Tolgoi project
    ($48.1 million), the Kharmagtai and Ovoot Hyar projects
    ($3.8 million), the Oyut Ulaan project ($0.7 million),
    the Saran Uul project ($0.8 million) and general
    reconnaissance projects ($6.1 million).



| |    |                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i) | Oyu Tolgoi
    Exploration In November,
    2003, AMEC E&C Services Limited (AMEC) released
    a new estimate of the Oyu Tolgoi projects mineral
    resources. Using an equivalent cut-off grade of 0.60% copper,
    AMEC increased the Hugo Dummett deposits inferred resource
    category to 962 million tonnes grading 1.30% copper and
    0.18 g/t gold.



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In its November estimate, AMEC increased the
    Hugo Dummett deposits high-grade core of inferred
    resources greater than 2% copper equivalent to
    149.4 million tonnes grading 2.88% copper and 0.53 g/t.                                                                                                                                                      
|
| | The Hugo Dummett deposit is the largest of the
    four copper and gold deposits outlined to date at Ivanhoe
    Mines Oyu Tolgoi project.                                                                                                                                                                                                                             
|
| | AMEC, using a 0.30% copper equivalent cut-off,
    reported that the Oyu Tolgoi project contains estimated inferred
    resources totalling 2.6 billion tonnes grading 0.73% copper
    and 0.17 g/t gold. This represented an increase of 27% in the
    amount of copper and gold previously reported by AMEC in its
    mineral resource report issued in July, 2003.
|
| | In addition, using the same 0.30% copper
    equivalent cut-off grade, AMEC estimated that the Southwest Zone
    contained 509 million tonnes of indicated resources grading
    0.40% copper and 0.59 g/t gold.                                                                                                                                                       
|
| | The AMEC estimate was prepared in accordance
    with Canadian regulatory requirements set out in National
    Instrument (NI) 43-101, under the direction of
    Stephen Juras, P. Geo., and Dr. Harry Parker, Ch.P. Geol.,
    independent qualified persons as defined by NI 43-101.                                                                               



| |     |                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ii) | Oyu Tolgoi
    Studies In early February,
    2004, an independent preliminary assessment report, or scoping
    study, was released. The scoping study was commissioned to
    assess the development alternatives open to Ivanhoe Mines and to
    chart an implementation path for the Oyu Tolgoi mining complex.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conclusions from the study support the economic
    viability of both conventional open-pit and underground mining
    operations. The Base Case from the Scoping Study proposes a
    two-stage development approach.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The first stage would consist of the construction
    of a process plant capable of handling 20 million tonnes of
    ore per year fed by open pits on the Southwest Oyu, Central Oyu
    and Hugo South deposits. Estimated capital costs for the first
    stage are $529 million.                                                                                                                                                             
|
| |  | The second stage would involve an expansion of
    the concentrator in years three and four, increasing the milling
    capacity to 40 million tonnes of ore per year, with the
    increased capacity expected in year five. Using estimates of
    copper and gold prices at $1.00 per pound and $400 per ounce
    respectively, most of the capital expenditures in the second
    stage are expected to be funded from operating cash flows.



| |      |                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | iii) | Asia
    Gold In July 2003 Ivanhoe
    Mines transferred to Asia Gold Corp. (Asia Gold) a
    series of early-stage Mongolian exploration licences covering
    approximately 3.1 million hectares (31,000 square
    kilometres) in the South Gobi region of Mongolia, located
    approximately 150 kilometres west of the Oyu Tolgoi project. In
    addition, Ivanhoe Mines transferred to Asia Gold



8






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##### 








| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | its South Korean gold and silver projects,
    including the Eunsan gold and silver mine, located in
    Chollanam-Do Province. In consideration for these assets, Asia
    Gold issued approximately 6.1 million common shares to the
    Company. Prior to July 2003, Asia Gold was a small, private
    Canadian company, unrelated to the Company, with various mineral
    exploration interests in Mongolia. Asia Gold, now a Canadian
    publicly-listed company, is currently 51% owned by the Company.



|   |                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b) | Myanmar
    In 2003, Ivanhoe Mines spent a total of $2.4 million on the
    Modi Taung property, the exploration activities mainly
    consisting of underground exploration on various gold veins. A
    scoping study for development of the Modi Taung veins was
    updated during 2003, with a target milling rate of 75 tonnes per
    day and the mining of ore material averaging 25 to 30 g/t gold.
|  
|c) | Other                                                                                                                                                                                                                                                                                                                                                                                                       



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i)  | China: Jinshan Gold Mines
    Inc. Ivanhoe Mines is
    exploring for gold, copper and platinum-group metals (PGMs) in
    Inner Mongolia and Yunnan through a series of joint ventures
    with Jinshan Gold Mines Inc. (JIN), (formerly
    Pacific Minerals Inc.). At the end of October, 2003, JIN and the
    Company reached an agreement in principle to restructure their
    existing participation arrangements in respect of these
    projects. The new agreement will reduce Ivanhoe Mines
    maximum earn-in from 80% to 50% on existing projects in China.
    Ivanhoe Mines retains the right to earn up to 80% of the
    available interest in any new projects acquired by JIN in China
    (excluding those in Anhui and Liaoning provinces). The new
    agreement also contains a mutual non-compete clause, whereby JIN
    agrees not to compete for any new mineral properties in Inner
    Mongolia and Ivanhoe Mines agrees not to compete for any new
    mineral properties in Liaoning Province. Ivanhoe Mines also
    agreed to transfer to JIN 50% of its interest in the Shuteen
    exploration licence in southern Mongolia.
|
| | ii) | Inner Mongolia: Ivanhoe
    Mines Throughout 2003,
    Ivanhoe Mines continued its extensive reconnaissance programs to
    identify high-priority targets based upon geologic models
    developed at Oyu Tolgoi and other epithermal-style deposits. In
    August, 2003, Ivanhoe Mines announced that it had entered into
    an agreement to form joint ventures with a Chinese government
    entity to explore for and develop gold, copper, silver,
    molybdenum and other minerals on three advanced projects in
    Inner Mongolia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to the three projects, Ivanhoe Mines
    also holds an interest in the Oblaga gold-copper-molybdenum
    project, in Inner Mongolia. Inner Mongolia exploration
    expenditures in 2003 totalled approximately $2.3 million.



| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | iii) | Vietnam: Olympus Pacific
    Minerals The Company holds
    a minority interest in a gold exploration joint venture in
    Vietnam with Olympus Pacific Minerals, a public Canadian mineral
    exploration company. The joint ventures principal project
    is the Phuoc Son gold project, in northwestern Quang Nam
    Province, Central Vietnam. In March, 2004, the Company and
    Olympus Pacific Minerals reached an agreement for the Company to
    convert its remaining interest in the Phuoc Son gold project
    into shares of Olympus Pacific Minerals.
|
| | iv)  | Australia:
    Cloncurry In September,
    2003, Ivanhoe Mines announced the $6.2 million acquisition
    of the Cloncurry projects copper-gold mining and
    exploration leases in Australia. The Cloncurry leases cover an
    area of more than 1,450 square kilometres, approximately 160
    kilometres southeast of Mount Isa in north-western Queensland.
    Ivanhoe Mines continues to assess its future plans for the
    Cloncurry property.                                                                                                                



