EXHIBIT 2
                                                                      ---------



================================================================================









REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS AND CONSOLIDATED
FINANCIAL STATEMENTS OF










I V A N H O E    M I N E S    L T D.





DECEMBER 31, 2007 AND 2006







================================================================================


<PAGE>
                                                     Deloitte & Touche LLP
                                                     2800 - 1055 Dunsmuir Street
                                                     4 Bentall Centre
                                                     P.O. Box 49279
                                                     Vancouver BC V7X 1P4
                                                     Canada

                                                     Tel: 604-669-4466
                                                     Fax: 604-685-0395
                                                     www.deloitte.ca



REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of
Ivanhoe Mines Ltd.

We have audited the accompanying  consolidated  balance sheets of Ivanhoe Mines
Ltd. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the
related  consolidated  statements of operations,  shareholders' equity and cash
flows  for  the  years  then  ended.   These   financial   statements  are  the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company  Accounting  Oversight  Board
(United States).  These standards require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial statements are free of
material misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements.  An audit
also  includes  assessing  the  accounting   principles  used  and  significant
estimates  made by  management,  as well as  evaluating  the overall  financial
statement  presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion,  these consolidated financial statements present fairly, in all
material   respects,   the  financial   position  of  Ivanhoe  Mines  Ltd.  and
subsidiaries  as of  December  31,  2007 and  2006,  and the  results  of their
operations  and their cash flows for the years  then ended in  accordance  with
accounting principles generally accepted in the United States of America.

We have also audited,  in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2007, based on the criteria  established
in  INTERNAL  CONTROL  -  INTEGRATED  FRAMEWORK  issued  by  the  Committee  of
Sponsoring  Organizations of the Treadway Commission and our report dated March
28, 2008 expressed an  unqualified  opinion on the Company's  internal  control
over financial reporting.


/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants
Vancouver, Canada
March 28, 2008

COMMENTS BY  INDEPENDENT  REGISTERED  CHARTERED  ACCOUNTANTS  ON  CANADA-UNITED
STATES OF AMERICA REPORTING DIFFERENCE

The standards of the Public Company Accounting  Oversight Board (United States)
require  the  addition  of an  explanatory  paragraph  (following  the  opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Company's financial statements,  such as the
changes  described  in Note 2 to the  consolidated  financial  statements.  Our
report to the Board of Directors  and  Shareholders,  dated March 28, 2008,  is
expressed in accordance with Canadian reporting  standards which do not require
a reference to such changes in accounting  principles  in the auditors'  report
when the changes are properly  accounted  for and  adequately  disclosed in the
financial statements.


/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants
Vancouver, Canada
March 28, 2008


<PAGE>
                                                     Deloitte & Touche LLP
                                                     2800 - 1055 Dunsmuir Street
                                                     4 Bentall Centre
                                                     P.O. Box 49279
                                                     Vancouver BC V7X 1P4
                                                     Canada

                                                     Tel: 604-669-4466
                                                     Fax: 604-685-0395
                                                     www.deloitte.ca



REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of
Ivanhoe Mines Ltd.

We have audited the internal control over financial  reporting of Ivanhoe Mines
Ltd. and  subsidiaries  (the  "Company") as of December 31, 2007,  based on the
criteria  established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is  responsible  for  maintaining  effective  internal  control over
financial  reporting,  and for its assessment of the  effectiveness of internal
control over financial  reporting,  included in the  accompanying  Management's
Report on Internal Control over Financial  Reporting.  Our responsibility is to
express an opinion on the Company's  internal control over financial  reporting
based on our audit.

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

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

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

In our opinion,  the Company  maintained,  in all material respects,  effective
internal control over financial reporting as of December 31, 2007, based on the
criteria  established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited,  in accordance with Canadian  generally accepted auditing
standards and the standards of the Public Company  Accounting  Oversight  Board
(United States),  the consolidated  financial statements as of and for the year
ended  December  31, 2007 of the  Company  and our report  dated March 28, 2008
expressed an unqualified  opinion on those financial  statements and included a
separate report titled Comments by Independent Registered Chartered Accountants
on Canada-United States of America Reporting Difference referring to changes in
accounting principles.


/s/ DELOITTE & TOUCHE LLP
Independent Registered Chartered Accountants
Vancouver, Canada
March 28, 2008

<PAGE>

<TABLE>
<CAPTION>
IVANHOE MINES LTD.
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF U.S. DOLLARS)
=======================================================================================================
                                                                                 DECEMBER 31,
                                                                       --------------------------------
                                                                           2007              2006
-------------------------------------------------------------------------------------------------------
<S>                                                                      <C>               <C>
ASSETS

CURRENT
    Cash and cash equivalents                                            $   145,694       $   363,572
    Accounts receivable (Note 6)                                              37,076            24,739
    Inventories                                                                1,996             5,313
    Prepaid expenses                                                           7,183             7,941
    Other current assets                                                         144               286
-------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                         192,093           401,851

INVESTMENT HELD FOR SALE (Note 5)                                                  -           157,738
LONG-TERM INVESTMENTS (Note 7)                                                52,010            36,879
OTHER LONG-TERM INVESTMENTS (Note 8)                                          47,132                 -
NOTE RECEIVABLE FROM RELATED PARTY (Note 9)                                    7,512                 -
PROPERTY, PLANT AND EQUIPMENT (Note 10)                                      225,623           101,994
DEFERRED INCOME TAXES (Note 15)                                                  770               481
OTHER ASSETS                                                                   5,030             4,216
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                             $   530,170       $   703,159
=======================================================================================================

LIABILITIES

CURRENT
    Accounts payable and accrued liabilities (Note 11)                   $   109,310       $    37,201
    Amounts due under credit facilities (Note 12)                             17,050                 -
-------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                    126,360            37,201

CONVERTIBLE CREDIT FACILITY (Note 13)                                        137,854                 -
LOANS PAYABLE TO RELATED PARTIES (Note 14)                                     5,088             5,088
DEFERRED INCOME TAXES (Note 15)                                                1,511               660
ASSET RETIREMENT OBLIGATIONS (Note 16)                                         9,160             6,353
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                            279,973            49,302
-------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 23)

SHAREHOLDERS' EQUITY

SHARE CAPITAL (Note 18)
    Authorized
      Unlimited number of preferred shares without par value
      Unlimited number of common shares without par value
    Issued and outstanding
      375,073,433 (2006 - 373,463,637) common shares                       1,477,457         1,462,039
SHARE PURCHASE WARRANTS AND
  SHARE ISSUANCE COMMITMENT (Note 18 (b) and (c))                             26,619            23,062
BENEFICIAL CONVERSION FEATURE (Note 13)                                       11,869                 -
ADDITIONAL PAID-IN CAPITAL                                                    52,649            33,705
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 19)                              17,498            13,233
DEFICIT                                                                   (1,335,895)         (878,182)
-------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                   250,197           653,857
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                               $   530,170       $   703,159
=======================================================================================================
</TABLE>

APPROVED BY THE BOARD:


/s/ D. Korbin                                     /s/ K. Thygesen
----------------------------                      ------------------------------
D. Korbin, Director                               K. Thygesen, Director


The  accompanying  notes are an integral part of these  consolidated  financial
statements.

<PAGE>

<TABLE>
<CAPTION>
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
===========================================================================================================================
                                                                                              Year ended December 31,
                                                                                      -------------------------------------
                                                                                                  2007                2006
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                 <C>
OPERATING EXPENSES
    Exploration (Note 3 and 18 (a))                                                        $  (304,024)        $  (212,955)
    General and administrative (Note 18 (a))                                                   (27,074)            (28,170)
    Depreciation                                                                                (4,222)             (4,117)
    Mining property care and maintenance                                                        (6,533)             (4,421)
    Accretion of convertible credit facility (Note 13)                                            (901)                  -
    Accretion of asset retirement obligations (Note 16)                                           (698)               (458)
    Gain on sale of other mineral property rights                                                    -               2,724
    Write-down of carrying values of property, plant and equipment                              (1,078)               (700)
---------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS                                                                                (344,530)           (248,097)
---------------------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSES)
    Interest income                                                                             12,936               8,187
    Interest expense                                                                            (2,547)                  -
    Foreign exchange gains                                                                      11,891                 398
    Share of income from investment held for sale (Note 5)                                         427              18,471
    Write-down of carrying value of investment held for sale (Note 5)                         (134,309)                  -
    Share of loss of significantly influenced investee (Note 7 (a))                             (9,165)             (1,648)
    Write-down of carrying value of other long-term investments (Note 8)                       (24,541)                  -
    Gain on sale of long-term investments (Note 7 (b)(i))                                        1,018               2,724
    Write-down of carrying value of long-term investment (Note 7 (b)(v))                             -              (1,000)
---------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND OTHER ITEMS                                                      (488,820)           (220,965)
    Provision for income taxes (Note 15)                                                          (795)               (683)
    Minority interests (Note 17)                                                                     -               3,369
---------------------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS                                                           (489,615)           (218,279)
    INCOME FROM DISCONTINUED OPERATIONS (Note 4)                                                31,902              19,622
---------------------------------------------------------------------------------------------------------------------------
NET LOSS                                                                                   $  (457,713)        $  (198,657)
---------------------------------------------------------------------------------------------------------------------------

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE FROM
    CONTINUING OPERATIONS                                                                  $     (1.31)        $     (0.65)
    DISCONTINUED OPERATIONS                                                                       0.09                0.06
---------------------------------------------------------------------------------------------------------------------------
                                                                                           $     (1.22)        $     (0.59)
===========================================================================================================================

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000's)                                                                     374,504             336,128
===========================================================================================================================
</TABLE>

             The accompanying notes are an integral part of these
                      consolidated financial statements.
<PAGE>

<TABLE>
<CAPTION>
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR SHARE AMOUNTS)
===================================================================================================================================

                                                                 Share
                                        Share Capital         Purchase                        Accumulated
                                -------------------------     Warrants                              Other
                                                             and Share   Benefical Additional     Compre-
                                      Number                  Issuance  Conversion    Paid-In     hensive
                                   of Shares       Amount   Commitment     Feature    Capital      Income      Deficit        Total
                                ------------   ----------  -----------  ----------  ---------  ----------   ----------   ----------
<S>                              <C>          <C>            <C>          <C>        <C>        <C>         <C>          <C>
Balances, December 31, 2005      315,900,668  $   994,442    $       -    $      -   $ 25,174   $   6,711   $ (670,704)  $  355,623
Net loss                                   -            -            -           -          -           -     (198,657)    (198,657)
Other comprehensive income
(Note 19):                                 -            -            -           -          -       6,522            -       6,522
                                                                                                                        ----------
Comprehensive loss                                                                                                        (192,135)
                                                                                                                        ----------

Shares issued for:
  Private placements, net of
  issue costs of $14,731          55,489,883      455,819            -           -          -           -            -      455,819
  Exercise of stock options        1,921,498       10,488            -           -     (3,475)          -            -        7,013
  Bonus shares                       124,657        1,097            -           -          -           -            -        1,097
  Share purchase plan                 26,931          193            -           -          -           -            -          193
Share purchase warrants
and share issuance commitment
(Note 18 (b))                              -            -       23,062           -    (14,240)          -       (8,821)           1
Dilution gains                             -            -            -           -      6,288           -            -        6,288
Stock compensation charged to
operations                                 -            -            -           -     19,958           -            -       19,958
-----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2006      373,463,637  $ 1,462,039    $  23,062    $      -   $ 33,705   $  13,233   $ (878,182)  $  653,857
Net loss                                   -            -            -           -          -           -     (457,713)    (457,713)
Other comprehensive income
(Note 19)                                  -            -            -           -          -       4,265            -        4,265
                                                                                                                        -----------
Comprehensive loss                                                                                                         (453,448)
                                                                                                                        -----------

Shares issued for:
  Exercise of stock options        1,520,634       14,232            -           -     (4,372)          -            -        9,860
  Bonus shares                        57,741          830            -           -          -           -            -          830
  Share purchase plan                 28,561          331            -           -          -           -            -          331
  Share purchase warrants              2,860           25            -           -          -           -            -           25
Convertible credit facility
and share purchase warrants
(Notes 13 and 18 (c))                      -            -        3,557      11,869          -           -            -       15,426
Dilution gains                             -            -            -           -      6,073           -            -        6,073
Stock compensation charged
to operations                              -            -            -           -     17,243           -            -       17,243
-----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2007      375,073,433  $ 1,477,457    $  26,619    $ 11,869   $ 52,649    $ 17,498  $(1,335,895)  $  250,197
===================================================================================================================================
</TABLE>

The  accompanying  notes are an integral part of these  consolidated  financial
statements.

<PAGE>

<TABLE>
<CAPTION>
IVANHOE MINES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN THOUSANDS OF U.S. DOLLARS)
======================================================================================
                                                            Year ended December 31,
                                                         -----------------------------
                                                                 2007            2006
----------------------------------------------------------------------   -------------
<S>                                                       <C>             <C>
OPERATING ACTIVITIES
--------------------------------------------------------------------------------------
   Cash used in operating activities (Note 21 (a))         $ (238,791)     $ (210,679)
--------------------------------------------------------------------------------------

INVESTING ACTIVITIES
   Proceeds from sale of discontinued operations               20,314          34,674
   Reclassification of other long-term investments (Note 8)   (70,691)              -
   Purchase of long-term investments                          (16,523)         (2,452)
   Loan to related party (Note 9)                              (7,014)              -
   Proceeds from sale of other mineral property rights              -           2,724
   Proceeds from sale of long-term investments                  1,163           1,777
   Cash reduction on commencement of equity accounting              -          (4,202)
   Expenditures on property, plant and equipment              (93,581)        (34,253)
   (Expenditures on) proceeds from other assets                (1,106)            222
   Other                                                            -             494
--------------------------------------------------------------------------------------
   Cash used in investing activities                         (167,438)         (1,016)
--------------------------------------------------------------------------------------

FINANCING ACTIVITIES
   Issuance of convertible credit facility (Note 13)          150,000               -
   Proceeds from credit facilities (Note 12)                   17,243               -
   Issue of share capital                                      10,216         463,025
   Minority interests' investment in subsidiaries               2,399          10,564
--------------------------------------------------------------------------------------
   Cash provided by financing activities                      179,858         473,589
--------------------------------------------------------------------------------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                         8,493              (3)
--------------------------------------------------------------------------------------

NET CASH (OUTFLOW) INFLOW                                    (217,878)        261,891
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                  363,572         101,681
--------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                    $   145,694     $   363,572
--------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS IS COMPRISED OF:
   Cash on hand and demand deposits                        $   29,427     $    32,179
   Short-term money market instruments                        116,267         331,393
--------------------------------------------------------------------------------------
                                                          $   145,694     $   363,572
======================================================================================
</TABLE>
Supplementary cash flow information  (Note 21)


The  accompanying  notes are an integral part of these  consolidated  financial
statements.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

1.    NATURE OF OPERATIONS

      Ivanhoe  Mines  Ltd.  (the  "Company"),  together  with its  subsidiaries
      (collectively  referred  to as  "Ivanhoe  Mines"),  is  an  international
      mineral  exploration  and development  company  holding  interests in and
      conducting operations on mineral resource properties  principally located
      in Central Asia and Australia.

2.    SIGNIFICANT ACCOUNTING POLICIES

      These consolidated  financial statements have been prepared in accordance
      with United States of America generally  accepted  accounting  principles
      ("U.S.  GAAP").  The  significant   accounting  policies  used  in  these
      consolidated financial statements are as follows:

      (a)   PRINCIPLES OF CONSOLIDATION

            These consolidated financial statements include the accounts of the
            Company and all its subsidiaries. The principal subsidiaries of the
            Company are Ivanhoe Mines Mongolia Inc. (B.V.I.), Ivanhoe Cloncurry
            Mines Pty Limited  (Australia),  SouthGobi  Energy  Resources  Ltd.
            (B.C.,  Canada)  (86% owned)  ("SouthGobi"),  and their  respective
            subsidiaries, and Bakyrchik Mining Venture (Kazakhstan) (70% owned)
            ("BMV").

            Jinshan Gold Mines Inc. (B.C.,  Canada)  ("Jinshan") ceased being a
            subsidiary of the Company in August 2006 and from September 1, 2006
            it has been accounted for as an equity  investment (Note 7 (a)). At
            December  31,  2007,  Ivanhoe  Mines owns 43% of Jinshan  (39% on a
            fully diluted basis).

            On February  27,  2007 the  investment  held for sale ceased  being
            accounted  for using the equity  method.  From  February  28,  2007
            onwards,  the investment held for sale has been accounted for under
            the cost method (Note 5).

            All intercompany transactions and balances have been eliminated.

            Variable Interest Entities  ("VIE's"),  which include,  but are not
            limited to, special purpose  entities,  trusts,  partnerships,  and
            other  legal  structures,   as  defined  by  Financial   Accounting
            Standards Board ("FASB") Interpretation No. 46 (Revised 2003) ("FIN
            46R")   "Consolidation   of  Variable   Interest   Entities  --  an
            Interpretation  of ARB  No.  51",  are  entities  in  which  equity
            investors  do  not  have  the  characteristics  of  a  "controlling
            financial  interest" or there is not sufficient  equity at risk for
            the   entity  to  finance   its   activities   without   additional
            subordinated  financial support. VIE's are subject to consolidation
            by the  primary  beneficiary  who will  absorb the  majority of the
            entities' expected losses and/or expected residual returns.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (b)   MEASUREMENT UNCERTAINTIES

            Generally accepted accounting principles require management to make
            assumptions  and  estimates  that affect the  reported  amounts and
            other  disclosures  in  these  consolidated  financial  statements.
            Actual results may differ from those estimates.

            Significant estimates used in the preparation of these consolidated
            financial    statements   include,    among   other   things,   the
            recoverability of accounts  receivable and investments,  the proven
            and probable ore reserves,  the estimated recoverable tonnes of ore
            from  each  mine  area,  the  estimated  net  realizable  value  of
            inventories,  the  provision  for income taxes and  composition  of
            deferred income tax assets and deferred income tax liabilities, the
            expected  economic  lives  of and the  estimated  future  operating
            results  and net cash flows  from  property,  plant and  equipment,
            stock-based compensation,  beneficial conversion feature, estimated
            fair  value  of  share   purchase   warrants  and  share   issuance
            commitment,   and  the  anticipated   costs  and  timing  of  asset
            retirement obligations.

      (c)   FOREIGN CURRENCIES

            The Company has  determined  the U.S.  dollar to be its  functional
            currency as it is the currency of the primary economic  environment
            in which the Company  and its  subsidiaries  operate.  Accordingly,
            monetary assets and liabilities  denominated in foreign  currencies
            are translated into U.S.  dollars at the exchange rate in effect at
            the balance sheet date and non-monetary  assets and liabilities are
            translated  at  the  exchange  rates  in  effect  at  the  time  of
            acquisition or issue. Revenues and expenses are translated at rates
            approximating  the  exchange  rates  in  effect  at the time of the
            transactions.  All  exchange  gains  and  losses  are  included  in
            operations.

      (d)   CASH AND CASH EQUIVALENTS

            Cash  and  cash   equivalents   include   short-term  money  market
            instruments with terms to maturity, at the date of acquisition, not
            exceeding 90 days.

      (e)   INVENTORIES

            Mine stores and  supplies  are valued at the lower of the  weighted
            average cost,  less  allowances for  obsolescence,  and replacement
            cost.

      (f)   LONG-TERM INVESTMENTS

            Long-term  investments  in  companies  in which  Ivanhoe  Mines has
            voting  interests  of 20% to 50%,  or where  Ivanhoe  Mines has the
            ability to exercise significant influence,  are accounted for using
            the equity method.  Under this method,  Ivanhoe Mines' share of the
            investees'  earnings and losses is included in  operations  and its
            investments  therein  are  adjusted  by a  like  amount.  Dividends
            received are credited to the investment accounts.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (f)   LONG-TERM INVESTMENTS (CONTINUED)

            The    other    long-term    investments    are    classified    as
            "available-for-sale"  investments.  Unrealized  gains and losses on
            these investments are recorded in accumulated  other  comprehensive
            income as a separate component of shareholders'  equity, unless the
            declines in market value are judged to be other than temporary,  in
            which  case the  losses  are  recognized  in income in the  period.
            Realized  gains and losses from the sale of these  investments  are
            included in income in the period.

      (g)   EXPLORATION AND DEVELOPMENT

            All direct costs  related to the  acquisition  of mineral  property
            interests are capitalized in the period incurred.