9






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##### 








Summary of exploration expenditures by project:

|                                      |          |                          |        |      |  |      |        |     |  |  |       |     | 
|------------------------------------- | -------- | ------------------------ | ------ | ---- |  | ---- | ------ | --- |  |  | ----- | --- | 
|                                      |          |                         
|                                      |          | Years ended December 31,
|                                      |          |                         
|                                      |          | 2003                     |        | 2002 |  | 2001
|                                      |          |                          |        |      |  |     
|Total exploration expenditures-$(000) |          |                          | 67,989 |      |  |      | 33,934 |     |  |  | 7,192 |    
|Percentage allocation                 |          |                          |        |      |  |      |        |     |  |  |       |    
|                                      | Mongolia |                          |        | 87%  |  |      |        | 81% |  |  |       | 53% | 
|                                      | China    |                          |        | 5%   |  |      |        | 1%  |  |  |       | 0%  | 
|                                      | Myanmar  |                          |        | 4%   |  |      |        | 7%  |  |  |       | 16% | 
|                                      | Korea    |                          |        | 3%   |  |      |        | 8%  |  |  |       | 24% | 
|                                      | Other    |                          |        | 1%   |  |      |        | 3%  |  |  |       | 7%  | 
|                                     
|                                      |          |                          | 100%   |      |  |      | 100%   |     |  |  | 100%  |    
|                                     

B) MINING OPERATIONS

Copper operation

MONYWA COPPER PROJECT (S&K MINE),
MYANMAR

|                            |  |                 |  |                         |        |            |  |              |        |            |  |      |     |            |  |  |        |  |  |  |        |  |  |  |     |  
|--------------------------- |  | --------------- |  | ----------------------- | ------ | ---------- |  | ------------ | ------ | ---------- |  | ---- | --- | ---------- |  |  | ------ |  |  |  | ------ |  |  |  | --- | -
|                            |  |                 |  |                        
|                            |  | Total Operation |  | Companys 50% net share
|                            |  |                 |  |                        
|                            |  |                 |  |                         |        |            |  |              |        |           
|                            |  |                 |  | Years ended             |        |            |  | Years ended  |        |           
|                            |  |                 |  | December 31,            |        |            |  | December 31, |        |           
|                            |  |                 |  |                         |        | % Increase |  |              |        | % Increase
|                            |  |                 |  | 2003                    |        | 2002       |  | (decrease)   |        | 2003       |  | 2002 |     | (decrease)
|                            |  |                 |  |                         |        |            |  |              |        |            |  |      |     |           
|Total tonnes moved          |  | Tonnes (000s)  |  |                         | 18,527 |            |  |              | 16,500 |            |  |      | 12% |            |  |  |        |  |  |  |        |  |  |  |     |  
|Tonnes of ore to heap       |  | Tonnes (000s)  |  |                         | 8,767  |            |  |              | 7,294  |            |  |      | 20% |            |  |  |        |  |  |  |        |  |  |  |     |  
|Ore grade                   |  | CuCN %          |  |                         | 0.60   | %          |  |              | 0.53   | %          |  |      | 13% |            |  |  |        |  |  |  |        |  |  |  |     |  
|Strip ratio                 |  | Waste/Ore       |  |                         | 0.92   |            |  |              | 0.73   |            |  |      | 26% |            |  |  |        |  |  |  |        |  |  |  |     |  
|Cathode production          |  | Tonnes          |  |                         | 27,870 |            |  |              | 27,542 |            |  |      | 1%  |            |  |  | 13,935 |  |  |  | 13,771 |  |  |  | 1%  |  
|Tonnage sold                |  | Tonnes          |  |                         | 27,615 |            |  |              | 27,749 |            |  |      | (0% | )          |  |  | 13,808 |  |  |  | 13,875 |  |  |  | (0% | )
|Average sale price received |  | US$/pound       |  |                         |        |            |  |              |        |            |  |      |     |            |  |  | $0.79  |  |  |  | $0.70  |  |  |  | 13% |  
|Sales                       |  | US$(000)        |  |                         |        |            |  |              |        |            |  |      |     |            |  |  | 22,866 |  |  |  | 20,227 |  |  |  | 13% |  
|Cost of operations          |  | US$(000)        |  |                         |        |            |  |              |        |            |  |      |     |            |  |  | 12,428 |  |  |  | 10,539 |  |  |  | 18% |  
|Operating profit            |  | US$(000)        |  |                         |        |            |  |              |        |            |  |      |     |            |  |  | 4,954  |  |  |  | 4,712  |  |  |  | 5%  |  

Current plans for the Monywa Copper Project, a
joint-venture operating company, is to develop the Letpadaung
deposit and incrementally expand the current copper cathode
capacity over the next six years to a total of
129,000 tonnes of copper per year. The increase in
production capacity over the next six years has been designed so
that all capital expenditures will be financed from the
mines internally generated cash flows.

The management of the Monywa Copper Project
intends to increase, by the end of March, 2005, the mines
annual copper production capacity to 39,000 tonnes. Total
copper cathode production for 2004 is currently projected at
32,000 tonnes.

Copper prices have been increasing steadily since
November, 2001, when they reached a low of approximately $0.60
per pound. Copper prices averaged $0.81 per pound in 2003,
including $0.93 per pound in the fourth quarter of 2003 and
$1.18 per pound in the first two months of 2004.

The increase in cost of operations in 2003 is
primarily related to the impact of increased activities on
mining, crushing and agglomeration costs, and a downward
adjustment to estimated metal inventory contained on the heaps
offset by decreases in process costs due to lower chemical
usages in the copper extraction process.

Following a payment at the end of February, 2004,
the original S&K Mines $90 million project debt
balance was reduced to $22.5 million. The S&K Mine
remains in technical default of certain covenants under the loan
agreement. However, based on the S&K Mines discussions
with the project lenders, the Company does not expect the
lenders to act upon the default. However, no assurances can be
given in this regard (see Risks and Uncertainties 
Breach of loan covenant).



10






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##### 








The Company believes the S&K Mine has the
ability to generate sufficient cash from operations, in the
short and long term, to repay its obligations and maintain
planned production.

Iron operation

SAVAGE RIVER MINE, TASMANIA

|                              |  |                   |  |              |           |          |  |            |           |  |  |  |       |  
|----------------------------- |  | ----------------- |  | ------------ | --------- | -------- |  | ---------- | --------- |  |  |  | ----- | -
|                              |  |                   |  |              |           |         
|                              |  |                   |  | Year ended   |           |         
|                              |  |                   |  | December 31, |           | %       
|                              |  |                   |  |              |           | Increase
|                              |  |                   |  | 2003         |           | 2002     |  | (decrease)
|                              |  |                   |  |              |           |          |  |           
|Total volumes moved           |  | BCM (000s)       |  |              | 10,007    |          |  |            | 9,749     |  |  |  | 3%    |  
|Tonnes milled                 |  | (000s)           |  |              | 5,308     |          |  |            | 5,002     |  |  |  | 6%    |  
|Strip ratio                   |  | BCM waste/BCM ore |  |              | 6.8       |          |  |            | 8.4       |  |  |  | (19%  | )
|Concentrate production        |  | (000s)           |  |              | 2,286     |          |  |            | 2,210     |  |  |  | 3%    |  
|Iron ore content              |  | Fe%               |  |              | 32.6%     |          |  |            | 33.5%     |  |  |  | (3%   | )
|Pellet production             |  | Tonnes            |  |              | 2,255,938 |          |  |            | 2,139,186 |  |  |  | 5%    |  
|Pellet sales                  |  | Tonnes            |  |              | 2,180,000 |          |  |            | 2,269,773 |  |  |  | (4%   | )
|Sales                         |  | US$/tonne         |  |              | $31       |          |  |            | $29       |  |  |  | 4%    |  
|                              |  | US$(000)          |  |              | 66,833    |          |  |            | 66,894    |  |  |  | (0%   | )
|Cost of operations            |  | US$(000)          |  |              | 63,480    |          |  |            | 52,753    |  |  |  | 20%   |  
|Operating profit (loss)       |  | US$(000)          |  |              | (1,952    | )        |  |            | 5,852     |  |  |  | (133% | )
|Average foreign exchange rate |  | US$/AUD$          |  |              | 0.6529    |          |  |            | 0.5440    |  |  |  | 20%   |  