            Generally,  exploration  costs are  charged  to  operations  in the
            period  incurred until such time as it has been  determined  that a
            property  has  economically  recoverable  reserves,  in which  case
            subsequent  exploration  costs and the costs  incurred to develop a
            property are  capitalized.  Exploration  costs include  value-added
            taxes  incurred in foreign  jurisdictions  when  recoverability  of
            those taxes is uncertain.

            Certain  costs   incurred   constructing   surface  assets  for  an
            exploration  shaft  have  been  capitalized  (Note 10  (b)).  These
            surface  assets  included  the  shaft  head  frame,  control  room,
            hoisting equipment and ancillary facilities. The Company determined
            that these costs met the  definition of an asset and that they were
            recoverable  through  salvage  value or  transfer  of the assets to
            other  locations.  These  costs were  tested for  impairment  using
            estimated  future cash flows based on reserves and resources beyond
            proven and probable reserves,  in accordance with accounting policy
            Note 2(h) for property, plant and equipment.

      (h)   PROPERTY, PLANT AND EQUIPMENT

            Property,  plant  and  equipment  are  carried  at cost  (including
            development and preproduction costs,  capitalized  interest,  other
            financing  costs  and  all  direct  administrative   support  costs
            incurred during the construction period, net of cost recoveries and
            incidental  revenues),  less accumulated depletion and depreciation
            including write-downs. Following the construction period, interest,
            other  financing  costs and  administrative  costs are  expensed as
            incurred.

            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.

            Property,  plant  and  equipment  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 one to twenty years).

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

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (h)   PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

            Ivanhoe  Mines reviews the carrying  values of its property,  plant
            and equipment whenever events or changes in circumstances  indicate
            that their carrying values may not be recoverable. An impairment is
            considered  to exist if  total  estimated  future  cash  flows,  or
            probability-weighted  cash flows on an undiscounted basis, are less
            than  the  carrying  value of the  assets.  An  impairment  loss is
            measured and recorded  based on  discounted  estimated  future cash
            flows  associated  with values beyond proven and probable  reserves
            and resources.  In estimating future cash flows, assets are grouped
            at the lowest  level for which  there is  identifiable  future cash
            flows that are largely  independent  of cash flows from other asset
            groups.  Generally, in estimating future cash flows, all assets are
            grouped at a particular mine for which there is  identifiable  cash
            flows.

      (i)   STRIPPING COSTS

            Stripping costs incurred during the production  phase of a mine are
            variable  production  costs  that  are  included  in the  costs  of
            inventory  produced  during the period that the stripping costs are
            incurred.

      (j)   ASSET RETIREMENT OBLIGATIONS

            Ivanhoe Mines recognizes liabilities for statutory,  contractual or
            legal obligations associated with the retirement of 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 that asset and
            the cost is amortized  as an expense over the economic  life of the
            related  asset.  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.

      (k)   STOCK-BASED COMPENSATION

            The Company has an Employees' and Directors'  Equity Incentive Plan
            which is disclosed in Note 18. Under SFAS No. 123(R) the fair value
            of stock  options at the date of grant is amortized to  operations,
            with an  offsetting  credit to  additional  paid-in  capital,  on a
            straight-line  basis over the vesting period. If and when the stock
            options  are  ultimately  exercised,   the  applicable  amounts  of
            additional paid-in capital are transferred to share capital.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (l)   DEFERRED INCOME TAXES

            The Company  computes income taxes in accordance with SFAS No. 109,
            "Accounting for Income Taxes". SFAS 109 requires that the provision
            for  deferred  income  taxes  be  based  on the  liability  method.
            Deferred taxes arise from the  recognition of the tax  consequences
            of temporary differences by applying statutory tax rates applicable
            to future years to  differences  between the financial  statement's
            carrying   amounts  and  the  tax  bases  of  certain   assets  and
            liabilities.  The Company records a valuation allowance against any
            portion  of  those  deferred  income  tax  assets  that  management
            believes will, more likely than not, fail to be realized.

      (m)   LOSS PER SHARE

            The Company  follows  SFAS No.  128,  "Earnings  Per Share",  which
            requires the  presentation of basic and diluted earnings per share.
            The  basic  loss per share is  computed  by  dividing  the net loss
            attributable  to common  stock by the  weighted  average  number of
            common shares  outstanding  during the year.  All stock options and
            share  purchase  warrants  outstanding at each period end have been
            excluded from the weighted average share calculation. The effect of
            potentially  dilutive stock options and share purchase warrants was
            antidilutive in the years ending December 31, 2007 and 2006.

            The  potentially  dilutive  shares excluded from the loss per share
            calculation due to antidilution are as follows:

                                                            December 31,
                                                 ------------------------------
                                                         2007             2006
                                                 -------------    -------------
            Options                                14,563,900       13,644,434
            Share purchase warrants               127,053,044       92,629,044
            Convertible credit facility            15,237,788                -
            -------------------------------------------------------------------
            Total potentially dilutive shares     156,854,732      106,273,478
            ===================================================================


      (n)   SEGMENTED REPORTING

            The  Company  operates  in  a  single  reportable  segment,   being
            exploration and development of mineral properties.

      (o)   ACCOUNTING CHANGES

            In June 2006, the FASB issued  Interpretation  No. 48,  "Accounting
            for  Uncertainty  in  Income  Taxes  - an  interpretation  of  FASB
            Statement No. 109" ("FIN 48").  This  interpretation  clarifies the
            recognition  threshold and  measurement  of a tax position taken or
            expected  to  be  taken  on a tax  return,  and  requires  expanded
            disclosure with respect to the uncertainty in income taxes.  FIN 48
            also provides guidance on derecognition,  classification,  interest
            and  penalties,  accounting in interim  periods,  disclosures,  and
            transition.  FIN 48 is effective for fiscal years  beginning  after
            December 15, 2006.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (o)   ACCOUNTING CHANGES (CONTINUED)

            The Company adopted the provisions of FIN 48 on January 1, 2007. No
            cumulative  effect adjustment to the January 1, 2007 balance of the
            Company's  deficit was required upon the  implementation of FIN 48.
            As of the date of adoption there were no unrecognized tax benefits.
            Under current  conditions  and  expectations,  management  does not
            foresee any significant  changes in unrecognized  tax benefits that
            would have a material impact on the Company's financial statements.

            The Company recognizes interest accrued related to unrecognized tax
            benefits in interest  expense and penalties in operating  expenses.
            As of the date of adoption of FIN 48 there was no accrued  interest
            or accrued penalties.

            The Company files income tax returns in Canada and several  foreign
            jurisdictions.  The  Company  is no longer  subject  to income  tax
            audits by taxing  authorities  in Canada  prior to 2002.  For other
            foreign jurisdictions, including Mongolia, all years remain subject
            to tax authority examination.

      (p)   RECENT ACCOUNTING PRONOUNCEMENTS

            In  September   2006,  the  FASB  issued   Statement  of  Financial
            Accounting  Standards  No. 157,  "Fair Value  Measurements"  ("SFAS
            157").  This Statement defines fair value,  establishes  guidelines
            for measuring  fair value and expands  disclosures  regarding  fair
            value  measurements.  SFAS 157 does not  require any new fair value
            measurements  but rather  eliminates  inconsistencies  in  guidance
            found  in  various  prior  accounting  pronouncements.  SFAS 157 is
            effective for fiscal years  beginning  after November 15, 2007. The
            Company  expects that adoption of SFAS 157 will not have a material
            impact on its financial condition or results of operations.

            In February 2007, the FASB issued Statement of Financial Accounting
            Standards No. 159, "The Fair Value Option for Financial  Assets and
            Financial Liabilities--Including an amendment of FASB Statement No.
            115" ("SFAS  159").  This  statement  gives  entities the option to
            measure  certain  financial  assets and  liabilities at fair value,
            with  changes  in fair  value  recorded  in  earnings.  SFAS 159 is
            effective for fiscal years  beginning  after November 15, 2007. The
            Company  expects that adoption of SFAS 159 will not have a material
            impact on its financial condition or results of operations.

            In December 2007, the FASB issued Statement of Financial Accounting
            Standards No. 141 (revised 2007),  "Business  Combinations"  ("SFAS
            141(R)").  SFAS 141(R)  changes  accounting for  acquisitions  that
            close beginning in 2009. More  transactions and events will qualify
            as business  combinations  and will be accounted  for at fair value
            under the new standard.  SFAS 141(R)  promotes  greater use of fair
            values in financial  reporting.  Some of the changes will introduce
            more volatility into earnings.  SFAS 141(R) is effective for fiscal
            years  beginning  on or after  December  15,  2008.  The Company is
            currently  assessing  the impact  that SFAS  141(R) may have on its
            financial position, results of operations, and cash flows.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

2.    SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      (p)   RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

            In December 2007, the FASB issued Statement of Financial Accounting
            Standards  No.  160,  "Noncontrolling   Interests  in  Consolidated
            Financial  Statements"  ("SFAS  160"),  an amendment of ARB No. 51.
            SFAS 160 will change the  accounting  and  reporting  for  minority
            interests which will be recharacterized as noncontrolling interests
            and classified as a component of equity.  SFAS 160 is effective for
            fiscal  years  beginning on or after  December  15, 2008.  SFAS 160
            requires  retroactive  adoption of the  presentation and disclosure
            requirements  for  existing  minority  interests.  The  Company  is
            currently  assessing  the  impact  that  SFAS  160 may  have on its
            financial position, results of operations, and cash flows.

3.    EXPLORATION EXPENSES

      Generally,  exploration  costs are  charged to  operations  in the period
      incurred  until such time as it has been  determined  that a property has
      economically  recoverable reserves, at which time subsequent  exploration
      costs and the costs incurred to develop a property are capitalized.

      Included in  exploration  costs are  engineering  and  development  costs
      associated with the Company's Oyu Tolgoi Project located in Mongolia.  It
      is expected  that the Company will  commence  capitalizing  costs of this
      nature once an Investment  Agreement  with the  Government of Mongolia is
      finalized.

      During the year ended  December  31,  2007,  the  majority  of the $304.0
      million (2006 - $213.0 million) charged to exploration expenses consisted
      of the  following  exploration  and  development  costs on the  Company's
      Mongolian properties:

<TABLE>
<CAPTION>
                                                                      Years ended December 31,
                                                                   ----------------------------
                                                                          2007            2006
                                                                   ------------  --------------
<S>                                                                  <C>             <C>
      Oyu Tolgoi
        Concentrator and Infrastructure Engineering                   $ 64,041        $ 28,912
        Site Construction                                               80,739          53,248
        Shaft Sinking                                                   44,115          35,471
        Exploration                                                     14,678          14,164
        Owner's Costs (a)                                               41,947          43,933
                                                                   ------------  --------------
                                                                       245,520         175,728
      Coal Division (a)                                                 14,760          10,132
      Other Mongolia Exploration (including SouthGobi) (a)              14,595          12,303
      -----------------------------------------------------------------------------------------
                                                                     $ 274,875       $ 198,163
      =========================================================================================
</TABLE>
      (a)   Includes non-cash stock-based compensation (Note 18 (a)).

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

4.    DISCONTINUED OPERATIONS

      In February  2005,  Ivanhoe  Mines sold the Savage River Iron Ore Project
      (the "Project") in Tasmania, Australia for two initial payments totalling
      $21.5 million,  plus a series of five  contingent,  annual  payments that
      commenced on March 31, 2006. The annual payments are based on annual iron
      ore pellet  tonnes  sold and an  escalating  price  formula  based on the
      prevailing annual Nibrasco/JSM pellet price.

      In 2006,  Ivanhoe Mines received the first annual  contingent  payment of
      $28.2  million.  In  2007,  Ivanhoe  Mines  received  the  second  annual
      contingent  payment of $20.3 million.  At December 31, 2007 Ivanhoe Mines
      has accrued  $23.3  million in relation  to the third  contingent  annual
      payment due in March 2008.

      To date,  Ivanhoe  Mines has received  $70.0 million in proceeds from the
      sale of the Project.

5.    INVESTMENT HELD FOR SALE

      As  part of the  agreement  that  established  the  Rio  Tinto  strategic
      partnership announced in October 2006, Ivanhoe Mines agreed to divest all
      of its business  interests and assets in Myanmar - including its indirect
      interest in the Monywa Copper Project - that were held through its Monywa
      subsidiary.  On February 27, 2007, Ivanhoe Mines transferred ownership of
      the Monywa  subsidiary to a company owned by an  independent  third-party
      trust  (the  Trust) in  consideration  for a  promissory  note.  The sole
      purpose of the Trust is to sell the shares of the  Monywa  subsidiary  to
      one or more arm's-length  third parties.  Other than the promissory note,
      Ivanhoe Mines retains no interest in the Monywa  subsidiary or any of its
      assets.

      Upon transfer of the Myanmar assets to the Trust  effective  February 27,
      2007,  Ivanhoe Mines ceased  accounting for the investment  held for sale
      under the  equity  method due to an  inability  to  exercise  significant
      influence.  The  investment  held for sale is now accounted for under the
      cost method.

      At December 31, 2007,  Ivanhoe Mines  reviewed the carrying  value of the
      investment  held for sale and concluded it was  impaired.  As a result of
      this review  Ivanhoe Mines  recorded a $134.3  million  write-down of the
      carrying amount of the investment held for sale.

6.    ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                     ----------------------------
                                                                            2007            2006
                                                                     ------------    ------------
<S>                                                                   <C>              <C>
Contingent income (Note 4)                                            $   23,280       $  11,691
Sale of investment (Note 7 (b)(i))                                             -           1,324
Refundable taxes                                                          12,537           9,053
Related parties (Note 20)                                                    248             319
Accrued interest                                                             361             910
Other                                                                        650           1,442
-------------------------------------------------------------------------------------------------
                                                                      $   37,076       $  24,739
-------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================


7.    LONG-TERM INVESTMENTS

<TABLE>
<CAPTION>
                                                                              December 31,
                                                                     ---------------------------
                                                                            2007           2006
                                                                     ------------    -----------
<S>                                                                   <C>             <C>
Investment in company subject to significant influence (a)            $    5,354      $  10,866
Investments "available for sale" (b)                                      46,656         26,013
------------------------------------------------------------------------------------------------
                                                                      $   52,010      $  36,879
------------------------------------------------------------------------------------------------
</TABLE>

      (a)   INVESTMENT IN COMPANY SUBJECT TO SIGNIFICANT INFLUENCE - JINSHAN

            During August 2006,  Jinshan  completed a private  placement  which
            diluted Ivanhoe Mines'  investment in Jinshan to 48.9%. As a result
            of this transaction,  Ivanhoe Mines ceased consolidating Jinshan on
            August 31, 2006 and commenced equity accounting for its investment.
            During  2007,   Ivanhoe  Mines   recorded  a  $9,165,000   (2006  -
            $1,648,000)  equity loss on this investment.  At December 31, 2007,
            the carrying value of the Company's investment in Jinshan was lower
            than its share of the underlying book value of Jinshan's net assets
            by   approximately   $1,688,000.   This   difference   relates   to
            unrecognized  dilution  gains  associated  with warrants  issued by
            Jinshan during the year. These dilution gains will be recognized as
            the warrants are exercised.

            At December  31,  2007,  the market  value of Ivanhoe  Mines' 43.0%
            (December  31,  2006 - 46.3%)  investment  in  Jinshan  was  $184.6
            million (December 31, 2006 - $88.3 million).

      (b)   INVESTMENTS "AVAILABLE FOR SALE"

<TABLE>
<CAPTION>
                                              DECEMBER 31, 2007                                   December 31, 2006
                            ------------------------------------------------------  ----------------------------------------------
                              EQUITY           COST      UNREALIZED       FAIR        Equity      Cost     Unrealized       Fair
                             INTEREST         BASIS         GAIN          VALUE      Interest     Basis       Gain          Value
                            ----------     ----------    ---------      ----------   --------   ---------  ----------    ---------
<S>                         <C>            <C>           <C>            <C>          <C>        <C>        <C>           <C>
Intec Ltd. (i)                   6.1%       $    916      $  1,726       $  2,642       7.1%    $  1,062     $ 7,088      $ 8,150
Entree Gold Inc.  (ii)          14.8%         19,957        13,354         33,311      14.7%      10,156       6,044       16,200
Exco Resources N.L. (iii)       12.0%          6,726         2,075          8,801          -           -           -            -
Redox Diamonds Ltd. (iv)        11.9%          1,451             -          1,451      13.8%       1,451           -        1,451
Wind Energy Group Inc. (v)      20.0%              -             -              -      21.3%           -           -            -
Asia Now Resources Corp.         1.9%            103           343            446       2.0%         103         101          204
Other                               -              5             -              5          -           8           -            8
----------------------------------------------------------------------------------------------------------------------------------
                                            $ 29,158      $ 17,498       $ 46,656               $ 12,780    $ 13,233     $ 26,013
==================================================================================================================================
</TABLE>

            (i)   During 2007,  Ivanhoe Mines sold 5.4 million  shares of Intec
                  Ltd. ("Intec") for $1,163,000. These transactions resulted in
                  a gain on sale of $1,018,000 being recognized.

                  During 2006,  Ivanhoe Mines sold 14.4 million shares of Intec
                  for $3,099,000. These transactions resulted in a gain on sale
                  of  $2,724,000  being  recognized.   At  December  31,  2006,
                  $1,777,000 in proceeds had been received and  $1,324,000  was
                  included in accounts receivable (Note 6).
<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================


7.    LONG-TERM INVESTMENTS (CONTINUED)

      (b)   INVESTMENTS "AVAILABLE FOR SALE" (CONTINUED)

            (ii)  During  2007,  Ivanhoe  Mines  exercised  2.5  million  share
                  purchase  warrants of Entree Gold Inc.  ("Entree") to acquire
                  1.2  million  shares  of  Entree  at  a  cost  of  $3,340,000
                  (Cdn$3,552,000).

                  Also during 2007 Ivanhoe  Mines  acquired an  additional  2.1
                  million  shares  of  Entree  at a total  cost  of  $6,460,000
                  (Cdn$6,385,000).

            (iii) During 2007, the Company purchased 26.4 million common shares
                  of Exco Resources  N.L.  ("Exco") and 21.1 million Exco share
                  purchase   options   for   a   total   cost   of   $6,726,000
                  (Aud$7,920,000).   Each  Exco   share   purchase   option  is
                  exercisable until June 1, 2008 to purchase an additional Exco
                  common share at a price of Aud$0.35.

            (iv)  During 2006, the Company purchased 8.3 million units of Redox
                  Diamonds Ltd. ("Redox") at a cost of $1.5 million.  Each unit
                  consists of one Redox common share and one Redox share option
                  exercisable  until April 2008 to purchase an additional Redox
                  common share at a price ranging from Cdn$0.30 to Cdn$0.35.

            (v)   During 2006, the Company  purchased 2.0 million common shares
                  of Wind  Energy  Group  Inc.  ("Wind  Energy"),  in two  $0.5
                  million  tranches,  at a cost of $1.0  million.  In September
                  2006,  the Company  recorded an impairment  provision of $1.0
                  million against this investment based on an assessment of the
                  underlying book value of Wind Energy's net assets.

8.    OTHER LONG-TERM INVESTMENTS

      At December 31, 2007,  the Company held non-bank  sponsored  asset-backed
      commercial  paper  (ABCP)  issued by a number of trusts  with an original
      cost of $70.7  million,  This ABCP was rated by DBRS as R-1 (high) at the
      date of  investment  and met the  criteria  of the  Company's  investment
      policy. An R-1 (high) rating by DBRS is the highest rating for commercial
      paper. These investments matured during the third quarter of 2007 but, as
      a result  of  liquidity  issues  in the ABCP  market,  did not  settle on
      maturity.

      On August 16,  2007 it was  announced  that a group  representing  banks,
      asset  providers,  and major  investors  had agreed to a standstill  with
      regard to all non-bank sponsored ABCP (the Montreal Proposal).  Under the
      proposal,  the affected  ABCP will be converted  into term  floating rate
      notes  maturing no earlier than the  scheduled  termination  dates of the
      underlying assets. The Montreal Proposal called for investors to continue
      to roll their ABCP  during the  standstill  period.  The Company is not a
      signatory to this agreement.

      On  September  6,  2007,  a  pan-Canadian  restructuring  committee  (the
      Committee) consisting of major investors was formed to propose a solution
      to the liquidity problem affecting the ABCP market.



<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

8.    OTHER LONG-TERM INVESTMENTS (CONTINUED)

      The ABCP in which the  Company has  invested  has not traded in an active
      market since mid-August 2007 and there are currently no market quotations
      available.  The ABCP in which the Company has  invested  continues  to be
      rated R1 (High, Under Review with Developing Implications) by DBRS.