Pellet prices at Savage River are negotiated once
a year and are priced in U.S. dollars. Most of Savage
Rivers annual pellet price adjustments become effective in
the second half of each calendar year. The increase in pellet
prices for the 2003 year was about 9% and the increase in
pellet prices for 2004 is 19.5%. The iron-ore market and the
demand for iron-ore pellets is very strong in 2004 to date, with
much of the demand coming from China. The tight ore supply has
prompted steel mills to secure long-term iron-ore pellet
contracts. Although the pellet price is negotiated every year,
most of the planned production for the Savage River Mine over
the next three to four years now has been taken up in supply
contracts.

Unfortunately, the financial gains resulting from
the 2003 increase in pellet prices and the expected increase in
2004 have been totally eroded by the strengthening of the
Australian dollar (AUD$) throughout 2003 and in
early 2004 (see Risks and Uncertainties 
Currency risks). To offset the negative impact of a strong
Australian dollar, the management of the Savage River Mine will
have to improve the economic viability of the mine by continuing
efforts to lower costs and successfully negotiate financial
assistance from third parties.

In 2003, the Company provided loans totalling
$7.5 million to the Savage River Mine to fund operating
cash-flow shortfalls that included $9.1 million in deferred
stripping costs and $3.6 million in capital assets
expenditures. In 2004, management of the Savage River Mine is
forecasting a cash shortfall, the magnitude of which is directly
related to the strength of the Australian dollar. Using an
average exchange rate of U.S.$0.75/AUD$, the cash shortfall is
estimated at $2.3 million. The Company has funded this
$2.3 million cash shortfall in the first quarter of 2004
but has not committed nor made any decision to commit additional
funds to finance any future cash shortfall at the Savage River
Mine. If the management of the Savage River Mine is unable to
obtain the necessary funding, including third party financial
assistance when needed, the mine may not be able to continue as
a going concern and, accordingly, adjustments may be required to
the carrying value of the Companys investment in the
Savage River Mine. All debt obligations of the Savage River Mine
to third parties are non-recourse to the Company.

The majority of the 20% increase in operating
costs in 2003 is attributable to the strengthening of the
Australian currency during the year.

Total pellet production for 2004 is estimated at
approximately 2.3 million tonnes.



11






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##### 








C) ADMINISTRATIVE AND OTHER

General and
administrative The 2003
increase in General and Administrative expenditures was
primarily due to increased stock-based compensation, increased
expenses related to site inspections, additional administrative
expenses in Asia and travel related to financing activities.

Foreign exchange
gains In 2003, the Company
maintained most of its cash resources in Canadian dollars. The
majority of the foreign exchange gains in 2003 is attributed to
the strengthening of the Canadian dollar against the
U.S. dollar.

Gain on sale of an
investment The
$4.6 million gain on sale of an investment in 2003 resulted
from the sale of the Companys shares of Emperor Mines
Limited.

Share of loss on significantly influenced
investees At
December 31, 2003, the Company held 35.5% of JINs
common shares, (see Review of Operations 
Exploration, Other-China: Jinshan Gold Mines Inc.) and
consequently $2.3 million of the $2.4 million,
represents the expensing by the Company of its share of
JINs net loss for 2003.

Dilution gain on investment in
subsidiary Starting in
Q303, following the acquisition by the Company of more
than 50% of the outstanding common shares of Asia Gold, the
financial results of Asia Gold are consolidated in the
Companys financial results. A $4.2 million dilution
gain was recognized by the Company following Asia Golds
initial public offering in Q403.

Share
Capital At March 26,
2004, the Company had a total of 271.4 million common
shares and purchase warrants outstanding as shown in the
following table:

|                                    |  |                   |  |                    
|----------------------------------- |  | ----------------- |  | -------------------
|Share purchase warrants outstanding |  | Maturity date     |  | Strike price       
|                                   
|                                   
|7.150 million(1)                    |  | December 19, 2004 |  | Cdn$12.00 per share
|                                    |  | December 19, 2005 |  | Cdn$12.50 per share
|5.76 million(2)(3)                  |  | February 15, 2005 |  | $8.68 per share    



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Each warrant entitles the holder to acquire one
    common share.               
|   
|(2) | Each 10 warrants entitle the holder to acquire
    one common share.            
|   
|(3) | In 2004, the expiry date was extended from
    February, 2004 to February, 2005.

At March 26, 2004, the Company had a total
of approximately 9.2 million incentive stock options
outstanding with a weighted average exercise price per share of
Cdn$3.60. Each option is exercisable to purchase a common share
of the Company at prices ranging from Cdn$1.08 to Cdn$12.70 per
share.



12






---



##### 









CASH RESOURCES AND
LIQUIDITY

At December 31, 2003, consolidated working
capital was $126.9 million, including cash of
$108.2 million, compared with working capital of
$10.8 million and cash of $35.4 million at
December 31, 2002.

Operating activities The $79.1 million in cash used in operating
activities in 2003 was primarily attributed to
$68.0 million in exploration activities and
$9.6 million in deferred stripping costs.

Investing activities In 2003, a total of $81.5 million in cash was used
in investing activities. The main cash expenditures included
$50.0 million for the acquisition of a Mongolian Treasury
Bill, $5.5 million in sustaining capital expenditures on
mining property, plant and equipment, $6.0 million in
non-producing mining plant and equipment on exploration projects
primarily located in Mongolia, Australia and South Korea and
$26.1 million in the acquisition of various mineral
interests. The $26.1 million in acquisition payments
consisted principally of the first $17.0 million
installment of the $37.0 million purchase price for the BHP
royalty interest acquisition, the remaining $4.0 million of
the $5.0 million Oyu Tolgoi property acquisition obligation
to BHP and a $4.7 million payment obligation related to the
Cloncurry mineral property rights acquisition.

Financing activities Financing activities in 2003 included $9.4 million
in loan repayments principally consisting of $15.0 million
in debt repayments for the S&K Mine ($7.5 million net
to Ivanhoe Mines) and approximately $1.4 million in
equipment loan repayments for the Savage River Mine.

In October, 2003, the Company raised
$50.0 million (Cdn$66.0 million) through the issue of
5.76 million Special Warrants at a price of $8.68
(Cdn$11.45) per Special Warrant. Each Special Warrant entitled
the holder to acquire one common share and one common-share
purchase warrant of the Company. In January, 2004, the Special
Warrants were converted into 5.76 million common shares of
the Company and 5.76 million share-purchase warrants. Each
10 share-purchase warrants are exercisable to purchase one
common share of the Company at $8.68 per share until February,
2005.

Through a series of equity financings during
2003, the Company also raised a total of $191.3 million
(Cdn$261.8 million) by issuing 55.6 million common
shares of the Company at prices ranging from Cdn$3.00 to
Cdn$11.45 per share. In December, 2003, as part of one such
financing, the Company also issued 7.15 million
share-purchase warrants expiring in December, 2005. Each warrant
entitles the holder to purchase one common share of the Company
at Cdn$12.00 per share until December 2004 and at Cdn$12.50 per
share during December 2005.