      It is  expected  that the  restructuring  of the ABCP will occur in April
      2008 if approval by investors is obtained to do so. This approval will be
      requested on a trust-by-trust basis most likely during April 2008.

      On December 23, 2007, the Committee  provided  certain  details about the
      expected  restructuring.  Based on this information it is estimated that,
      of the $70.7 million of ABCP in which the Company has invested:

        o   $4.8 million is represented by traditional securitized assets;
        o   $60.8  million  is   represented  by  a  combination  of  leveraged
            collaterized  debt,  synthetic assets and traditional  securitized;
            and
        o   $5.1 million is represented by assets that have an exposure to U.S.
            sub-prime mortgages.

      The  Company  has  estimated  the fair value of its  investments  in ABCP
      considering  the  best  available  public  information  regarding  market
      conditions and other factors that a market participant would consider for
      such investments.  The assumptions used in determining the estimated fair
      value reflect the public statements made by the Committee that it expects
      the ABCP will be converted  into various  long-term  floating  rate notes
      with maturities matching the maturities of the underlying assets.

      The Company  has used a  scenario-based  probability-weighted  discounted
      cash flow  approach to value its ABCP  investments  at December  31, 2007
      which considered expected interest rates of 3.3%, estimated restructuring
      fees,  estimated  renegotiated  maturity  dates  of  5 to  7  years,  and
      estimated  principal  reductions ranging from 0% to 100% depending on the
      nature of the underlying assets and the scenario modeled.  As a result of
      this  valuation,  the Company has recorded a write-down  of $24.5 million
      representing 34.6% of the original face value.

      Continuing uncertainties regarding the value of the assets which underlie
      the ABCP,  the amount  and  timing of cash  flows and the  outcome of the
      restructuring  process  could  give rise to a further  change in the fair
      value of the  Company's  investment  in the ABCP which  would  impact the
      Company's results from operations.

      The Company has classified its ABCP as other long-term investments on the
      Consolidated  Balance  Sheet at  December  31,  2007 and as an  investing
      activity in the Consolidated Statement of Cash Flows.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

9.    NOTE RECEIVABLE FROM RELATED PARTY

      On June  26,  2007,  Ivanhoe  Mines  participated  in  Jinshan's  private
      placement of senior unsecured  promissory notes.  Ivanhoe Mines purchased
      $7.0  million  (Cdn$7.5  million)  of units.  Each unit  consists  of one
      promissory note and 200 transferable share purchase  warrants.  Each note
      has a par value of Cdn$1,000  and will pay 12%  interest per annum,  paid
      quarterly for three years.  Each warrant is  exercisable  into one common
      share for twenty-four months from the date of closing and has an exercise
      price of  Cdn$2.50  per share.  Jinshan has the right to  accelerate  the
      expiry  date of the  warrants  after 18 months  from the issue  date,  if
      Jinshan's common shares trade at or above a volume weighted average share
      price of Cdn$4.25 for 20 consecutive trading days. Jinshan can also elect
      to repay  the  notes  after  six  months  from the date of issue  with no
      penalty.  Ivanhoe Mines' notes are  subordinate to the other notes issued
      by Jinshan.

10.   PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                  December 31,
                                              -------------------------------------------------------------------------------------
                                                                  2007                                        2006
                                              -----------------------------------------     ---------------------------------------
                                                               ACCUMULATED                                Accumulated
                                                              DEPLETION AND                              Depletion and
                                                              DEPRECIATION,                              Depreciation,
                                                                INCLUDING     NET BOOK                     Including      Net Book
                                                  COST         WRITE-DOWNS     VALUE          Cost        Write-downs      Value
                                              -----------    --------------  ---------     ----------    -------------  -----------
<S>                                            <C>            <C>            <C>           <C>            <C>            <C>
      Mining properties
           Bakyrchik Mining Venture,
              Kazakhstan (a)                   $  87,541      $ (87,541)     $       -     $  87,541      $ (87,541)     $       -
      -----------------------------------------------------------------------------------------------------------------------------

      Mining plant and equipment
           Bakyrchik Mining Venture,
              Kazakhstan (a)                   $   3,107      $  (3,107)     $       -     $   3,107      $  (3,107)     $       -
      -----------------------------------------------------------------------------------------------------------------------------

      Other mineral property interests
           Oyu Tolgoi, Mongolia (b)            $  43,740      $  (6,255)     $  37,485     $  43,190      $  (6,251)     $  36,939
           Cloncurry, Australia (c)                6,293           (126)         6,167         6,293           (126)         6,167
           Other exploration projects              1,687           (115)         1,572         1,647           (115)         1,532
      -----------------------------------------------------------------------------------------------------------------------------
                                               $  51,720      $  (6,496)     $  45,224     $  51,130      $  (6,492)     $  44,638
      -----------------------------------------------------------------------------------------------------------------------------

      Other capital assets
           Oyu Tolgoi, Mongolia (b)            $  23,614      $  (9,634)     $  13,980     $  22,192      $  (6,377)     $  15,815
           Cloncurry, Australia (c)                2,745           (400)         2,345         1,518           (131)         1,387
           Other exploration projects              3,580         (2,062)         1,518         2,489         (1,406)         1,083
      -----------------------------------------------------------------------------------------------------------------------------
                                               $  29,939      $ (12,096)     $  17,843     $  26,199      $  (7,914)     $  18,285
      -----------------------------------------------------------------------------------------------------------------------------

      Capital works in progress
           Oyu Tolgoi, Mongolia (b)            $ 144,878      $       -      $ 144,878     $  34,295      $       -      $  34,295
           Bakyrchik Mining Venture,
              Kazakhstan (a)                      17,678              -         17,678         4,776              -          4,776
      -----------------------------------------------------------------------------------------------------------------------------
                                               $ 162,556      $       -      $ 162,556     $  39,071      $       -      $  39,071
      -----------------------------------------------------------------------------------------------------------------------------
                                               $ 334,863      $(109,240)     $ 225,623     $ 207,048      $(105,054)     $ 101,994
      =============================================================================================================================
</TABLE>

      (a)   Ivanhoe  Mines placed the  Bakyrchik  Mining  Venture on a care and
            maintenance basis in 1998.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

10.   PROPERTY, PLANT AND EQUIPMENT (CONTINUED)

      (b)   Ivanhoe  Mines has a 100%  interest  in the Oyu Tolgoi  copper-gold
            project  located in Mongolia.  In 2007,  the project's  four mining
            licenses were  re-issued as Special  Permits for Mining,  which are
            each valid for 30 years and may be extended  two times for 20 years
            per extension.

            Capital works in progress at December 31, 2007 consisted  mainly of
            surface  assets  being  constructed  at Oyu Tolgoi for Shaft No. 1,
            Shaft No. 2, and the concentrator.

            A significant  portion of exploration  expenses incurred during the
            year relate directly to the development of Oyu Tolgoi.  Included in
            exploration   expenses   are  shaft   sinking,   engineering,   and
            development costs that have been expensed and not capitalized (Note
            3).

      (c)   Ivanhoe  Mines owns  certain  copper-gold  and  uranium  mining and
            exploration leases in Queensland, Australia.


11.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

                                                              December 31,
                                                      -------------------------
                                                           2007           2006
                                                      ---------       ---------
      Accounts payable                                $  55,349       $ 33,101
      Payroll and other employee related payables           974            454
      Accrued construction costs                         49,008          2,227
      Amounts payable to related parties (Note 20)        3,979          1,419
      -------------------------------------------------------------------------
                                                      $ 109,310       $ 37,201
      =========================================================================


12.   AMOUNTS DUE UNDER CREDIT FACILITIES

      In October 2007,  Ivanhoe Mines obtained  non-revolving  bank loans which
      are due on demand and secured  against certain of the ABCP products (Note
      8).


13.   CONVERTIBLE CREDIT FACILITY

                                                                December 31,
                                                         ----------------------
                                                              2007         2006
                                                         ---------    ---------
      Principal amount of convertible credit facility    $ 150,000    $      -
      Accrued interest                                       2,378           -
      ------------------------------------------------------------------------
                                                           152,378           -
      (Deduct) add
        Beneficial conversion feature                      (11,869)          -
        Share purchase warrants                             (3,556)          -
        Accretion of discount                                  901           -
      ------------------------------------------------------------------------
                                                         $ 137,854    $      -
      ========================================================================

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================


13.   CONVERTIBLE CREDIT FACILITY (CONTINUED)

      In September 2007, Ivanhoe Mines announced that Rio Tinto would provide a
      convertible  credit  facility of up to $350.0 million to finance  ongoing
      mine  development  activities  at the  Oyu  Tolgoi  Project  pending  the
      finalization  of an Investment  Agreement  between  Ivanhoe Mines and the
      Government  of Mongolia.  A  definitive  Credit  Agreement  was signed in
      October 2007,  following which Ivanhoe Mines made an initial draw against
      the credit facility of $150.0 million.

      The  proceeds  of the  credit  facility  will  be  used  to  ensure  that
      long-lead-time  orders for the  manufacture  of mining  equipment such as
      trucks,  tires,  electric motors and ball mills,  and development work on
      Shafts  No. 1 and No. 2 at Oyu  Tolgoi,  remain  on  schedule  pending  a
      satisfactory  conclusion  of an Investment  Agreement  with the Mongolian
      Government.  The Credit Agreement  contemplates that all such development
      activities and expenditures  will be made in accordance with an Operating
      Plan and Budget  unanimously  approved by the Ivanhoe Mines and Rio Tinto
      representatives on the Oyu Tolgoi Technical Committee.

      Amounts  advanced under the credit  facility will bear interest at a rate
      per annum equal to the three-month  London  Inter-Bank  Offered Rate plus
      3.3%,  and will mature on September 12, 2010. The  outstanding  principal
      amount  and up to $108.0  million  in  interest  are  convertible  into a
      maximum of 45.8  million  common  shares of  Ivanhoe  Mines at a price of
      US$10.00 per share and will be automatically converted into common shares
      upon maturity.

      As part of the credit facility transaction, Rio Tinto also received share
      purchase  warrants  exercisable  to  purchase up to 35.0  million  common
      shares of Ivanhoe  Mines at a price of US$10.00 per share for a period of
      five years (Note 18 (c)).  These  warrants  may be  exercised  on a basis
      proportionate  to the amount of funds  drawn down by Ivanhoe  Mines under
      the credit facility, plus interest.

      Amounts  drawn on the credit  facility are  allocated to the  convertible
      credit  facility  liability and  incremental  exercisable  share purchase
      warrants based on their  respective  fair values at the time of the draw.
      The existence of a beneficial  conversion  feature is then assessed using
      an  effective  conversion  price based on the  proceeds  allocated to the
      convertible  credit  facility  liability in  accordance  with EITF 00-27,
      "Application  of Issue  No.  98-5 to  Certain  Convertible  Instruments".
      Allocating  proceeds to share  purchase  warrants  and, if  necessary,  a
      beneficial  conversion  feature  results in discounts on the  convertible
      credit  facility  liability.  These discounts are recognized as accretion
      expense over the life of the credit facility using the effective interest
      rate method. Any unamortized balance of the beneficial conversion feature
      discount is expensed immediately upon conversion of the credit facility.

      The accounting  treatment for  paid-in-kind  interest is the same as that
      described above for amounts drawn on the credit facility.

      In January 2008,  Ivanhoe Mines made another draw against the facility of
      $100.0 million.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

14.   LOANS PAYABLE TO RELATED PARTIES

      These  loans are  payable  to the  Chairman  of the  Company or a company
      controlled by him. They are non-interest bearing, unsecured and repayable
      in U.S.  dollars.  Repayment  of these  loans  has been  postponed  until
      Ivanhoe  Mines  receives an aggregate of $111.1  million from the sale of
      the Savage River  Project.  At December 31, 2007,  $70.0 million has been
      received from the sale with a further $23.3 million accrued as receivable
      (Note 4 and 6).

15.   INCOME TAXES

      As  referred  to in  Note  2(b),  Ivanhoe  Mines  must  make  significant
      estimates  in  respect  of  its   provision  for  income  taxes  and  the
      composition of its deferred  income tax assets and  liabilities.  Ivanhoe
      Mines'  operations  are,  in part,  subject  to  foreign  tax laws  where
      interpretations,  regulations and legislation are complex and continually
      changing.  As a result,  there are  usually  some tax matters in question
      that may, upon  resolution in the future,  result in  adjustments  to the
      amount  of  deferred  income  tax  assets  and  liabilities,   and  those
      adjustments  may be material to Ivanhoe  Mines'  financial  position  and
      results of operations.

      Ivanhoe  Mines'  provision  for income and capital  taxes for  continuing
      operations consists of the following:


                                                       Years ended December 31,
                                                      ------------------------
                                                            2007         2006
                                                      ----------    ----------

      Deferred income taxes                              $   585      $    13
      Capital taxes                                          210          670
      ------------------------------------------------------------------------
                                                         $   795      $   683
      ========================================================================


      Deferred income tax assets and  liabilities for continuing  operations at
      December 31, 2007 and 2006 arise from the following:

                                                              December 31,
                                                    ---------------------------
                                                         2007             2006
                                                    ---------       -----------
      Deferred income tax assets
           Long-term investments                    $   3,764       $    3,921
           Loss carry-forwards                        306,570          208,965
           Other                                        8,351           14,379
      -------------------------------------------------------------------------
                                                      318,685          227,265
           Valuation allowance                       (317,915)        (226,784)
      -------------------------------------------------------------------------
           Net deferred income tax assets                 770              481
      -------------------------------------------------------------------------

      Deferred income tax liabilities
           Long-term investments                          281                -
           Property, plant and equipment                1,230              660
      -------------------------------------------------------------------------
                                                        1,511              660
      -------------------------------------------------------------------------
      Deferred income tax liabilities, net          $     741       $      179
      =========================================================================


<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================


15.   INCOME TAXES (CONTINUED)

      A  reconciliation  of the  provision  for  income and  capital  taxes for
      continuing operations is as follows:

<TABLE>
<CAPTION>
                                                                    Years ended December 31,
                                                               -------------------------------
                                                                      2007               2006
                                                               ------------       ------------
<S>                                                             <C>               <C>
      Recovery of income taxes based on the combined
           Canadian federal and provincial statutory tax
           rates of 34.1% in 2007 and 2006
           applied to the loss before taxes and other items     $  166,785        $   75,393
      Deduct
           Lower foreign tax rates                                  (9,912)          (17,253)
           Tax benefit of losses not recognized                   (151,267)          (51,343)
           Capital taxes                                              (210)             (670)
           Other, including non-deductible expenses                 (6,191)           (6,810)
      -----------------------------------------------------------------------------------------
      Provision for income and capital taxes                    $     (795)       $     (683)
      =========================================================================================
</TABLE>

      At December 31, 2007,  Ivanhoe Mines had the following  unused tax losses
      from continuing  operations,  for which no deferred income tax assets had
      been recognized:

<TABLE>
<CAPTION>
                                                         Local             U.S. Dollar            Expiry
                                                       Currency          Equivalent (i)           Dates
                                                   ---------------      ---------------      ----------------
<S>                         <C>                    <C>                    <C>                 <C>
Non-capital losses:
     Canada                               Cdn.     $       133,141        $     133,354        2008 to 2027
     Australia                               A     $        40,774        $      35,681             (a)
     Mongolia                 Mongolian Tugrik       1,042,811,851        $     891,597             (b)
     Kazakhstan               Kazakhstan Tenge          20,063,291        $     166,252        2008 to 2014
     Indonesia               Indonesian Rupiah          26,958,622        $       2,872        2011 to 2012

Capital losses:
     Canada                               Cdn.     $       127,900        $     128,105            (c)
</TABLE>
(i)   Translated using the year-end exchange rate.

      (a)   These  losses  are  carried   forward   indefinitely,   subject  to
            continuity of ownership and business tests.

      (b)   These  losses are  carried  forward  until  production  from a mine
            commences;  thereafter,  they can be amortized  on a  straight-line
            basis over a period of five years.

      (c)   These  losses are  carried  forward  indefinitely  for  utilization
            against any future net realized capital gains.

      Ivanhoe Mines also has deductible  temporary  differences  and unused tax
      losses in certain  other  foreign  jurisdictions  that are not  disclosed
      above,  as it is  currently  highly  unlikely  that  these  items will be
      utilized.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

16.   ASSET RETIREMENT OBLIGATIONS

                                                             December 31,
                                                      -------------------------
                                                            2007          2006
                                                      -----------   -----------

      Balance, beginning of year                         $ 6,353       $ 6,231
      Increase (decrease) in obligations for:
           Changes in estimates                            1,866          (485)
           Foreign exchange                                  243           149
           Accretion expense                                 698           458
      -------------------------------------------------------------------------
      Balance, end of year                               $ 9,160       $ 6,353
      =========================================================================

      The total undiscounted  amount of estimated cash flows required to settle
      the  obligations  is  $34,085,000  (2006 -  $19,841,000),  which has been
      discounted  using credit  adjusted  risk free rates  ranging from 7.5% to
      8.0%. The majority of reclamation obligations are not expected to be paid
      for several  years and will be funded from Ivanhoe  Mines' cash  balances
      and  environmental  bonds  restricted  for the purpose of settling  asset
      retirement obligations.


17.   MINORITY INTERESTS

      At December 31, 2007 there were minority  interests in BMV and SouthGobi.
      Jinshan ceased being consolidated on August 31, 2006 (Note 7 (a)).

      Currently,  losses  applicable  to the  minority  interests  in  BMV  and
      SouthGobi are being  allocated to Ivanhoe Mines since those losses exceed
      the minority interests in the net assets of BMV and SouthGobi.

<TABLE>
<CAPTION>
                                                                    Minority Interests
                                                     ----------------------------------------------------
                                                     SouthGobi       Jinshan        BMV           Total
                                                     ---------      --------     --------      ----------
<S>                                                  <C>            <C>          <C>           <C>
      Balance, December 31, 2005                     $   1,581      $  7,347     $     -       $   8,928
      ---------------------------------------------------------------------------------------------------
           Minority interests' share of loss            (2,063)       (1,306)          -          (3,369)
           Increase in minority interest arising
              from share issuances by subsidiary           482         5,388           -           5,870
           Commencement of equity accounting
              for investment in Jinshan                      -       (11,429)          -         (11,429)
      ---------------------------------------------------------------------------------------------------
      Balance, December 31, 2006 and
      December 31, 2007                              $       -      $      -     $     -       $       -
      ===================================================================================================
</TABLE>

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

18.   SHARE CAPITAL

      (a)  EQUITY INCENTIVE PLAN

            The Company has an Employees' and Directors'  Equity Incentive Plan
            (the "Equity Incentive Plan"), which includes three components: (i)
            a Share  Option  Plan;  (ii) a Share Bonus Plan;  and (iii) a Share
            Purchase Plan.

            (i)   The Share  Option Plan  authorizes  the Board of Directors of
                  the Company to grant  options to directors  and  employees of
                  Ivanhoe  Mines to acquire  Common  Shares of the Company at a
                  price  based on the  weighted  average  trading  price of the
                  Common  Shares  for the five days  preceding  the date of the
                  grant.  Options  vest  over  four  years  and have  five year
                  contractual  terms unless  otherwise  determined from time to
                  time by the Board of Directors,  on the recommendation of the
                  Compensation  and Benefits  Committee.  The Share Option Plan
                  also  provides  that these  options may, upon approval of the
                  Board of  Directors,  be  converted  into stock  appreciation
                  rights.

            (ii)  The Share Bonus Plan  permits the Board of  Directors  of the
                  Company to  authorize  the  issuance,  from time to time,  of
                  Common  Shares of the Company to employees of the Company and
                  its affiliates.

            (iii) The Share  Purchase Plan  entitles each eligible  employee of
                  Ivanhoe  Mines  to  contribute  up to seven  percent  of each
                  employee's  annual basic salary in semi-monthly  instalments.
                  At  the  end  of  each   calendar   quarter,   each  employee
                  participating  in the Share  Purchase  Plan is issued  Common
                  Shares of the Company equal to 1.5 times the aggregate amount
                  contributed by the participant, based on the weighted average
                  trading price of the Common Shares during the preceding three
                  months.

            The Company is authorized  to issue a maximum of 37,000,000  Common
            Shares pursuant to the Equity Incentive Plan. At December 31, 2007,
            an aggregate of 5,435,246  Common Shares were  available for future
            grants of awards under the plan.