The $241.2 million in proceeds raised from
the Companys various 2003 financings have been, or are
intended, to fund the following activities: the
$37.0 million acquisition of the BHP royalty, the purchase
of the Mongolian $50.0 million Treasury Bill, working
capital, and the Companys exploration and engineering
activities on its Mongolian properties during 2003 and through
part of 2004. The following is a summary of sources and uses of
proceeds:

|                   |                                         |           |       |       | 
|------------------ | --------------------------------------- | --------- | ----- | ----- | 
|                   |                                         | $ Million
|                   |                                         |          
|Source of proceeds |                                         |           |       |      
|                   | Sale of Common Shares                   |           |       | 191.2 | 
|                   | Sale of Special Warrants                |           |       | 50.0  | 
|                  
|                   |                                         |           | 241.2 |      
|                  
|Use of proceeds    |                                         |           |       |      
|                   | Mongolian Treasury Bill                 |           |       | 50.0  | 
|                   | BHP property payment                    |           |       | 4.0   | 
|                   | BHP royalty payment                     |           |       | 17.0  | 
|                   | Mongolia exploration  2003             |           |       | 59.5  | 
|                   | Other activities(1)                     |           |       | 28.3  | 
|                   | Remaining proceeds at December 31, 2003 |           |       | 82.4  | 
|                  
|                   |                                         |           | 241.2 |      
|                  



|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Principal expenditures in this category include
    $8.6 million for the Clocurry mineral interests, capital
    assets, and related environmental bond acquisition,
    $7.5 million in working capital advances to the Savage
    River Mine, $8.5 million in exploration expenditures
    outside Mongolia, $3.4 million in mining



13






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##### 










| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | property shut-down costs, $3.9 million
    purchase of long-term investments, less $6.7 million
    proceeds from the sale of the Companys investment in
    shares of Emperor Mines Limited.

The Companys existing cash resources are
sufficient to meet all of its planned capital expenditures for
the first six months of 2004. The Company expects to fund
planned expenditures for the second half of 2004 from external
sources, which may include debt or equity financing, proceeds
form the sale of existing non-core assets, a third party
participation in one or more of the Companys projects or a
combination thereof. Failure to generate sufficient funding from
one or more of these sources may require Ivanhoe Mines to delay,
postpone or curtail certain of its planned activities for the
second half of 2004 and thereafter. Over the long term, the
Company still needs to obtain additional funding for, or third
party participation in, its undeveloped or partially developed
projects (including the Oyu Tolgoi project, the Companys
other Mongolian properties, and the Bakyrchik Gold Mine) to
bring them into full production (see Risks and
Uncertainties  Additional Funding Requirements).



14






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##### 









CONTRACTUAL
OBLIGATIONS  $(000)

|                               |                   |                                           |        |        |  |      |        |        |  |      |        |        |  |       |        |        |  |  |       |     |  |  |        |          |   |  |         |         | 
|------------------------------ | ----------------- | ----------------------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | ----- | ------ | ------ |  |  | ----- | --- |  |  | ------ | -------- | - |  | ------- | ------- | 
|                               |                   |                                          
|                               |                   | Payments due in years ending December 31,
|                               |                   |                                          
|                               |                   | 2004                                      |        | 2005   |  | 2006 |        | 2007   |  | 2008 |        | 2009+  |  | Total
|                               |                   |                                          
|                               |                   |                                          
|Long term debt(1)              |                   |                                           | 8,075  |        |  |      | 11,867 |        |  |      | 127    |        |  |       | 4,898  |        |  |  | 604   |     |  |  | 487    |          |   |  | 26,060  |        
|Operating leases(2)            |                   |                                           | 13,043 |        |  |      | 11,338 |        |  |      | 6,808  |        |  |       | 1,140  |        |  |  |      |     |  |  |       |          |   |  | 32,329  |        
|Purchase obligations(3)        |                   |                                           | 26,340 |        |  |      | 8,941  |        |  |      | 5,784  |        |  |       | 5,633  |        |  |  |      |     |  |  |       |          |   |  | 46,698  |        
|Other long-term obligations(4) |                   |                                           | 928    |        |  |      | 1,405  |        |  |      | 1,651  |        |  |       | 7,550  |        |  |  | 540   |     |  |  | 23,991 |          |   |  | 36,065  |        
|                              
|                               |                   |                                           | 48,386 |        |  |      | 33,551 |        |  |      | 14,370 |        |  |       | 19,222 |        |  |  | 1,144 |     |  |  | 24,478 |          |   |  | 141,152 |        
|                              
|ALLOCATION                     |                   |                                           |        |        |  |      |        |        |  |      |        |        |  |       |        |        |  |  |       |     |  |  |        |          |   |  |         |        
|                               | Savage River Mine |                                           |        | 31,749 |  |      |        | 25,198 |  |      |        | 13,526 |  |       |        | 11,865 |  |  |       | 604 |  |  |        | 17,493(5 | ) |  |         | 100,436 | 
|                               | S&K Mine          |                                           |        | 8,435  |  |      |        | 8,295  |  |      |        | 540    |  |       |        | 5,274  |  |  |       | 540 |  |  |        |         |   |  |         | 23,084  | 
|                               | Mongolia          |                                           |        | 7,814  |  |      |        | 58     |  |      |        | 304    |  |       |        | 9      |  |  |       |    |  |  |        |         |   |  |         | 8,185   | 
|                               | Bakyrchik         |                                           |        |       |  |      |        |       |  |      |        |       |  |       |        |       |  |  |       |    |  |  |        | 6,985    |   |  |         | 6,985   | 
|                               | Cloncurry         |                                           |        |       |  |      |        |       |  |      |        |       |  |       |        | 2,074  |  |  |       |    |  |  |        |         |   |  |         | 2,074   | 
|                               | Other             |                                           |        | 388    |  |      |        |       |  |      |        |       |  |       |        |       |  |  |       |    |  |  |        |         |   |  |         | 388     | 
|                              
|                               |                   |                                           | 48,386 |        |  |      | 33,551 |        |  |      | 14,370 |        |  |       | 19,222 |        |  |  | 1,144 |     |  |  | 24,478 |          |   |  | 141,152 |        
|                              



|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These amounts are included in the Companys
    Consolidated Balance Sheets for the year ended December 31,
    2003.                                                                                                         
|   
|(2) | Consists of equipment leases for various mining
    equipment operating at the Savage River Mine.                                                                                                                             
|   
|(3) | The majority of these amounts consist of Savage
    River Mines commitments for long-term supply of
    electricity and gas and minimum drilling commitments in Mongolia.                                                    
|   
|(4) | Other long-term obligations consist of deferred
    royalty payments, provision for the Savage River Mines
    employee entitlements at mine closure and undiscounted asset
    retirement obligations.                      
|   
|(5) | This amount represents Savage River Mines
    obligations at mine closure, principally consisting of asset
    retirement obligations, employee entitlements and the estimated
    balance of loans payable to third parties.

In 1997, the S&K Mine entered into an
agreement for the sale of a guaranteed quantity of Grade A
Product (as defined in the agreement) from the Monywa Copper
Mine Project to Marubeni Corporation, which is affiliated with
one of the lenders of the project financing. This agreement is
expected to expire by the end of 2006.

The Savage River Mine has entered into contracts
with two of its major customers for the sale of a guaranteed
quantity of iron ore. The sales price of iron ore specified in
these agreements is renegotiated annually.

Ivanhoe Mines has, in the normal course of its
business, entered into various long-term contracts that include
commitments for future operating payments under contracts for
power, port operations, equipment rentals and other
arrangements. Substantially all of the Savage River Mines
obligations relate to commitments for natural gas, power and a
mining contract. Currently, the mining operations at the Savage
River Mine are scheduled to terminate at the end of 2007 and the
pellet producing operations are scheduled to terminate in 2009.

Pursuant to a deferred purchase obligation, the
management of the Savage River Mine and the Tasmanian Government
are committed to co-manage the remediation of environmental
exposures created by prior operations on the Savage River site.
The remediation work may be carried out by the mine in
conjunction with normal mining operations. This deferred
obligation, which amounted to A$14.5 million at
December 31, 2003, is secured in part by a bank letter of
credit for A$2.8 million and is repayable by
December 24, 2014.



15






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CRITICAL ACCOUNTING
ESTIMATES

The preparation of financial statements in
conformity with generally accepted accounting principles in
Canada requires companies to establish accounting policies and
to make estimates that affect both the amount and timing of the
recording of assets, liabilities, revenues and expenses. Some of
these estimates require judgments about matters that are
inherently uncertain.

A detailed summary of all of the Companys
significant accounting policies and the estimates derived
therefrom is included in Note 2 to the annual Consolidated
Financial Statements for the year ended December 31, 2003.
While all of the significant accounting policies are important
to the Companys consolidated financial statements, the
following accounting policies, and the estimates derived
therefrom, have been identified as being critical:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Carrying Values of Mining Property, Plant and
    Equipment and Other Mineral Property Interests;
|
| |  | Depletion and Depreciation of Property, Plant and
    Equipment;                                 
|
| |  | Heap Inventory Valuation;                                                                        
|
| |  | Reclamation and Remediation Obligations;                                                         
|
| |  | Income Taxes.                                                                                    

Carrying values of Mining Property, Plant and
Equipment and Other Mineral Property Interests

The Company undertakes a review every year to
evaluate the carrying values of operating mines and other
mineral property interests. A life-of-mines cash flow for
each remaining year is prepared based on managements
estimates of remaining mine reserves and grade, future
production and sale volumes, unit sales prices, future operating
and capital costs and reclamation costs to the end of mine life.
For each mining project, the carrying value is compared to the
estimated future discounted cash flows and any excess is written
down against operations.

The estimates used by management are subject to
various risks and uncertainties. It is reasonably possible that
changes in estimates could occur which may affect the expected
recoverability of the Companys investments in mining
projects and other mineral property interests.

Depletion and Depreciation of Property, Plant
and Equipment

Mining property, plant and equipment comprise the
largest component of Ivanhoe Mines assets and, as such,
the amortization of these assets has a significant effect on the
Companys financial statements.

On the commencement of commercial production,
depletion of each mining property is provided on the
unit-of-production basis using estimated proven and probable
reserves as the depletion basis. The mining plant and equipment
and other capital assets are depreciated, following the
commencement of commercial production, over their expected
economic lives using either the unit-of-production method or the
straight-line method (over two to fifteen years), as
appropriate.

Capital projects in progress are not depreciated
until the capital asset has been put into operation.

The proven and probable reserves are determined
based on a professional evaluation using accepted international
standards for the assessment of mineral reserves. The assessment
involves the study of geological, geophysical and economic data
and the reliance on a number of assumptions. The estimates of
the reserves may change, based on additional knowledge gained
subsequent to the initial assessment. This may include
additional data available from continuing exploration, results
from the reconciliation of actual mining production data against
the original reserve estimates, or the impact of economic
factors such as changes in the price of commodities or the cost
of components of production. A change in the original estimate
of reserves would result in a change in the rate of depletion
and depreciation of the related mining assets or could result in
impairment resulting in a write-down of the assets.

The effect of a change in the estimate of
reserves would have a relatively greater effect on the
amortization of mining assets of the Savage River Mine because
of the few remaining years left in the life of the mine.

Following the start of commercial production,
some mining companies accounting policies is to expense
all costs of removing waste material. Many mining companies,
including Ivanhoe Mines, have adopted a different accounting
policy whereby, for the entire mine life, the costs of removing
waste rock at open-pit mines,



16






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commonly referred to as stripping
costs, are deferred. Mining costs associated with
waste-rock removal are deferred or accrued, as appropriate, and
charged to operations on the basis of the average stripping
ratio for each mine area. The average stripping ratio is
calculated as the ratio of the tonnes of waste material
estimated to be mined to the estimated recoverable tonnes of
metals from that mine area. The policy of deferring stripping
costs results in the smoothing of costs of removing waste
material over the life of the mine rather than expensing those
actual costs in the period incurred.


The following is a summary of strip ratios for
each operating mine:

|                     |  |             |      |                      |  |             |      |  |  |                      |          |  |  |  |      |  |      |  |      | 
|-------------------- |  | ----------- | ---- | -------------------- |  | ----------- | ---- |  |  | -------------------- | -------- |  |  |  | ---- |  | ---- |  | ---- | 
|                     |  |             |      |                      |  |            
|                     |  | Strip ratio |      |                      |  | Strip ratio
|S&K Mine(1)          |  |             |      | Savage River Mine(2) |  |            
|                     |  |             |      |                      |  |             |      |  |  |                     
|Actual               |  |             | 2002 |                      |  |             | 0.73 |  |  |                      | Actual   |  |  |  | 2002 |  |      |  | 8.40 | 
|                     |  |             | 2003 |                      |  |             | 0.92 |  |  |                      |          |  |  |  | 2003 |  |      |  | 6.83 | 
|Forecast             |  |             | 2004 |                      |  |             | 0.15 |  |  |                      | Forecast |  |  |  | 2004 |  |      |  | 4.89 | 
|                     |  |             | 2005 |                      |  |             | 0.26 |  |  |                      |          |  |  |  | 2005 |  |      |  | 5.83 | 
|                     |  |             | 2006 |                      |  |             | 0.20 |  |  |                      |          |  |  |  | 2006 |  |      |  | 4.01 | 
|Life of mine average |  |             |      |                      |  |             | 0.21 |  |  | Life of mine average |          |  |  |  |      |  | 3.45 | 



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | The strip ratio is calculated using tonnes of
    waste mined over tonnes of ore mined.  
|   
|(2) | The strip ratio is calculated using volumes of
    waste mined over volumes of ore mined.

Heap inventory valuation

Ivanhoe Mines copper operations involve the
process of stacking ore in heaps and extracting a copper-bearing
solution from the heaps using a continuous leaching process. The
inventory categorized as broken ore on leach pads
represents the inventory cost of estimated recoverable copper
quantities contained in the heaps. It is not practical in a
normal mine operation to obtain direct measurements of these
quantities of recoverable copper. Instead, remaining metal
inventory quantities are estimated indirectly by subtracting
total copper production from the cumulative estimate of
recoverable copper stacked on the heaps.

A decrease in the estimated copper quantities
recoverable from the heaps would directly increase the cost of
copper production and decrease the value of broken ore on leach
pads.

Each month, the broken ore on leach pads is
valued at the lower of the weighted average cost of production
and net realizable value. The monthly cost of production
includes all costs related to mining for the month, including
allocated depreciation and depletion charges. All of this ore
has been classified as a current asset since, based on
historical leaching data, the copper is expected to be recovered
within the next 12 months. The estimated units of copper on
the leach pads are based on the amount of ore placed on the
pads, the expected recovery rates and actual production.