            Under SFAS No. 123 (R), the value of each option award is estimated
            on the date of grant using the Black-Scholes  option-pricing model.
            The  Black-Scholes  option-pricing  model  requires  the  input  of
            subjective  assumptions,  including the expected term of the option
            award and stock  price  volatility.  The  expected  term of options
            granted is derived from  historical  data on employee  exercise and
            post-vesting employment termination behaviour.  Expected volatility
            is based on the historical volatility of the Company's stock. These
            estimates  involve  inherent  uncertainties  and the application of
            management  judgment.  In  addition,  the  Company is  required  to
            estimate the expected  forfeiture  rate and only recognize  expense
            for  those  options  expected  to  vest.  As  a  result,  if  other
            assumptions  had been used, the recorded  stock-based  compensation
            expense could have been materially different from that reported.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

18.   SHARE CAPITAL (CONTINUED)

      (a)   EQUITY INCENTIVE PLAN (CONTINUED)

            The weighted average grant-date fair value of stock options granted
            during 2007 and 2006 was Cdn$5.39 and Cdn$4.31,  respectively.  The
            fair value of these options was  determined  using a  Black-Scholes
            option pricing model,  recognizing forfeitures as they occur, using
            the following weighted average assumptions:

                                                       2007               2006
                                                ------------       ------------
            Risk-free interest rate                   4.10%              4.12%
            Expected life                         3.2 YEARS          3.3 years
            Expected volatility                         51%                50%
            Expected dividends                         $NIL               $Nil


            A summary  of stock  option  activity  and  information  concerning
            outstanding  and  exercisable  options at  December  31, 2007 is as
            follows:

<TABLE>
<CAPTION>
                                                                   Options Outstanding
                                                          --------------------------------------
                                                               Options            Number of               Weighted
                                                              Available             Common                 Average
                                                              for Grant             Shares             Exercise Price
                                                          -----------------   ------------------   ---------------------
                                                                                                        (Expressed in
                                                                                                      Canadian dollars)
            ------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                   <C>
            Balances, December 31, 2005                          8,305,936            7,416,700            $       7.27
                 Increase in amount authorized                   3,000,000                    -                       -
                 Options granted                                (8,519,000)           8,519,000                    9.39
                 Options exercised                                       -           (1,964,966)                   4.28
                 Options cancelled                                 326,300             (326,300)                   8.80
                 Bonus shares                                     (124,657)                   -                       -
                 Shares issued under share
                    purchase plan                                  (26,931)                   -                       -
            ------------------------------------------------------------------------------------------------------------
            Balances, December 31, 2006                          2,961,648           13,644,434            $       8.99
                 Increase in amount authorized                   5,000,000                    -                       -
                 Options granted                                (2,915,500)           2,915,500                   13.45
                 Options exercised                                       -           (1,520,634)                   7.15
                 Options cancelled                                 475,400             (475,400)                   8.32
                 Bonus shares                                      (57,741)                   -                       -
                 Shares issued under share
                    purchase plan                                  (28,561)                   -                       -
            ------------------------------------------------------------------------------------------------------------
            Balances, December 31, 2007                          5,435,246           14,563,900            $      10.10
            ============================================================================================================
</TABLE>

            At December 31, 2007,  the U.S.  dollar  equivalent of the weighted
            average exercise price was $10.12 (December 31, 2006 - $7.70).

            The total  intrinsic  value of options  exercised  during the years
            ended December 31, 2007 and 2006 was $9.5 million and $9.1 million,
            respectively.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

18.   SHARE CAPITAL (CONTINUED)

      (a)   EQUITY INCENTIVE PLAN (CONTINUED)

            As at  December  31,  2007,  options  vested and  expected  to vest
            totalled  14,563,900  (December 31, 2006 -  13,644,434)  and had an
            aggregate  intrinsic  value of $10.2  million  (December 31, 2006 -
            $29.4 million).

            The following table summarizes  information  concerning outstanding
            and exercisable options at December 31, 2007:

<TABLE>
<CAPTION>
                                            Options Outstanding                                        Options Exercisable
                                   --------------------------------------------------------    -----------------------------------
                                                          Weighted            Weighted                                Weighted
                  Range of                                 Average             Average                                Average
                  Exercise              Number            Remaining        Exercise Price          Number          Exercise Price
                   Prices             Outstanding      Life (in years)        Per Share         Exercisable          Per Share
            -------------------------------------------------------------------------------    -----------------------------------
               (Expressed in                                                (Expressed in                          (Expressed in
                  Canadian                                                    Canadian                                Canadian
                  dollars)                                                    dollars)                                dollars)
<S>                                  <C>                 <C>             <C>                     <C>                <C>
            $3.25 to $3.50              300,000             0.30          $       3.25              300,000          $    3.25
            $3.51 to $6.75              216,000             0.71                  6.75              216,000               6.75
            $6.76 to $7.69              925,500             2.50                  7.24              355,900               7.40
            $7.70 to $8.20            1,716,000             4.81                  7.88            1,265,500               7.85
            $8.21 to $8.99              670,000             1.99                  8.70              397,500               8.76
            $9.00 to $10.27           6,494,700             5.08                  9.73            3,416,700               9.73
            $10.28 to $12.70          1,491,700             5.10                 12.14            1,267,800              12.29
            $12.71 to $16.79          2,750,000             6.18                 13.57              113,500              13.93
            ----------------------------------------------------------------------------------------------------------------------
                                     14,563,900             4.79          $      10.10            7,332,900          $    9.39
            ======================================================================================================================
</TABLE>

            As  at  December  31,  2007  there  was  $25.3   million  of  total
            unrecognized  compensation  cost related to unvested stock options.
            This cost is  expected  to be  recognized  over a  weighted-average
            period of approximately 1.8 years.

            As at December  31, 2007 the  aggregate  intrinsic  value for fully
            vested stock options was $10.3  million  (December 31, 2006 - $14.1
            million).

            Stock-based   compensation  charged  to  operations  was  allocated
            between   exploration   expenses  and  general  and  administrative
            expenses as follows:


                                                     Year ended December 31,
                                                 ------------------------------
                                                        2007              2006
                                                 ------------     -------------

            Exploration                          $    11,669      $     12,779
            General and administrative                 5,574             7,179
            -------------------------------------------------------------------
                                                 $    17,243      $     19,958
            ===================================================================

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

18.   SHARE CAPITAL (CONTINUED)

      (b)   RIO TINTO PLACEMENT

            In,  2006,   Ivanhoe   Mines  and  Rio  Tinto  formed  a  strategic
            partnership  whereby  Rio Tinto would  invest in Ivanhoe  Mines and
            form a joint  Ivanhoe  Mines - Rio Tinto  Technical  Committee,  to
            engineer,  construct and operate Ivanhoe Mines's Oyu Tolgoi project
            in  Mongolia.   The  agreement  provides  for  Rio  Tinto  to  make
            investments  in  the  equity  of  Ivanhoe   Mines,   under  defined
            conditions, totalling approximately $1.5 billion.

            In October  2006,  Rio Tinto  completed a first  private  placement
            tranche  under  the  agreement  by  purchasing  approximately  37.1
            million  shares  at a  price  of  $8.18  per  share,  for  proceeds
            totalling $303.4 million.

            Rio Tinto  will take up a $388.0  million  second  tranche  private
            placement  following the  satisfactory  conclusion of an Investment
            Agreement for the Oyu Tolgoi Project  between Ivanhoe Mines and the
            Mongolian  Government.  Rio Tinto has the  option to  exercise  the
            second tranche earlier.

            In addition to the two  private  placements,  Rio Tinto was granted
            approximately  92.0 million warrants,  divided into two series. The
            lives of these  warrants  are  determined  by the date an  approved
            Investment  Agreement is reached.  The Warrant  Determination  Date
            within the warrant terms presented below is the earlier of the date
            an approved Investment Agreement is reached or October 27, 2009.

            The 46.0  million  Series A  Warrants  are  non-transferable.  Each
            warrant  entitles  Rio Tinto to  purchase  one Common  Share of the
            Company at a price of:

                  (i)   $8.38  during the period  commencing  November 30, 2006
                        and ending 180 days following the Warrant Determination
                        Date; and

                  (ii)  $8.54 during the period  commencing  181 days after the
                        Warrant  Determination  Date and  ending 365 days after
                        the Warrant Determination Date.

            The 46.0  million  Series B  Warrants  are  non-transferable.  Each
            warrant  entitles  Rio Tinto to  purchase  one Common  Share of the
            Company at a price of:

                  (i)   $8.38  during the period  commencing  November 30, 2006
                        and ending 180 days following the Warrant Determination
                        Date;

                  (ii)  $8.54 during the period  commencing  181 days after the
                        Warrant  Determination  Date and  ending 365 days after
                        the Warrant Determination Date;

                  (iii) $8.88 during the period  commencing  366 days after the
                        Warrant  Determination  Date and  ending 545 days after
                        the Warrant Determination Date; and

                  (iv)  $9.02 during the period  commencing  546 days after the
                        Warrant  Determination  Date and  ending 725 days after
                        the Warrant Determination Date.

            Ivanhoe   Mines  has  recorded  an  amount  of  $23.1   million  in
            shareholders'  equity,  attributable  to the fair  value of the Rio
            Tinto share  purchase  warrants and second  tranche share  issuance
            commitment.  As at  December  31, 2007 all of the Series A Warrants
            and Series B Warrants were outstanding.


<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

18.   SHARE CAPITAL (CONTINUED)

      (c)   RIO TINTO FINANCING

            As part of the credit  facility  transaction  disclosed in Note 13,
            Rio Tinto received share purchase warrants  exercisable to purchase
            up to 35.0  million  common  shares of Ivanhoe  Mines at a price of
            US$10.00 per share at any time on or before October 24, 2012. These
            warrants may be exercised  on a basis  proportionate  to the sum of
            all amounts  drawn down on the facility  and interest  added to the
            principal  amount  of  the  facility.  As  at  December  31,  2007,
            15,237,788 share purchase warrants were exercisable.