Copper recovery rates are dependent on whether
the ore is processed before it is staked on the heaps. Copper
recoveries from crushed and agglomerated ore material is
approximately 80% and the leach cycle takes almost a year to
complete. The leaching cycle for run-of-mine
material  unprocessed material deposited directly on
the heaps  is much shorter, (approximately
160 days), but the copper percentage recovery rate is
normally lower and is approximately 75%.

At December 31, 2003, the total amount of
recoverable metal contained in the heaps was estimated at
approximately 24,000 tonnes of copper (net 12,000 tonnes to
Ivanhoe Mines), at a cost of approximately $520 per tonne, or
$0.24 per pound of copper.

Ivanhoe Mines reviews the estimated units of
copper on the heap-leach pads on a regular basis and, where
appropriate, revises its estimates of those quantities to
recognize changes in the expected recovery rates based on actual
recoveries.



17






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Reclamation and Remediation
Obligations

The Company has obligations for site restoration
and decommissioning related to its mining properties. The
Company, using mine closure plans or other similar studies that
outline the requirements planned to be carried out, estimates
the future obligations from mine closure activities. Because the
obligations are dependent on the laws and regulations of the
countries in which the mines operate, the requirements could
change resulting from amendments in those laws and regulations
relating to environmental protection and other legislation
affecting resource companies.

Ivanhoe Mines recognizes liabilities for
statutory, contractual or legal obligations associated with the
retirement of mining property, plant and equipment, when those
obligations result from the acquisition, construction,
development or normal operation of the assets. Initially, a
liability for an asset retirement obligation is recognized at
its fair value in the period in which it is incurred. Upon
initial recognition of the liability, the corresponding asset
retirement cost is added to the carrying amount of the related
asset and the cost is amortized as an expense over the economic
life of the asset using either the unit-of-production method or
the straight-line method, as appropriate. Following the initial
recognition of the asset retirement obligation, the carrying
amount of the liability is increased for the passage of time and
adjusted for changes to the amount or timing of the underlying
cash flows needed to settle the obligation.

Because the estimate of obligations is based on
future expectations, in the determination of closure provisions,
management makes a number of assumptions and judgments. The
closure provisions are more uncertain the further into the
future the mine closure activities are to be carried out. Actual
costs incurred in future periods related to the disruption to
date could differ materially from the $22.8 million
undiscounted future value estimated by Ivanhoe Mines at
December 31, 2003.

Income Taxes

Future income tax assets and liabilities are
computed based on differences between the carrying amounts of
assets and liabilities on the balance sheet and their
corresponding tax values, using the enacted or substantially
enacted, as applicable, income tax rates at each balance sheet
date. Future income tax assets also result from unused loss
carry-forwards and other deductions. The valuation of future
income tax assets is reviewed quarterly and adjusted, if
necessary, by use of a valuation allowance to reflect the
estimated realizable amount.

The determination of the ability of the Company
to utilize tax loss carry-forwards to offset future income tax
payable requires management to exercise judgment and make
assumptions about the future performance of the Company.
Management is required to assess whether the Company is
more likely than not able to benefit from these tax
losses. Changes in economic conditions, metal prices and other
factors could result in revisions to the estimates of the
benefits to be realized or the timing of utilizing the losses.

Recent Accounting Pronouncements

In November, 2001, the Canadian Accounting
Standards Board issued Accounting Guideline No.13, Hedging
Relationships (AcG-13), which established the
conditions for applying hedge accounting; although it does not
specify how hedge accounting is applied. AcG-13 is effective for
fiscal years commencing on or after July 1, 2003. The
adoption of AcG-13 is not expected to have a material impact on
Ivanhoe Mines financial position and results of operations.

In June, 2003, the CICA issued Accounting
Guideline No. 15, Consolidation of Variable Interest
Entities (AcG-15). AcG-15 requires the primary
beneficiary of a variable interest entity to consolidate the
variable interest entity. AcG-15 is effective for interim and
annual reporting periods beginning on or after November 1,
2004. Ivanhoe Mines is currently evaluating the impact of AcG-15.

As part of its agenda, the Emerging Issues Task
Force of the U.S. Financial Accounting Standards Board is
currently reviewing several accounting policies related to the
mining industry. Should this result in changes to
U.S. Generally Accepted Accounting Principles
(GAAP), Canadian GAAP may also be changed in an
effort to harmonize with U.S. GAAP.



18






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RISKS AND
UNCERTAINTIES

Material risks and uncertainties affecting
Ivanhoe Mines, their potential impact, and the Companys
principal risk management strategies, are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Additional Funding
    Requirements The further
    development and exploration of the various mineral properties in
    which it holds interests depends upon Ivanhoe Mines
    ability to obtain financing through joint ventures, debt
    financing, equity financing or other means. Ivanhoe Mines must
    arrange significant project financing for development of the Oyu
    Tolgoi project. There can be no assurance that Ivanhoe Mines
    will be successful in obtaining any required financing as and
    when needed. Depressed markets for precious and base metals may
    make it difficult or impossible for Ivanhoe Mines to obtain debt
    financing or equity financing on favorable terms, or at all.
    Ivanhoe Mines operates in a region of the world that is prone to
    economic and political upheaval and certain mineral properties
    held by Ivanhoe Mines are located in politically and
    economically unstable countries, which may make it more
    difficult for Ivanhoe Mines to obtain debt financing from
    project lenders. Failure to obtain additional financing on a
    timely basis may cause Ivanhoe Mines to postpone its development
    plans, forfeit rights in some or all of its properties or joint
    ventures, or reduce or terminate some or all of its operations.
|
| |  | Risks pertaining to
    Mongolia Mongolia is, and
    for the foreseeable future is expected to remain, the country in
    which Ivanhoe Mines concentrates most of its business activities
    and financial resources. Since 1990, Mongolia has been in
    transition from state socialism and a planned economy to a
    political democracy and a free market economy. Much progress has
    been made in this transition but much progress remains to be
    made, particularly with respect to the rule of law. Many laws
    have been enacted, but in many instances they are neither
    understood nor enforced. For decades Mongolians have looked to
    politicians and bureaucrats as the sources of the
    law. This has changed in theory, but often not in
    practice. With respect to most day-to-day activities in
    Mongolia, government civil servants interpret, and often
    effectively make, the law. This situation is gradually changing
    but at a relatively slow pace. Laws may be applied in an
    inconsistent, arbitrary and unfair manner and legal remedies may
    be uncertain, delayed or unavailable.                                                                                                                                                                                
|
| |   | Ivanhoe Mines current focus is the Oyu
    Tolgoi project. Ivanhoe Mines is engaged in discussions with a
    working group of Mongolian government representatives aimed at
    reaching a long-term stability agreement establishing the
    critical terms and conditions that will apply to the Oyu Tolgoi
    project during its operational phase. Management believes that
    such an agreement (or lack thereof) will have a material impact
    on Ivanhoe Mines ability to obtain the financing necessary
    to develop the project. The stability agreement that Ivanhoe
    Mines is seeking from the Mongolian government is expected to
    address tax and fiscal issues, as well as other matters
    including cross-border and import/ export issues and
    confirmation of appropriate mining, land and water licence
    tenures and infrastructure necessary to carry out all
    exploration, mining, milling, processing and related activities
    over the life of the project. No assurances can be given as to
    when, or if, Ivanhoe Mines discussions with the Mongolian
    government working group will culminate in a stability agreement
    or that any such stability agreement will contain terms and
    conditions that are, in all material respects, favorable to
    Ivanhoe Mines.    
|
| |   | In December 2003, the Company purchased
    $50 million of treasury bills issued by the Mongolian
    government. The treasury bills, which are denominated in
    U.S. dollars, bear interest at 3% per year and mature on
    December 31 2004, were issued as part of the
    governments initiative to retire, at a substantial
    discount, its Soviet-era foreign debt to the Russian Federation.
    Based on written assurances furnished by the government, the
    Company understands that Mongolia has never defaulted on its
    obligations in respect of any of its previously issued treasury
    bills and that the final settlement of its convertible rouble
    sovereign debt to the Russian Federation on favorable terms will
    contribute enormously to the economic and social development of
    Mongolia. However, Mongolia continues to maintain a relatively
    high level of debt and, as such, its debt securities carry a
    higher level of risk than similar securities issued by countries
    with lower debt and more developed economies.                                                                                                                                                                                                                                                    
|
| |  | Uncertainties related to mineral resource
    estimates There is a
    degree of uncertainty attributable to the calculation of
    resources and corresponding grades being mined or dedicated to
    future production. Until resources are actually mined and
    processed, the quantity of resources and grades must be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



19






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##### 








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | considered as estimates only. In addition, the
    quantity of resources may vary, depending on metals prices. Any
    material change in the quantity of resources, grades or
    stripping ratio may affect the economic viability of Ivanhoe
    Mines properties. In addition, there can be no assurance
    that metal recoveries in small-scale laboratory tests will be
    duplicated in larger scale tests under on-site conditions or
    during production.                                                                                                                                                                                                       
|
| |  | Metal price
    volatility Copper and
    iron-ore pellet prices are subject to volatile price changes
    from a variety of factors, including international economic and
    political trends, expectations of inflation, global and regional
    demand, currency-exchange fluctuations, interest rates and
    global or regional consumption patterns, speculative activities
    and increased production due to improved mining and production
    methods. The supply of, and demand for, Ivanhoe Mines
    principal products  iron ore and copper 
    is affected by various factors, including political events,
    economic conditions and production costs.
|
| |   | Unlike most metals, iron ores are not fungible
    commodities, as each is somewhat different in composition and
    usage characteristics. The iron-ore market behaves like a
    product, rather than a commodity, market, with zones of
    competition and zones of exclusion. The market is one of direct
    customer to producer relationships, without middlemen,
    warehousing or buffer stocks, speculators or futures market. The
    market is imperfect and oligopolistic. Prices are not set by the
    market clearance principle, but to optimize returns to producers
    within the constraint of the total market size.                                  
|
| |   | In the second half of 2003, copper prices
    benefited from speculative buying activity from hedge funds in
    anticipation of a global economic turnaround which has yet to
    fully materialize. Chinas ever-expanding need to import
    various metals to feed its buoyant economy also contributed to
    the sharp increase in prices in 2003 and 2004 for copper and
    iron ore.                                                                                                                                                                                                                                                                                 
|
| |   | Prior to 2003, many metal prices, when adjusted
    for inflation, were in a downward trend. Although many analysts
    now forecast that metal prices are expected to increase in the
    near future, there is no assurance that the 2003 increase in
    metal prices represents a turning point or a confirmation of a
    reversal of that previously established downward trend in metal
    prices.                                                                                                                                                                                                                                                                    
|
| |   | Ivanhoe Mines did not hedge any metal sales or
    production in 2003 and currently has no plans to do so in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Operating
    risks Ivanhoe Mines faces
    a number of potential risks with respect to the proposed
    expansion of the S&K Mine, which includes the development of
    the nearby Letpadaung deposit. Myanmars current
    power-generating ability is limited and there can be no
    assurance that improvements to Myanmars national power
    system, sufficient to furnish the additional required power for
    the planned expansion of the S&K Mine operations, will be
    made on a timely basis, or at all. If not, it may be necessary
    to construct a local source of power, which may not be feasible
    or which may render the project uneconomic.  
|
| |   | The high-lift leach piles planned for the S&K
    Mine and the Letpadaung deposit carry technical risks. These
    risks include geotechnical failure, chemical degradation of the
    heap material, compaction and loss of permeability, lack of
    oxygen, excessive iron build-up and excessive acid generation.
    Manifestation of these risks could adversely affect the level of
    copper recoveries and increase operating costs.                                                                                                                                                                                                                                
|
| |   | Although Ivanhoe Mines believes that the material
    extracted from the Letpadaung deposit will exhibit the same
    heap-leaching characteristics as the ore currently being mined
    at the S&K mine, this assumption cannot be confirmed prior
    to mining. Different metallurgical characteristics in the
    Letpadaung deposit, if and to the extent they might exist, could
    adversely affect the technical feasibility and economics of the
    S&K Mines Letpadaung development plans.                                                                                                                                                                       
|
| |   | The Savage River Mines operations are
    heavily dependent upon the successful operation of the
    concentrator and pipeline apparatus. All the process facilities
    and the pipeline have been in operation for over 30 years
    and are subject to potentially higher rates of failure than a
    new plant. Despite a                                                                                                                                                                                                                                                                                                                                                



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | comprehensive maintenance program, there can be
    no assurance that the operating availabilities required to
    achieve planned product output can be sustained.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |   | The mining operations at the Savage River Mine
    often need to extract, from various parts of the mine, different
    types of ore material to provide the concentrator with the
    desired ore-feed quality. As operations at the Savage River Mine
    get closer to the end of mine life, the ability of the
    mines management to achieve a consistent blend of ore to
    the concentrator is reduced. There can be no assurance that
    deterioration in the quality of ore material fed to the
    concentrator will not affect the pellet grade or pellet quality,
    which may affect marketability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |   | Historically, the stability of the Savage River
    Mines open-pit walls has been problematic and in 2002 the
    mine experienced a slope failure at Extension 2 of the
    North Pit, which temporarily halted operations on the North Pit.
    Although Ivanhoe Mines has retained expert advice in this area,
    is pro-actively managing the pit-wall stability and has taken
    additional corrective measures since the 2002 slope failure,
    there can be no assurance that a failure, large enough to cause
    an extended interruption in production, will not occur during
    the life of the project.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Currency
    risks Fluctuations in
    currency-exchange rates may adversely affect the financial
    position and results of operations of the Savage River Mine. The
    mine receives United States dollars from the bulk of its sales
    of iron-ore products, but pays most of its operating costs in
    Australian dollars. The recent strengthening of the Australian
    dollar against the United States dollar has negatively impacted
    the cash flow from the Savage River Mine. Further deterioration
    in the United States dollar against the Australian dollar will
    have a negative effect on the financial viability of the Savage
    River Mine.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Economic
    Sanctions In May, 1997,
    the United States government imposed economic sanctions on
    Myanmar, banning new investments in Myanmar by any United States
    investor. In August, 1997, the Canadian government imposed
    selective economic sanctions on Myanmar, directed against
    imports and exports between Canada and Myanmar. These sanctions
    were based on the United States and Canadian governments
    belief that the current government of Myanmar has repressed
    opposition to the government. While the sanctions in their
    current form do not affect the Companys investments in
    Myanmar, there can be no assurances that the sanctions will not
    be broadened or that other countries will not adopt sanctions in
    the future. The existence of United States sanctions may
    restrict the ability of United States companies to participate
    in the Monywa Copper Project. It is not possible to assess
    whether additional legislation will be enacted by the United
    States, Canada or elsewhere or, if enacted, will ultimately
    affect the Company or investment in the Company.
|
| |  | Limited production
    history The Company has
    paid no dividends on its common shares since incorporation and
    does not anticipate doing so in the foreseeable future. To date,
    the Company has not received any cash flow generated by the
    S&K Mine. Also, at least for the 2004 year, the Savage
    River Mine and all other exploration and development projects of
    Ivanhoe Mines will need funding from the Company. Ivanhoe Mines
    has a limited operating history and there can be no assurance of
    its ability to operate its projects profitably. While Ivanhoe
    Mines may in the future generate additional working capital
    through the operation, development, sale or possible syndication
    of its properties, there is no assurance that Ivanhoe Mines will
    be capable of producing positive cash flow on a consistent basis
    or that any such funds will be available for exploration and
    development programs.                                                                                                                                                                                     
|
| |  | Uninsurable risks or self-insured
    risks Exploration,
    development and production operations on mineral properties
    involve numerous risks, including unexpected or unusual
    geological operating conditions, rock bursts or slides, fires,
    floods, earthquakes or other environmental occurrences, and
    political and social instability. It is not always possible to
    obtain insurance against all such risks and the Company may
    decide not to insure against certain risks as a result of high
    premiums or other reasons. Should such liabilities arise, they
    could reduce or eliminate any further profitability and result
    in increasing costs and a decline in the value of the securities
    of the Company. Ivanhoe Mines does not maintain insurance
    against political or environmental risks. Also, because of the
    recent major increases in insurance premiums and the inability
    to obtain full coverage, both the S&K Mine and the Savage
    River Mine are self-insuring on a portion of their mine assets.                                                                                  