19.   ACCUMULATED OTHER COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                     December 31,
                                                               -----------------------------
                                                                       2007            2006
                                                               -------------   -------------
<S>                                                              <C>             <C>
      Balance, beginning of year                                 $   13,233      $    6,711
      Other comprehensive income for the year:
           Changes in fair value of long-term investments             5,235           7,534
      Reclassification for gains recorded in earnings                  (970)         (1,012)
      --------------------------------------------------------------------------------------
      Other comprehensive income before tax:                          4,265           6,522
      Income tax recovery related to other
           comprehensive income                                           -               -
      --------------------------------------------------------------------------------------
      Other comprehensive income, net of tax:                         4,265           6,522
      --------------------------------------------------------------------------------------
      Balance, end of year                                       $   17,498      $   13,233
      ======================================================================================
</TABLE>


20.   OTHER RELATED PARTY TRANSACTIONS

      The following tables summarize related party expenses incurred by Ivanhoe
      Mines,  primarily  on  a  cost-recovery  basis,  with  an  officer  of  a
      subsidiary of Ivanhoe Mines, a company  subject to significant  influence
      by Ivanhoe  Mines,  a company  affiliated  with  Ivanhoe  Mines,  or with
      companies  related by way of directors  or  shareholders  in common.  The
      tables summarize the  transactions  with related parties and the types of
      expenditures incurred with related parties:

<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                                               ------------------------------
                                                                       2007             2006
                                                               -------------   --------------
<S>                                                              <C>             <C>
      Global Mining Management Corporation (a)                   $    8,577      $     7,015
      Ivanhoe Capital Aviation LLC (b)                                3,840            3,840
      Fognani & Faught, PLLC (c)                                      1,583            1,394
      Ivanhoe Capital Pte. Ltd. (d)                                      10               78
      Ivanhoe Capital Services Ltd. (e)                                 958              743
      Rio Tinto plc (f)                                               1,330                -
      ---------------------------------------------------------------------------------------
                                                                 $   16,298      $    13,070
      =======================================================================================
</TABLE>


<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

20.   OTHER RELATED PARTY TRANSACTIONS (CONTINUED)


                                                     Years ended December 31,
                                                  -----------------------------
                                                          2007            2006
                                                  -------------   -------------
      Exploration                                   $    1,330       $       -
      Legal                                              1,583           1,394
      Office and administrative                          2,756           2,306
      Salaries and benefits                              6,789           5,530
      Travel (including aircraft rental)                 3,840           3,840
      -------------------------------------------------------------------------
                                                    $   16,298       $  13,070
      =========================================================================

      The above noted  transactions were in the normal course of operations and
      were   measured  at  the  exchange   amount,   which  is  the  amount  of
      consideration established and agreed to by the related parties.

      Accounts  receivable and accounts payable at December 31, 2007,  included
      $248,000 and $3,979,000,  respectively  (December 31, 2006 - $319,000 and
      $1,419,000,  respectively), which were due from/to a company under common
      control, a company affiliated with Ivanhoe Mines, or companies related by
      way of directors in common.

      (a)   Global  Mining  Management  Corporation  ("Global")  is  a  private
            company based in Vancouver owned equally by seven companies, one of
            which is Ivanhoe  Mines.  Global has a director  in common with the
            Company.  Global  provides  administration,  accounting,  and other
            office services to the Company on a cost-recovery basis.

      (b)   Ivanhoe Capital Aviation LLC ("Aviation") is a private company 100%
            owned by the  Company's  Chairman.  Aviation  operates  an aircraft
            which is rented by the Company on a cost-recovery basis.

      (c)   An  officer of a  subsidiary  of  Ivanhoe  Mines is a partner  with
            Fognani & Faught,  PLLC, a legal firm which provides legal services
            to Ivanhoe Mines.

      (d)   Ivanhoe Capital Pte. Ltd.  ("ICPL") is a private company 100% owned
            by  the   Company's   Chairman.   ICPL   provides   administration,
            accounting,  and other office services in Singapore and London on a
            cost-recovery basis.

      (e)   Ivanhoe  Capital  Services Ltd.  ("ICS") is a private  company 100%
            owned by the Company's  Chairman.  ICS provides management services
            out of Singapore on a cost-recovery basis.

      (f)   Rio  Tinto  owns  9.9%  of  Ivanhoe   Mines.   Rio  Tinto  provides
            engineering  related  services  for the  Oyu  Tolgoi  Project  on a
            cost-recovery basis.

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

21.   CASH FLOW INFORMATION

      (a)   RECONCILIATION  OF  NET  LOSS  TO  NET  CASH  FLOW  FROM  OPERATING
            ACTIVITIES

<TABLE>
<CAPTION>
                                                                                                  Year ended December 31,
                                                                                           -------------------------------------
                                                                                                    2007                  2006
                                                                                           ---------------        --------------
<S>                                                                                          <C>                   <C>
            Net loss                                                                         $  (457,713)          $  (198,657)
            Income from discontinued operations                                                  (31,902)              (19,622)
            Items not involving use of cash
             Stock-based compensation                                                             17,243                19,958
             Accretion expense                                                                     1,599                   458
             Depreciation                                                                          4,222                 4,117
             Gain on sale of other mineral property rights                                             -                (2,724)
             Write-down of carrying values of property, plant and equipment                        1,078                   700
             Share of income from investment held for sale, net of cash distribution              23,428               (18,471)
             Write-down of carrying value of investment held for sale                            134,309                     -
             Interest income on other long-term investments                                         (982)                    -
             Accrued interest expense                                                              2,378                     -
             Unrealized foreign exchange (gains) losses                                           (9,270)                  108
             Share of loss of significantly influenced investees                                   9,165                 1,648
             Dilution gain on investment in significantly influenced investee                          -                     -
             Write-down of carrying value of other long-term investments                          24,541                     -
             Gain on sale of long-term investments                                                (1,018)               (2,724)
             Write-down of carrying value of long-term investments                                     -                 1,000
             Write-down of carrying value of loan receivable                                         908                     -
             Deferred income taxes                                                                   585                    13
             Minority interests                                                                        -                (3,369)
             Bonus shares                                                                            830                 1,097
             Net change in non-cash operating working capital items (Note 21 (b))                 41,808                 5,789
            --------------------------------------------------------------------------------------------------------------------
            Cash used in operating activities                                                $  (238,791)          $  (210,679)
            --------------------------------------------------------------------------------------------------------------------
</TABLE>


      (b)   NET CHANGE IN NON-CASH OPERATING WORKING CAPITAL ITEMS

                                                     Years ended December 31,
                                                   ---------------------------
                                                         2007            2006
                                                   -----------   -------------
            (Increase) decrease in:
                 Accounts receivable               $     (749)     $  (10,729)
                 Inventories                            3,317          (1,766)
                 Prepaid expenses                         473          (2,025)
                 Other current assets                     142           3,000
            Increase in:
                 Accounts payable and accrued
                 liabilities                           38,625          17,309
            ------------------------------------------------------------------
                                                   $   41,808      $    5,789
            ==================================================================

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

21.     CASH FLOW INFORMATION (CONTINUED)

         (c)      OTHER SUPPLEMENTARY INFORMATION


                                                     Years ended December 31,
                                                   ----------------------------
                                                           2007           2006
                                                   -------------   ------------
            Interest paid                              $    169        $     -
            -------------------------------------------------------------------
            Income taxes paid                          $    210        $   670
            ===================================================================


22.   SEGMENT DISCLOSURES

      Ivanhoe Mines has one operating  segment;  its exploration  division with
      projects located primarily in Mongolia.

                                                           December 31,
                                                   ----------------------------
                                                         2007             2006
                                                   -----------    -------------
      Property, plant and equipment at the end
      of the year:
           Mongolia                                 $ 196,915         $ 87,509
           Inner Mongolia, China                        1,370            1,408
           Australia                                    8,512            7,555
           Kazakhstan                                  17,678            4,776
           Canada                                         860              203
           Other                                          288              543
      -------------------------------------------------------------------------
                                                    $ 225,623        $ 101,994
      =========================================================================


23.   COMMITMENTS

      Ivanhoe  Mines has, in the normal  course of its  business,  entered into
      various  long-term  contracts,   which  include  commitments  for  future
      operating payments under contracts for drilling,  engineering,  equipment
      rentals and other arrangements as follows:

                   2008                               $ 102,633
                   2009                                     343
                   2010                                     210
                   2011 onwards                             338
                   ---------------------------------------------
                                                      $ 103,524
                   =============================================

<PAGE>

IVANHOE MINES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED; TABULAR AMOUNTS IN THOUSANDS)
===============================================================================

24.   DISCLOSURES REGARDING FINANCIAL INSTRUMENTS

      (a)   The estimated  fair value of Ivanhoe Mines'  financial  instruments
            was as follows:

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                           -------------------------------------------------------------------
                                                                        2007                                 2006
                                                           ------------------------------       ------------------------------
                                                             CARRYING             FAIR            Carrying            Fair
                                                              AMOUNT              VALUE            Amount             Value
                                                           ------------       -----------       -----------       ------------
<S>                                                         <C>                <C>               <C>               <C>
            Cash                                            $ 145,694          $ 145,694         $ 363,572         $ 363,572
            Accounts receivable                                37,076             37,076            24,739            24,739
            Other current assets                                  144                144               286               286
            Long-term investments                              52,010            231,217            36,879           114,263
            Other long-term investments                        47,132             47,132                 -                 -
            Note receivable from related party                  7,512              7,512                 -                 -

            Accounts payable and
                 accrued liabilities                          109,310            109,310            37,201            37,201
            Amounts due under credit facilities                17,050             17,050                 -                 -
            Loans payable to related parties                    5,088              4,625             5,088             4,106
</TABLE>

            The  fair  value  of  Ivanhoe  Mines'  long-term   investments  was
            determined by reference to published market  quotations,  which may
            not be reflective of future values.

            The fair value of loans payable to related parties was estimated by
            discounting future payments to their present value.

            The fair value of Ivanhoe Mines'  remaining  financial  instruments
            was estimated to approximate their carrying value, due primarily to
            the   immediate   or   short-term   maturity  of  these   financial
            instruments.

      (b)   Ivanhoe  Mines is  exposed  to  credit  risk  with  respect  to its
            accounts receivable.  The significant concentrations of credit risk
            are  situated in Mongolia  and  Australia.  Ivanhoe  Mines does not
            mitigate the balance of this risk in light of the credit worthiness
            of its major debtors.

      (c)   Ivanhoe  Mines is exposed to interest rate risk with respect to the
            variable  rates of  interest  incurred  on the  convertible  credit
            facility  (Note 13) and amounts due under credit  facilities  (Note
            12).  Interest rate risk is concentrated  in Canada.  Ivanhoe Mines
            does not mitigate the balance of this risk.