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extent of liability for previous environmental
    damage Ivanhoe Mines has
    received exemptions from liability from relevant governmental
    authorities for environmental damage caused by previous mining
    operations at the Savage River Mine, the S&K Mine and the
    Bakyrchik Project. There is a risk, however, that, if an
    environmental accident occurred at those sites, it may be
    difficult or impossible to assess the extent to which
    environmental damage was caused by Ivanhoe Mines
    activities or the activities of previous operators. In that
    event, the indemnities could be ineffective and possibly
    worthless.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Breach of loan
    covenant Since August,
    2002, the S&K Mine has not been in technical compliance with
    certain covenants in its credit agreement, including a
    requirement to maintain a minimum amount of working capital and
    a requirement to retain a specified minimum amount of cash on
    deposit in a debt-service reserve account. The lenders have not,
    to date, notified the S&K Mine that it is in default of
    these covenants and, although management does not believe that
    the lenders will do so in the foreseeable future, the lenders
    may, at any time while the S&K Mine remains non-compliant,
    formally notify the S&K Mine that it is in default. If, in
    that event, the S&K Mine failed to cure the default in a
    timely manner, the lenders would be entitled to pursue their
    remedies against the S&K Mine, which could include
    foreclosing on the S&K Mines interest in the Monywa
    Copper Project. The S&K Mines obligations to the
    lenders are non-recourse to the Company.
|
| |  | Limited customer
    base The Savage River Mine
    has only a small number of customers and the pricing of its
    iron-ore products is subject to annual negotiations. Demand for
    the Savage River Mines iron-ore products can fluctuate
    based on market conditions in the international steel industry.
    The loss by the Savage River Mine of a key customer or a
    material decrease in sales to a key customer could have an
    adverse impact on short- to medium- term cash flow and adversely
    affect the mines economic viability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |   | All of the Ivanhoe Mines production from
    the S&K Mine is sold to a single Japanese buyer. If, for any
    reason, the S&K Mine was unable to sell all of its
    production to its existing buyer, economic sanctions against
    trade with Myanmar may significantly reduce the number of
    potential alternative buyers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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RELATED-PARTY
TRANSACTIONS

The Company is also a party to cost-sharing
agreements with other companies in which Robert M. Friedland,
its Chairman and Chief Executive Officer, has a material, direct
or indirect beneficial interest. Through these agreements,
Ivanhoe Mines shares office space, furnishings, equipment and
communications facilities in Vancouver, Singapore, Beijing and
London, and an aircraft on a cost-recovery basis. Ivanhoe Mines
also shares the costs of employing administrative and
non-executive management personnel in these offices.

Companies in which the Company is a party to the
cost-sharing agreement and Mr. Friedlands ownership
interest in each of them, are as follows:

|                               |  |                  |        |  
|------------------------------ |  | ---------------- | ------ | -
|                               |  | R.M. Friedlands
|                               |  | Ownership       
|Company Name                   |  | Interest        
|                              
|                              
|Ivanhoe Energy Inc.            |  |                  | 32.17  | %
|Ivanhoe Capital Corporation    |  |                  | 100.00 | %
|Ivanhoe Nickel & Platinum Ltd. |  |                  | 54.58  | %

The Companys related party transactions
also include transactions with Asia Gold Corp., (a 51%-owned
subsidiary) and exploration expenditures incurred as part of
several joint-venture agreements with Jinshan Gold Mines Inc. (a
35.5%-owned, publicly listed company).

The shared and other expenditures for the last
two years were as follows:

|                                   |  |                          |       |      |  |   |       | 
|---------------------------------- |  | ------------------------ | ----- | ---- |  | - | ----- | 
|                                   |  |                         
|                                   |  | Years ended December 31,
|                                   |  |                         
|                                   |  | 2003                     |       | 2002
|                                   |  |                          |       |     
|                                   |  |                         
|                                   |  | $(000)                  
|Consulting                         |  | $                        |      |      |  | $ | 75    | 
|Exploration                        |  |                          | 1,768 |      |  |   | 261   | 
|Management fees                    |  |                          | 223   |      |  |   | 294   | 
|Office and administrative          |  |                          | 1,834 |      |  |   | 1,234 | 
|Salaries and benefits              |  |                          | 1,372 |      |  |   | 1,095 | 
|Travel (including aircraft rental) |  |                          | 2,636 |      |  |   | 2,184 | 
|                                  
|                                   |  | $                        | 7,833 |      |  | $ | 5,143 | 
|                                  

Accounts receivable and accounts payable of the
Company at December 31, 2003, included $347,000 and
$777,000, respectively, (December 31, 2002 
$107,000 and $2,003,000, respectively) which were due from/to a
company under common control or companies related by way of
directors in common.



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MANAGEMENTS
REPORT TO THE SHAREHOLDERS

The Consolidated Financial Statements and the
managements discussion and analysis of financial condition
and results of operations (MD&A) are the
responsibility of the management of Ivanhoe Mines Ltd. These
financial statements and the MD&A have been prepared in
accordance with accounting principles and MD&A disclosure
requirements generally accepted in Canada, using
managements best estimates and judgment of all information
available up to March 29, 2004.

The Board of Directors is responsible for
ensuring that management fulfills its responsibilities for
financial reporting and internal control. The Audit Committee of
the Board of Directors, consisting solely of outside directors,
meets regularly during the year with financial officers of the
Company and the external auditors to satisfy itself that
management is properly discharging its financial reporting
responsibilities to the Directors who approve the consolidated
financial statements.

These financial statements have, in
managements opinion, been properly prepared within
reasonable limits or materiality and within the framework of the
accounting policies summarized in Note 2 of the Notes to
the Consolidated Financial Statements.

The consolidated financial statements have been
audited by Deloitte & Touche LLP, the independent auditors,
in accordance with Canadian generally accepted auditing
standards. The auditors have full and unrestricted access to the
Audit Committee.

|                |  |                        
|--------------- |  | -----------------------
|R. Edward Flood |  | P.F. Massé             
|Deputy Chairman |  | Chief Financial Officer

March 29, 2004

Vancouver, BC Canada




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